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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _____ To _____
Commission File Number 0-26115
INTERLIANT, INC.
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(Exact Name Of Registrant As Specified In Its Charter)
Delaware 13-3978980
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(State of Incorporation) (IRS Employer Identification No.)
Two Manhattanville Road, Purchase, New York 10577
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(Address of Principal Executive Offices) (Zip Code)
(914) 640-9000
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed 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) Yes X No ___, and (2) has been
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subject to such filing requirements for the past 90 days. Yes X No ___.
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The number of shares outstanding of the Registrant's Common Stock as of May 1,
2000 was 47,521,293.
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INTERLIANT, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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
PART II. OTHER INFORMATION 15
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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PART I. FINANCIAL INFORMATION
INTERLIANT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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(unaudited)
Assets Note 2
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 77,872,009 $ 27,608,039
Restricted cash 1,156,780 1,011,772
Short-term investments 100,406,660 3,612,229
Accounts receivable, net of allowance of $1,407,000 and
$1,378,000 at March 31, 2000 and December 31, 1999, respectively 21,490,102 13,981,358
Prepaid and other current assets 7,153,610 3,469,763
Payroll and benefit funds held for customers 7,925,805
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Total current assets 216,004,966 49,683,161
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Furniture, fixtures and equipment, net 28,371,207 18,199,010
Intangibles, net 143,926,980 93,636,201
Other assets 7,333,517 1,356,696
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Total assets $395,636,670 $162,875,068
============ ============
Liabilities and stockholders' equity
Current liabilities:
Notes payable and current portion of long-term debt $ 1,281,234 $ 1,211,835
Accounts payable and accrued expenses 23,347,749 15,701,591
Deferred revenue 7,523,269 5,883,549
Payroll and benefit funds held for customers 7,925,805
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Total current liabilities 40,078,057 22,796,975
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Long-term debt, less current portion 167,684,341 2,503,211
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 0 shares
issued and outstanding
Common stock, $.01 par value; 200,000,000 shares authorized;
47,435,200, and 44,601,141 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 474,352 446,011
Additional paid-in capital 280,875,674 201,922,128
Accumulated deficit (93,403,062) (64,822,097)
Accumulated other comprehensive income (72,692) 28,840
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Total stockholders' equity 187,874,272 137,574,882
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Total liabilities and stockholders' equity $395,636,670 $162,875,068
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERLIANT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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2000 1999
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<S> <C> <C>
Revenues:
Service revenues $ 21,440,686 $ 5,434,162
Product revenues 5,417,481
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Total revenues 26,858,167 5,434,162
Costs and expenses:
Cost of service revenues 13,926,954 3,250,703
Cost of product revenues 4,606,662
Sales and marketing 7,999,118 1,896,357
General and administrative (exclusive of non-cash
compensation shown below) 11,339,031 4,237,191
Non-cash compensation 4,453,187 567,562
Depreciation 2,466,533 699,552
Amortization of intangibles 9,316,043 2,594,330
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54,107,528 13,245,695
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Operating loss (27,249,361) (7,811,533)
Interest (expense) income, net (111,892) 53,912
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Loss before cumulative effect of accounting change (27,361,253) (7,757,621)
Cumulative effect of change in accounting method (1,219,712)
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Net loss $(28,580,965) $ (7,757,621)
===================== ========================
Basic and diluted loss per share:
Loss before cumulative effect of accounting change $ (0.59) $ (0.31)
Cumulative effect of accounting change (0.03) -
--------------------- ------------------------
Net loss $ (0.62) $ (0.31)
===================== ========================
Weighted average shares
outstanding - basic and diluted 45,989,468 24,769,890
===================== ========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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INTERLIANT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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2000 1999
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<S> <C> <C>
Net cash used in operating activities $ (13,715,082) $ (5,602,276)
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Investing Activities
Purchases of furniture, fixtures and equipment (6,464,743) (984,320)
Payments issued in connection with non-compete agreements (500,000)
Purchases of short-term investments (96,794,431)
Acquisitions of businesses, net of cash acquired (18,869,248) (18,930,098)
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Net cash used in investing activities (122,128,422) (20,414,418)
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Financing Activities
Net proceeds from common stock transactions 26,833,766 10,646,433
Net proceeds from issuance of Series A redeemable convertible preferred stock 13,000,000
Net proceeds from issuance of 7% Subordinated Convertible Notes 158,848,179
Proceeds from capital lease financing 936,544
Repayment of debt (511,015) (66,621)
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Net cash provided by financing activities 186,107,474 23,579,812
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Net increase in cash and cash equivalents 50,263,970 (2,436,882)
Cash and cash equivalents at beginning of period 27,608,039 6,813,360
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Cash and cash equivalents at end of period $ 77,872,009 $ 4,376,478
================ ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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Interliant, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000 (unaudited)
1. BUSINESS
Interliant, Inc. (the Company) is a leading Application Service Provider
(ASP), providing customers with a broad range of outsourced e-business
solutions. The Company's service offerings combine hosting infrastructure with
Internet professional service expertise, which enable the rapid design,
implementation, deployment and management of cost-effective e-business solutions
for customers.
The Company was organized under the laws of the State of Delaware on
December 8, 1997. Web Hosting Organization LLC (WEB), a Delaware Limited
Liability Company, is the majority and controlling shareholder of the Company.
WEB's investors comprise Charterhouse Equity Partners III, L.P. and Chef
Nominees Limited (collectively, CEP Members), and WHO Management, LLC (WHO).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the regulations of the Securities and
Exchange Commission (SEC), but omit certain information and footnote disclosure
necessary to present the statements in accordance with accounting principles
generally accepted in the United States. The interim financial information as of
March 31, 2000 and for the three months ended March 31, 2000 and 1999 is
unaudited and has been prepared on the same basis as the audited consolidated
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information.
The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
For further information, refer to the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K.
Operating results for the three months ended March 31, 2000 and 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
Payroll and Benefit Funds Held for Customers
As part of its payroll and payroll tax filing services, the Company
collects funds for federal, state and local employment taxes from its customers.
The Company also collects funds for medical claims and processes payments for
its customers. The Company receives deposits from
4
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customers for payroll tax deposits and payment of benefit claims in advance of
disbursing the funds. Related liabilities are recorded for funds held. All
customer funds are held in accounts separate from the Company's general
operating funds.
New Accounting Standards
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." The
Company recorded a cumulative effect change in accounting principle, effective
January 1, 2000, for revenue recognized in 1999 for set up fees associated with
Web hosting and application hosting services. Effective January 1, 2000 such
fees are being amortized over one year, which generally represents the longer of
the contractual period or expected life of the customer relationship. For the
three months ended March 31, 2000, the Company recorded a cumulative effect
charge of $1.2 million to reflect the change in accounting principle.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25". The Company believes the
adoption of this new accounting standard will not have a significant effect on
its financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent liabilities, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Net Loss Per Share
Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic
net loss per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted loss per share does not
differ from basic loss per share since potential common shares to be issued upon
the exercise of stock options are anti-dilutive for the periods presented.
3. ACQUISITIONS
During the three months ended March 31, 2000, the Company consummated the
following acquisitions, each of which has been accounted for using the purchase
method of accounting:
In February 2000, the Company acquired all of the outstanding stock of Soft
Link, Inc., a provider of Enterprise Resource Planning (ERP) solutions based on
PeopleSoft software. The purchase price consisted of $18.2 million in cash,
subject to adjustment based on the net worth of Soft Link, Inc. as of the
closing date, and 254,879 shares of the Company's common stock (Common Stock)
valued at approximately $36.80 per share. The agreement provides for contingent
consideration, not to exceed $10.0 million, if specified revenues and earnings
targets are met for the calendar year 2000. The contingent consideration is
payable 50% in cash, and the remaining 50% in cash or Common Stock at the
Company's option. The payment of contingent consideration, if any, will be
recorded as additional purchase price.
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In February 2000, the Company purchased substantially all of the assets and
assumed certain liabilities of reSOURCE PARTNER, Inc., a provider of hosting
services for outsourced human resources and finance solutions primarily using
PeopleSoft software. The purchase price consisted of $2.5 million in cash,
subject to adjustment based on the determination of closing net equity, and the
issuance of 1,041,179 shares of Common Stock valued at $36.80 per share.
The allocation of purchase price for the acquisitions completed in 2000 as
reflected in the March 31, 2000 condensed consolidated balance sheet is
preliminary based on the Company's initial assessment of the fair value of
assets acquired. The allocations may be modified among the various components of
intangible assets as the Company finalizes the purchase accounting for such
acquisitions.
The following unaudited condensed pro forma information presents the unaudited
results of operations of the Company as if the acquisitions completed in 2000
and 1999 had occurred on January 1, 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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2000 1999
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<S> <C> <C>
Revenues $ 35,189,000 $ 31,795,000
Loss before cumulative effect of accounting change (33,494,000) (18,978,000)
Loss per share before cumulative effect
of accounting change - basic and diluted $ (0.71) $ (0.61)
</TABLE>
4. DEBT
In February 2000, the Company sold $154.8 million of 7% Convertible
Subordinated Notes in a private placement, including $4.8 million sold upon
exercise of the initial purchasers' over-allotment option. The notes are
convertible at the option of the holder, at any time on or prior to maturity
into Common Stock at a conversion price of $53.10 per share, which is equal to a
conversion rate of 18.8324 shares per $1,000 principal amount of notes. Interest
is payable semi-annually, beginning August 2000. The notes mature on February
16, 2005. Upon the occurrence of certain events, the Company may redeem the
notes prior to maturity.
In March 2000, the Company sold $10.0 million of 7% Convertible
Subordinated Notes in a private placement. Such notes have substantially the
same terms as the notes described above.
5. STOCKHOLDERS' EQUITY
Common Stock
In January and February 2000, the Company sold an aggregate of 787,881
shares of Common Stock in private placements to three purchasers for total
proceeds of $27.5 million. In connection with the sales, the Company issued
warrants to purchase 157,575 shares of Common Stock at an average exercise price
of $34.90 per share, which approximated the market price of the Company's Common
Stock at the date of issuance. The warrants expire December 31, 2000.
Stock Option Plan
During the three months ended March 31, 2000, under the 1998 Stock Option
Plan (Plan) the Company granted options to purchase 486,400 shares of Common
Stock at exercise prices ranging from $28.88 to $43.38 per share. The weighted-
average exercise price of the options granted was $37.35 per share.
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During the three months ended March 31, 2000, options to purchase 750,120
shares of Common Stock were exercised. As of March 31, 2000, options to purchase
2,183,176 shares of Common Stock were outstanding, of which 447,306 options were
vested.
In January 2000, the Company entered into a four-year employment agreement
with a new Chief Executive Officer. In connection with this agreement, the
Company issued this employee options to purchase 1,500,000 shares of Common
Stock at an average exercise price of $18.00 per share. Such options were not
issued pursuant to the Plan. The average exercise price of the options was below
the fair value of the Common Stock as of the measurement date, and as a result,
the Company will recognize approximately $30.0 million as compensation expense
over the four-year vesting period of the options.
6. SEGMENT INFORMATION
The Company currently has three reportable segments: Web hosting,
application hosting,and Internet professional services. During the three months
ended March 31, 1999, the Company's revenues were substantially derived from Web
hosting services. The summary unaudited results of operations for the three
months ended March 31, 2000 for each of the segments is shown below.
<TABLE>
<CAPTION>
Internet
Web Application Professional
Hosting Hosting Services Other Total
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,770,248 $ 6,394,104 $ 13,813,092 $ 880,723 $ 26,858,167
Operating income (loss) (2,845,165) (4,200,593) 715,736 (20,919,339) (27,249,361)
Segment assets 15,059,298 32,870,586 20,829,415 326,877,371 395,636,670
</TABLE>
The Company's management generally reviews the results of operations of
each segment exclusive of depreciation and amortization (aggregating $11.8
million and $3.3 million, respectively, for the three months ended March 31,
2000) and interest related to each segment. Accordingly, such expenses are
excluded from the segment operating loss and are shown under the Other caption.
In addition, all intangible assets and corporate expenses of the Company are
included in the Other caption.
The Company believes that the reportable segments may change in future
periods as management continues to integrate acquisitions and further develop
and enhance its service offerings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following description of our financial condition and results
of operations in conjunction with the Unaudited Condensed Consolidated Financial
Statements and the Notes thereto. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Certain forward-looking statements
relate to, among other things, future results of operations, profitability,
growth plans, sales, expense trends, capital requirements and general industry
and business conditions applicable to our business. Any statements contained
herein that are not statements of historical fact may be deemed to be forward-
looking statements. Our actual results and the timing of certain events may
differ significantly from the results discussed in the forward-looking
statements. These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. The words
"anticipate," "believe," "estimate" and similar expressions used herein are
generally intended to identify forward-looking statements. In addition to the
other risks described elsewhere in this report and in other filings by the
Company with the Securities and Exchange Commission, important factors to
consider in evaluating such forward-looking statements include but are not
limited to: changes in external competitive market factors; changes in our
business strategy; an inability to execute our strategy due to unanticipated
changes in the emerging hosting and Internet services industries or the economy
in general; difficulties in the timely expansion of our network and data centers
or in the acquisition and integration of new businesses; difficulties in
retaining and attracting new employees or customers; difficulties in developing
or deploying new services; risks associated with rapidly changing technology;
and various other competitive factors that may prevent us from competing
successfully in existing or future markets. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained herein will in fact be realized and we assume no obligation to update
this information.
OVERVIEW
We are a leading application service provider, or ASP, providing our
customers with a broad range of outsourced e-business solutions. Our customers
face significant challenges in doing business on the Internet due to its
technical complexity, their lack of technical skills, the cost of implementation
and ongoing support and the time necessary to implement solutions. By providing
comprehensive outsourced solutions that combine our hosting infrastructure with
Internet professional services expertise, we can rapidly design, implement,
deploy and effectively manage cost-effective e-business solutions for our
customers.
As an ASP, we provide:
. hosting infrastructure for our customers' network-based applications,
which allows our customers to store their databases, applications or
Web sites on equipment owned and maintained by us or on our customers'
equipment located in our data centers;
. Internet professional services for designing, implementing and
deploying these network-based applications; and
. operations support, systems and applications management and customer
care for our customers and their end-users.
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Our strategy has been to rapidly acquire operating companies in the Web
hosting, application hosting and Internet professional services businesses, to
build or acquire data centers, and to integrate the acquired hosting operations
into those data centers. We have acquired 23 operating businesses to date for
total consideration of approximately $188.2 million, including transaction
costs. We have accounted for all acquisitions using the purchase method of
accounting, which has resulted in the recognition of a substantial amount of
intangible assets on our balance sheet. Of the total consideration, we paid
$10.2 million of assumed seller debt and have allocated approximately $0.3
million to tangible net assets and $177.7 million to intangible assets, which
comprise covenants not to compete, customer lists, assembled work force, trade
names and goodwill. In accordance with APB 16, an allocation methodology was
applied to each acquisition to determine the value to be assigned to each type
of intangible asset where appropriate. Amounts not allocated to net tangible
assets and identifiable intangible assets have been recorded as goodwill.
Recoverability of our investment in intangible assets is dependent on our
ability to operate our businesses successfully and generate positive cash flows
from operations. Annual charges for amortization of intangible assets with
respect to acquisitions completed to date will be approximately $47.0 million,
which will result in increased losses or reduced net income. The purchase
consideration for the acquisitions was in the form of cash, stock or a
combination of cash and stock.
Since our inception in December 1997, we have experienced operating losses
and negative cash flows from operating activities for each quarterly and annual
period. As of March 31, 2000, we had an accumulated deficit of approximately
$93.4 million. Had the companies acquired to date been included since January 1,
1999, our accumulated deficit would have been approximately $106.0 million. The
revenue and income potential of our business is unproven and our limited
operating history makes an evaluation of us and our prospects difficult. We
anticipate increased operating expenses as we:
. significantly expand our sales and marketing initiatives to continue to
grow our brands;
. fund greater levels of product development;
. continue to complete and equip our data centers;
. implement centralized billing, accounting and customer service systems; and
. continue our acquisition program.
Although we have experienced revenue growth, primarily attributable to
acquisitions, we do not believe that this growth is necessarily indicative of
future operating results. Future acquisitions are expected to increase operating
expenses and operating losses and as a result, we expect to continue to incur
operating losses for the foreseeable future. We cannot assure you that we will
ever achieve profitability on a quarterly or annual basis, or, if achieved, that
we will sustain profitability.
RESULTS OF OPERATIONS
We derive our revenues from application hosting, Web hosting and Internet
professional and other services. Application hosting revenues primarily comprise
monthly usage fees per number of end users, including bandwidth fees and one-
time set up fees. Web hosting revenues consist primarily of hosting fees and set
up fees, which cover costs incurred by us to establish customers' Web sites. We
provide virtual, dedicated and co-located Web hosting. We charge our Web hosting
customers a fixed amount for bandwidth availability and incremental fees if
those fixed amounts are exceeded. In addition, our virtual Web hosting customers
are also charged for disk space on a server, dedicated hosting customers are
charged for use of one or more dedicated servers and our co-location customers
are charged for the amount of data center space such co-location customers'
servers occupy. We charge flat rates for our enhanced Internet services.
Internet professional service charges generally are fee-based on a time and
materials basis.
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Our contracts with our application hosting customers range in length from
month-to-month to three years. Our contracts with our Web hosting customers
typically range in length from month-to-month to one year. A large proportion of
our Web hosting customer contracts are cancelable by either party with 30 days'
notice. Revenues derived from hosting are recognized ratably over the applicable
contractual period. Payments received and billings in advance of providing
services are deferred until such services are provided. Revenues from Internet
professional services are recognized as the services are rendered. Substantially
all of our Internet professional services contracts call for billings on a time
and materials basis.
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." The
Company recorded a cumulative effect change in accounting principle, effective
January 1, 2000, for revenue recognized in 1999 for set up fees associated with
Web hosting and application hosting services. Effective January 1, 2000 such
fees are being amortized over one year, which generally represents the longer of
the contractual period or expected life of the customer relationship. For the
three months ended March 31, 2000, the Company recorded a cumulative effect
charge of $1.2 million to reflect the change in accounting principle.
Cost of revenues consists primarily of salaries and related expenses
associated with Internet professional services and data center operations
personnel, costs of hardware and software products sold to customers, and data
communications expenses, including one-time fees for circuit installation and
variable recurring circuit payments to network providers. Monthly circuit
charges vary based upon circuit type, distance and usage, as well as the term of
the contract with the carrier.
Sales and marketing expense consists of personnel costs associated with the
direct sales force, internal telesales, product development and product
marketing employees, as well as costs associated with marketing programs,
advertising, product literature, external telemarketing costs and corporate
marketing activities, including public relations.
General and administrative expense includes the cost of customer service
functions, finance and accounting, human resources, legal and executive
salaries, corporate overhead, acquisition integration costs and fees paid for
professional services.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Revenues increased $21.5 million, from $5.4 million for the three months
ended March 31, 1999 to $26.9 million for the corresponding 2000 period. The
increase in revenues was primarily due to the 11 acquisitions consummated during
1999 and 2000. On a pro forma basis, giving effect to acquisitions completed
through March 31, 2000, revenues for the three months ended March 31, 2000 were
$35.2 million.
For the three months ended March 31, 2000, on a pro forma basis:
. application hosting revenues comprise 27.5% of our revenues;
. Web hosting revenues comprise 16.4% of our revenues;
. Internet professional services revenues comprise 53.6% of our
revenues; and
. other services revenues comprise 2.5% of our revenues.
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Cost of Revenues
Cost of revenues increased by $15.2 million, from $3.3 million for the
three months ended March 31, 1999 to $18.5 million for the corresponding 2000
period. This increase was due primarily to the 11 acquisitions consummated
during 1999 and 2000, and increased infrastructure costs to support current and
future revenue growth. In the future, cost of revenues will likely increase due
to capacity utilization, additional investments in existing and new data
centers, changes in the mix of services, fluctuations in bandwidth costs and
increased levels of staffing to support anticipated revenue growth.
On a pro forma basis, cost of revenues for the three months ended March 31,
2000 were $25.0 million.
For the three months ended March 31, 2000, gross margin on a pro forma
basis was 28.9% as compared to 31.0% on a historical basis. The lower pro forma
gross margins are the result of an increase in the proportion of revenue from
Internet professional services and product sales to total revenues related to
our recent acquisitions of Internet professional services businesses, which
typically generate lower gross margins as compared with our hosting services.
Sales and Marketing
Sales and marketing expense increased by $6.1 million, from $1.9 million
for the three months ended March 31, 1999 to $8.0 million for the corresponding
2000 period. This increase was attributable to the 11 acquisitions consummated
during 1999 and 2000. A key component of our revenue growth strategy is to
significantly increase our sales and marketing activities. We expect that this
will include the continued expansion of our sales force, increased marketing
efforts to grow recognition of our brands, and the development of reseller and
referral partner channels. As a result, sales and marketing expenses will
increase substantially in future periods to support anticipated revenue growth.
On a pro forma basis, sales and marketing expense for the three months
ended March 31, 2000 was $9.2 million. Sales and marketing costs as a percentage
of revenue was 29.8% on a historical basis versus 26.0% on a pro forma basis due
primarily to higher proportion of Internet professional services revenues for
the pro forma period, which businesses have historically incurred lower
marketing costs as a percentage of revenues.
General and Administrative
General and administrative expense increased by $11.0 million, from $4.8
million for the three months ended March 31, 1999 to $15.8 million for the
corresponding 2000 period. This increase in general and administrative expense
was attributable to the 11 acquisitions consummated during 1999 and 2000, and
increased investments in infrastructure and levels of staffing with respect to
the customer service, billing, accounting and human resources functions to
support revenue growth. Substantial staffing and related increases are expected
to continue in future periods in order to support anticipated revenue growth.
In February 2000, we issued options to purchase 1,500,000 shares of Common
Stock to our Chief Executive Officer at exercise prices that were below the
market price of our Common Stock at the date of grant. In total, such options
were valued at approximately $30.0 million, and for the three months ended March
31, 2000, we charged $3.8 million to non-cash compensation expense in connection
with this arrangement.
On a pro forma basis, general and administrative expense for the three
months ended March 31, 2000 was $18.7 million.
11
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Depreciation
Depreciation expense increased by $1.8 million, from $0.7 million for the
three months ended March 31, 1999 to $2.5 million for the corresponding 2000
period. The increase in depreciation expense was attributable to the 11
acquisitions consummated during 1999 and 2000, our investments in equipment,
furniture and construction to complete and equip our data centers in Atlanta,
Georgia and Vienna, Virginia, and investments in computer equipment to support
customer growth. On a pro forma basis, depreciation expense for the three months
ended March 31, 2000 was $2.8 million.
Amortization
Amortization expense increased by $6.7 million, from $2.6 million for the
three months ended March 31, 1999 to $9.3 million for the corresponding 2000
period. This increase in amortization expense was attributable to the 11
acquisitions consummated during 1999 and 2000. We expect amortization expense to
increase in future periods as we continue to make additional acquisitions.
On a pro forma basis, amortization expense for the three months ended March
31, 2000 was $11.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Summary
- -------
We have financed our operations and acquisitions primarily from private
placements of debt and equity, and our initial public offering of common stock.
We had $178.3 million in cash, cash equivalents and short-term investments at
March 31, 2000. Net cash used in operations for the three months ended March 31,
2000 was $13.7 million. This reflects primarily the net loss for the period of
$28.6 million along with changes in operating assets and liabilities, offset by
$2.5 million of depreciation expense and $9.3 million of amortization of
goodwill and other intangible assets and $4.8 million of other non-cash items
including provisions for bad debts and non-cash compensation charges. Net cash
used for investing activities for the three months ended March 31, 2000 was
$122.1 million, of which $96.8 million was for the purchases of short-term
investments in connection with proceeds received from financings completed
during the first quarter, $6.5 million for purchases of furniture, fixtures and
equipment and $18.9 million for acquisitions of businesses, net of acquired
cash. Net cash from financing activities for the three months ended March 31,
2000 was $186.1 million, primarily the result of the sale of $164.8 million of
7% Subordinated Convertible Notes and $27.5 million from private placements of
Common Stock, offset by $7.5 million in offering costs for such transactions.
First Quarter 2000 Activities
- -----------------------------
In January and February 2000, we raised $27.5 million in strategic funding
from equity investments by Dell Computer, Network Solutions and BMC Software. In
connection with these sales, we issued warrants to purchase 157,575 shares of
common stock with a weighted average exercise price of $34.90 per share, which
expire on December 31, 2000. We also entered into commercial agreements with
each of the strategic investors. We anticipate that these commercial agreements
will result in significant incremental revenues, expenses, EBITDA losses and
capital expenditures for the foreseeable future in the expectation that
eventually they will result in positive EBITDA and profits. The foregoing is a
forward-looking statement and is based on our current business plan and the
assumptions on which that plan is based.
In February 2000, we sold $154.8 million of 7% Convertible Subordinated
Notes in a private placement, including $4.8 million sold upon exercise of the
initial purchasers' over-allotment option. The notes are convertible at the
option of the holder, at any time on or prior to
12
<PAGE>
maturity, into Common Stock at a conversion price of $53.10 per share, which is
equal to a conversion rate of approximately 18.8324 shares per $1,000 principal
amount of notes. Semi-annual interest payments of $5.4 million commence in
August 2000. The notes mature on February 16, 2005. Upon the occurrence of
certain events, we may redeem the notes prior to maturity.
In March 2000, we sold $10.0 million of 7% Convertible Subordinated Notes
in a private placement with Microsoft. Such notes have substantially the same
terms as the notes described above. We also entered into a commercial agreement
with Microsoft to develop application hosting services for Microsoft-based
platforms. We anticipate that this commercial agreement will indirectly result
in significant incremental revenues, expenses, EBITDA losses and capital
expenditures for the foreseeable future in the expectation that eventually it
will result in positive EBITDA and profits. The foregoing is a forward-looking
statement and is based on our current business plan and the assumptions on which
that plan is based.
In February and March 2000, we completed two acquisitions (see Note 3 of
Notes to Condensed Consolidated Financial Statements for the three months ended
March 31, 2000, included in Part I of this Form 10-Q). The total cash
consideration for these acquisitions amounted to approximately $20.7 million.
In addition to funding ongoing operations and capital expenditures, our
principal commitments consist of non-cancelable operating leases and contingent
payments of earnouts to certain sellers of operating companies acquired by us.
In connection with certain acquisitions, we paid $1.4 million during the three
months ended March 31, 2000. If all targets for earnouts entered into through
March 31, 2000 are achieved in full, total consideration pursuant to these
earnouts will be $7.3 million and $16.5 million in cash in 2000 and 2001,
respectively. Certain agreements provide for issuance of common stock in lieu of
cash, at our option.
We currently believe that our existing cash and cash equivalents, together
with the net proceeds from the investments by strategic partners and the sale of
the notes described above will be adequate to meet operating needs through 2001,
subject to the use of additional cash for unspecified acquisitions, in which
case the period would be shortened. The foregoing is a forward-looking statement
and is based on our current business plan and the assumptions on which it is
based, including our ability to successfully integrate acquisitions and achieve
the expected benefits, such as operational efficiencies and revenue improvements
from cross-selling opportunities. Our plans also assume that we will complete a
given number of acquisitions, at given valuations using as consideration a given
mix of cash and stock. If our plans change or our assumptions prove to be
inaccurate, we may be required to seek additional capital sooner than we
currently anticipate. We may also seek to raise additional capital to take
advantage of favorable conditions in the capital markets. It is likely that
after 2001 we will need additional funds to conduct our operations, continue our
acquisition and internal growth programs, and fund debt service obligations. In
order to fund the repayment of our existing debt service obligations, we will
either have to increase revenues without a commensurate increase in costs to
generate sufficient cash from operations, refinance existing debt obligations,
raise additional equity, or execute a combination thereof. We cannot be assured,
however, that if we need or seek additional capital that we will be successful
in obtaining it.
Interest Rate Risk
We have limited exposure to financial market risks, including changes in
interest rates. At March 31, 2000, we had short-term investments of
approximately $100.4 million. These short-term investments consist of highly
liquid investments in debt obligations of highly rated entities with maturities
of between 90 days and one year. These investments are subject to interest rate
risk and will fall in value if market interest rates increase. We expect to hold
these investments until maturity, and therefore expect to realize the full value
of these investments, even though
13
<PAGE>
changes in interest rates may affect their value prior to maturity. If interest
rates decline over time, this will result in a reduction of our interest income
as our cash is reinvested at lower rates.
14
<PAGE>
PART II. OTHER INFORMATION
INTERLIANT, INC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In the three months ended March 31, 2000, options to purchase 750,120
shares of Common Stock were exercised at a weighted average exercise price of
$1.14 per share.
In January and February 2000, Interliant sold an aggregate of 787,881
shares of Common Stock to three strategic partners for a total purchase price of
$27.5 million. In connection with these sales, Interliant issued warrants to
purchase an aggregate of 157,575 shares of common stock with a weighted average
exercise price of $34.90 per share.
In February 2000, Interliant sold an aggregate principal amount of $154.8
million of 7% Convertible Subordinated Notes to the initial purchasers and in
March 2000, Interliant sold an aggregate principal amount of $10.0 million of
the same 7% Convertible Subordinated Notes to Microsoft Corporation.
On February 29, 2000, in connection with the acquisition of Soft Link, Inc,
Interliant issued, as partial consideration, 254,879 shares of common stock to
certain stockholders of SoftLink, Inc.
On February 29, 2000, in connection with the purchase of substantially all
of the assets and assumption of certain liabilities of reSOURCE PARTNER, Inc.,
Interliant issued, as partial consideration, 1,041,179 shares of common stock to
certain stockholders of reSOURCE PARTNER, Inc.
Interliant believes that the transactions described above were exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act, Regulation D or Rule 144A promulgated thereunder, as transactions by an
issuer not involving public offering, or pursuant to Rule 701 promulgated under
Section 3(b) of the Securities Act, as transactions pursuant to written
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each of these transactions represented that they
were acquiring the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the securities certificates issued in such transactions. All
recipients had adequate access, through their relationships with Interliant, to
information about Interliant, or were given an adequate opportunity to review
information about Interliant.
USE OF PROCEEDS FROM REGISTERED SECURITIES
On July 13, 1999, we completed an initial public offering of our common
stock whereby we sold 8,050,000 shares of common stock, including 1,050,000
shares sold pursuant to the underwriters' over-allotment option. The offering
price was $10.00 per share for an aggregate price of $80.5 million, before
underwriters' discounts and commissions and offering costs payable by us. From
the effective date of the registration statement filed in connection with such
offering to November 1, 1999, we paid an aggregate of $5.6 million in
underwriting discounts and commissions, and approximately $2.0 million of
initial public offering expenses. After deducting the underwriting discounts and
commissions and the initial public offering expenses payable directly by us, net
proceeds from the initial public offering were approximately $72.5 million.
As of March 31, 2000, we used the entire net proceeds of the IPO as follows:
. $13.4 million for repayment of debt issued or assumed in connection with
acquisitions;
. $27.0 million in connection with the acquisitions of additional businesses;
. $15.3 million for capital expenditures, including data centers; and
. $16.8 million for cash used in operations.
15
<PAGE>
ITEM 5. OTHER INFORMATION.
For information concerning acquisitions refer to Footnote 3 to the
Consolidated Financial Statements for the three months ended March 31, 2000,
included in Part I of this Form 10-Q and incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) Exhibits -
Exhibit 27 - Financial Data Schedule (for SEC Use Only)
(b.) Reports on Form 8-K:
Current Report on Form 8-K dated January 31, 2000, which
reported the following:
. Certain forward-looking information with respect to the
Company's financial results for the period ended
December, 31, 2000;
. $27.5 million of strategic equity financing from Dell
Computer, Network Solutions and BMC Software;
. The announcement of the appointment of Herbert R. Hribar
as Chief Executive Officer and Director, and the grant of
options to purchase 1.5 million shares of the Company's
Common Stock at a weighted-average exercise price of
$18.00 per share;
. The formation of Interliant Europe, a business to be
owned by the Company and @viso Limited; and
. The announcement of the Company's intention to issue
convertible subordinated notes through a Rule 144a
offering.
Current Report on Form 8-K and Form 8-K/A dated February 16,
2000, which reported the following:
. The acquisitions of Soft Link, Inc. and reSOURCE PARTNER,
Inc.; and
. The completion of the sale of $154.8 million of 7%
Subordinated Convertible Notes.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Interliant, Inc.
Date: May 15, 2000 /s/ Herbert R. Hribar
-------------------------------------
Herbert R. Hribar
Chief Executive Officer and President
Date: May 15, 2000 /s/ William A. Wilson
-------------------------------------
William A. Wilson
Chief Financial Officer
17
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This schedule contains summary financial information extracted from Form 10-Q
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