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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 0-8164
APERIAN, INC.
(Exact name of small business issuer as specified in charter)
DELAWARE 74-2971167
(State of incorporation or organization) (IRS Employer I.D. No.)
1121 EAST 7TH STREET AUSTIN, TEXAS 78702
(Address of principal executive offices) (Zip Code)
512-476-6925
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) NO ( )
As of October 31, 2000 the Registrant had 12,559,669 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes (X) NO ( )
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APERIAN, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
</TABLE>
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APERIAN, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000
------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 26,001,538
Accounts receivable 2,602,715
Other current assets 3,193,445
-------------
Total current assets 31,797,698
Property, plant, and equipment, net 27,438,969
Goodwill, net 6,901,514
Other assets 418,408
-------------
TOTAL ASSETS $ 66,556,589
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 462,104
Other accrued expenses 690,750
Current portion of obligations under capital leases 1,659,565
-------------
Total current liabilities 2,812,419
Long-term liabilities
Obligations under capital leases 4,581,550
Notes payable 10,135,832
Deferred rent 1,027,987
-------------
Total long-term liabilities 15,745,369
Commitments and Contingencies --
-------------
Total liabilities 18,557,788
-------------
Stockholders' equity
Common stock at $.01 par value; 75,000,000 authorized, 12,559,669
shares (excluding 5,087 shares held in treasury) issued and outstanding 125,596
Additional paid-in-capital 106,291,201
Accumulated deficit (58,417,996)
-------------
Total stockholders' equity 47,998,801
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,556,589
=============
</TABLE>
The accompanying notes are an integral part of these financial statements
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APERIAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,806,112 $ 440,860 $ 2,715,557 $ 890,003
Cost of revenues 2,478,538 305,283 4,111,622 812,729
------------ ------------ ------------ ------------
Gross margin (deficit) (672,426) 135,577 (1,396,065) 77,274
Operating expenses:
Sales and marketing 1,819,760 688,985 2,915,571 1,074,121
General and administrative 5,820,841 2,203,848 8,764,657 3,228,974
Amortization of goodwill 237,983 -- 237,983 --
------------ ------------ ------------ ------------
Total operating expenses 7,878,584 2,892,833 11,918,211 4,303,095
------------ ------------ ------------ ------------
Operating loss (8,551,010) (2,757,256) (13,314,276) (4,225,821)
Interest (income) expense, net (379,829) 210,786 (883,856) 259,342
------------ ------------ ------------ ------------
Net loss $ (8,171,181) $ (2,968,042) $(12,430,420) $ (4,485,163)
============ ============ ============ ============
Preferred stock dividends and stock discounts -- (6,550) -- (675,563)
------------ ------------ ------------ ------------
Net loss to common stockholders $ (8,171,181) $ (2,974,592) $(12,430,420) $ (5,160,726)
============ ============ ============ ============
Net loss per share
Basic $ (0.66) $ (0.13) $ (1.01) $ (0.25)
============ ============ ============ ============
Diluted $ (0.66) $ (0.13) $ (1.01) $ (0.25)
============ ============ ============ ============
Weighted average shares outstanding
Basic 12,444,209 23,014,620 12,313,379 20,746,749
============ ============ ============ ============
Diluted 12,444,209 23,014,620 12,313,379 20,746,749
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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APERIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,430,420) $ (4,485,163)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 1,772,301 186,056
Amortization of debt discount 109,812 131,068
Interest accretion on notes payable 43,750 --
Loss on disposal of property, plant and equipment 16,002 176,175
Amortization of deferred rent 318,487 19,911
Common stock and options issued for compensation (189,904) 102,375
Changes in operating assets and liabilities:
Accounts receivable (1,626,459) 222,693
Other receivables - advances 72,805 (102,707)
Other current assets (2,799,709) 13,287
Other assets (138,735) --
Accounts payable (5,558,896) (963,228)
Other accrued expenses (320,224) 429,208
------------ ------------
Net cash used in operating activities (20,731,190) (4,270,325)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (17,505,888) (189,526)
Proceeds from sale of property, plant, and equipment 16,885 --
Business acquired, net of cash received (77,691) --
------------ ------------
Net cash (used in) provided by investing activities (17,566,694) (189,526)
------------ ------------
Cash flows from financing activities:
Net draws (payments) on bank line of credit -- (200,000)
Payments on obligations under capital leases (414,278) (41,230)
Payments on notes payable (606,500) (87,760)
Proceeds - equipment financings 5,304,247 --
Proceeds - notes payable 10,000,000 1,087,500
Proceeds - private placement of preferred stock, net of offering costs -- 526,800
Proceeds - exercise of warrants 528,000 120,500
Proceeds - exercise of stock options 228,844 --
Proceeds - shareholder notes receivable 500,000 --
Proceeds - issuance of common stock -- 3,514,988
------------ ------------
Net cash provided by financing activities 15,540,313 4,920,798
------------ ------------
Net change in cash and cash equivalents (22,757,571) 460,947
Cash and cash equivalents at beginning of period 48,759,109 8,471
------------ ------------
Cash and cash equivalents at end of period $ 26,001,538 $ 469,418
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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APERIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosure:
Cash paid during the period for:
Interest $ 90,600 $ 110,506
============ ============
Supplemental schedule of non-cash investing and financing activities;
Common stock issued for preferred stock dividends $ -- $ 5,563
Discount on preferred and common stock issued -- 600,000
Stock options or warrants issued for:
Placement agent fees -- 236,400
Debt issuance fees -- 486,000
Acquisition of OuterNet:
Assets acquired 732,559 --
Liabilities assumed (752,056) --
Common stock issued (7,120,000)
Goodwill recorded 7,139,497 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
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APERIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principals and the rules of the
Securities and Exchange Commission (the SEC), and should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's latest annual Report filed with the SEC on Form 10-KSB, as amended. In
the opinion of management all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of financial position and
results of operations for the interim periods presented have been reflected
herein. The results of operations are not necessarily indicative of the results
to be expected for the full year. Notes to the financial statements which would
substantially duplicate the disclosure contained in the audited financial
statements for the year ended March 31, 2000, as reported in the Form 10-KSB
have been omitted.
Comprehensive Income
There are no differences between net loss and comprehensive loss for the six
months ended September 30, 2000 or 1999.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Interpretation will
be applied prospectively to new awards, modifications to outstanding awards, and
changes in employee status on or after July 1, 2000, except as follows: (i)
requirements related to the definition of an employee apply to new awards
granted after December 15, 1998; (ii) modifications that directly or indirectly
reduce the exercise price of an award apply to modifications made after December
15, 1998; and (iii) modifications to add a reload feature to an award apply to
modifications made after January 12, 2000. The Company is evaluating the effect
the application of the Interpretation will have on the financial statements.
Reorganization
On September 11, 2000, the articles of incorporation of our predecessor, MSI
Holdings, Inc. ("MSI") were amended to provide that each three shares of common
stock then outstanding would be combined into one share of common stock. On that
same day, MSI merged into Aperian, Inc., a Delaware corporation and wholly owned
subsidiary of MSI. The effects of the stock combination and merger on holders of
common stock, including differences between the laws of Utah and Delaware and
the charter documents of MSI and Aperian, were described in our Proxy Statement
dated August 17, 2000. All references to us or the Company prior to September
11, 2000 are references to MSI. All common share amounts have been adjusted to
reflect the stock combination.
Reclassification
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
2. ACQUISITIONS AND INVESTMENTS
The merger of OuterNet Connection Strategies, Inc. ("OuterNet), a company
offering web hosting and professional consulting services occurred on July 26,
2000 following approval of the merger by OuterNet's
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common shareholders. As a result of the merger, OuterNet became a wholly owned
subsidiary of the Company. Pursuant to the terms of the merger, the shares of
common stock of OuterNet issued and outstanding immediately prior to the
effective time of the merger were converted into an aggregate of 333,333 shares
of the Company's common stock (after giving effect to the stock combination).
The acquisition was accounted for as a purchase with the results of OuterNet's
operations included from the acquisition date. The Company recorded goodwill in
the amount of $7.1 million in its acquisition of OuterNet. Goodwill amortization
for the quarter and six months ended September 30, 2000 was approximately
$238,000. Goodwill is being amortized on a straight-line basis over a 5-year
period.
3. NOTES PAYABLE
As reported on August 7, 2000, the Company and Hewlett-Packard Company
("HP") have entered into a financing under which HP has agreed, subject to the
fulfillment of certain conditions, to lend up to $40 million to the Company. The
loans, which are evidenced by a convertible secured promissory note (the
"Note"), will bear interest, payable quarterly, at the rate of 10.5% per annum.
Principal will be due on August 3, 2004. Under the Note, the Company is required
to use at least 50% of the proceeds of the borrowings to purchase HP products,
support and services. The remainder may be used for other corporate purposes.
The Note will be secured by security interests in the HP equipment and other
equipment acquired by the Company with the proceeds of the loans. At HP's option
the Note is convertible into the Company's common stock at a price of $25.00,
after giving effect to the stock combination. In connection with the financing,
HP is to be a preferred provider of products and services for the Company's data
centers. During September 2000 the Company borrowed $10 million under this
financing arrangement.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This quarterly report on Form 10-QSB contains forward-looking statements,
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or those anticipated. Words used in this report such as
"believe", "anticipate", "expect", "may", "will" and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. The Company does not undertake any
obligation to update or revise these forward-looking statements to reflect any
future events or circumstances. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report, including
those under the section entitled "RISK FACTORS THAT MAY AFFECT OUR FUTURE
RESULTS" which consist primarily of a brief discussion of certain risks which
are in their entirety forward-looking statements, and those included in the
Company's other reports previously filed with the commission, including the
disclosures in the "RISK FACTORS THAT MAY AFFECT OUR FUTURE RESULTS" section
appearing in the Form 10-KSB for the fiscal year ended March 31, 2000.
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with (i) the financial
statements and accompanying notes appearing in this Quarterly Report, and (ii)
the Company's financial statements and accompanying notes appearing in the
Company's Form 10-KSB for the fiscal year ended March 31, 2000, as filed with
the Commission.
DESCRIPTION OF NEW OPERATIONS
During fiscal year 2000 the Company exited the relatively mature low margin
legacy business of office network connectivity and systems integration, and
entered into the high growth business of Internet connectivity, web-hosting and
infrastructure outsourcing. Web-hosting services are among the fastest-growing
segments of the Internet services sector. For example, The GartnerGroup
forecasts that the market will grow from $2.8 billion this year to $9.3 billion
in revenues by 2004. As a result of our transition we have undergone a virtually
complete change of management and employee personnel. Fundamentally, this is a
capital and people intensive service business, which requires that a substantial
investment be made over an extended period prior to turning cash flow positive.
We provide our broadband Internet services from our data centers located in
Austin, Texas, Dallas, Texas Tampa, Florida, and Atlanta, Georgia. Our fifth
data center in Phoenix, Arizona, is scheduled to open during the third quarter.
Each of these data centers is directly connected to Genuity's and MCI WorldCom's
UUNet ("UUNet") worldwide fiber optic networks. Both the Genuity and UUNet
backbones are among the largest and most technologically sophisticated fiber
optic Internet backbones in the United States. We are able to leverage Genuity's
and UUNet's proprietary network routing protocols to optimize the efficiency and
reliability of our Direct Optical Co-location Connection ("DOCC(TM)")
infrastructure.
Our objective is to be a leading broadband Internet infrastructure provider
("IIP") to businesses with significant Internet applications, Internet service
providers ("ISPs") and application service providers ("ASPs"). Our focus is to
provide a complete infrastructure solution set to mid-market customers seeking
to outsource their content and data management needs.
Our current business of providing Internet infrastructure and managed
services requires that we provide the latest technology and work personally with
our customers to tailor solutions for their individual needs. As a result, our
business is both capital and personnel intensive. There is, moreover, a
significant lead-time from when we incur expenses and hire personnel to build
and manage new facilities and the time revenues are generated. Thus, expansion
through construction of new facilities requires continued access to significant
additional capital.
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We have recently reevaluated our near term plans in view of the significant
tightening of capital available to companies in our business. During the near
term our focus will be directed at decreasing our need for additional capital
and establishing our ability to function on a positive cash flow basis. During
this period we will focus on increasing revenues through expanding the customer
base and increasing value-added service offerings at our existing data centers
and controlling the growth of expenses. We intend to continue growth through
adding data centers to the extent additional capital becomes available on
attractive terms, but until additional sources of outside capital are available,
we do not contemplate significant expenditures to build new data centers.
RESULTS OF OPERATIONS
The revenues for this new business are included under Broadband Internet
Services in our Consolidated Statements of Operations. We received our final
revenues from providing hardware and systems integration services in September
1999. Revenues from Broadband Internet Services aggregated nearly $1 million for
the year ended March 31, 2000. These revenues have increased each quarter since
June 1999, when our first data center in Austin, Texas began operations. Quarter
by quarter revenues is as follows:
<TABLE>
<CAPTION>
Broadband Internet Services by quarter:
---------------------------------------
<S> <C>
Quarter ended June 30, 1999 $ 9,077
Quarter ended September 30, 1999 85,650
Quarter ended December 31, 1999 278,455
Quarter ended March 31, 2000 583,554
Quarter ended June 30, 2000 909,445
Quarter ended September 30, 2000 1,806,112
</TABLE>
To date, we have had limited revenues and have not shown a profit in our
operations. During fiscal year 2000, our total revenues were $1.8 million of
which nearly $1 million came from our new Internet infrastructure business. Our
revenues this fiscal year of approximately $2.7 million have been derived
completely from our Internet infrastructure business. Our net loss was
approximately $22.0 million in fiscal year 2000 and approximately $8.2 million
for the quarter ended September 30, 2000 ($12.4 million during the six month
period).
As of September 30, 2000, our accumulated deficit was approximately $58.4
million. Approximately $12.9 million of the accumulated deficit relates to
preferred stock discounts and dividends, with the remainder resulting from
losses from operations. Of the fiscal 2000 net loss from operations,
approximately $8.7 million was due to non-cash charges for issuances of common
stock, stock options, and stock warrants to employees and non-employees.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were approximately $7.9 million as compared to the
approximate $4.0 million for the quarter ended June 30, 2000, representing an
increase of approximately $3.9 million for the second quarter. The increase in
salaries and benefits of approximately $1.0 million was the result of staff
additions, which included executive management, specialized technical personnel,
sales, finance and project management employees. Total personnel increased from
108 at June 30, 2000 to 168 at September 30, 2000. Professional fees increased
approximately $828,000 from the previous quarter, primarily as the result of
hiring expenses paid to recruiting firms and legal fees associated with the
Company's reorganization and the acquisition of OuterNet Connection Strategies,
Inc. ("OuterNet"). The increase of approximately $437,000 in advertising and
marketing expenses is due to the Company's continuing need to advertise in
target markets where we have built data centers and to build broader regional
and national brand awareness. The $510,000 increase in occupancy costs was the
result of opening data centers in Dallas, Tampa, and Atlanta. Depreciation and
amortization expense increased approximately $742,000 due to the purchase of
equipment and fixtures for the new data centers. In addition, the Company
recorded approximately $238,000 in amortization of goodwill related to the
acquisition of OuterNet.
Interest income for the three months ended September 30, 2000, was $380,000.
This is attributable to interest earned on the proceeds from the various private
placements of common stock of the Company through February 2000, with the
Company receiving net proceeds of approximately $56.5 million. This amount
decreased
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approximately $124,000 from the interest income recorded for the three months
ended June 30, 2000, because of the decreasing cash balance.
While we expect to continue to incur net losses for the foreseeable future,
we expect the losses to decrease as the result of the growth of revenues and
decreased rate of growth of expenses as the result of the decision to focus
near-term efforts on growing the customer base and value-added service offerings
in our existing data centers. We expect the effects of this focus to be felt
during the third quarter as we slow the growth rate in many expense categories
while continuing to increase revenues from broadband internet services at our
existing data centers. The effect should increase during the fourth quarter when
we expect to begin to add revenues from Phoenix, and start-up expenses of the
Phoenix data center, and the costs of our national advertising campaign to build
brand awareness will decrease significantly from third quarter levels. We also
expect that revenues from professional services consulting, a business we
acquired from OuterNet and which we expect to play a key role in our future
growth, will begin to have a more significant effect on our results of
operations during the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced significant losses to date. While we intend during the
near term to decrease our need for additional outside capital by focusing on
adding customers and value added services at our existing data centers, we will
continue to use capital to fund internal cash needs for at least the next two
years, and significant capital to fund expansion beyond our existing data
centers will be necessary for long term growth.
At September 30, 2000, our principal source of liquidity was approximately
$26 million in cash and cash equivalents. This cash was raised primarily through
various private placements of common stock with the Company receiving net
proceeds of $56.5 million. As of September 30, 2000, our current liabilities
were approximately $2.8 million.
Net cash used in operating activities for the six months ended September 30,
2000 was approximately $20.7 million, primarily due to net losses, an increase
in accounts receivable and other current assets, and decreases of approximately
$5.5 million in accounts payable and accrued expenses. These amounts were offset
in part by depreciation and amortization expense, amortization of debt discount,
amortization of deferred rent, and decreases in other receivables and other
current assets. This compares to net cash used in operating activities for the
six months ended September 30, 1999 of approximately $4.3 million, which was
primarily due to net losses and decreases in accounts payable. Net cash used in
operating activities is expected to decrease significantly over the next several
quarters as the revenues from our existing data centers and professional
services business are expected to increase more rapidly than expenses. Many
components of selling, general and administrative expenses, including personnel
related expenses, occupancy expenses, professional fees and advertising and
marketing expenses will grow at significantly lower rates, in at all, than the
rate of growth of revenues. In addition, second quarter operating activities
included the use of $5.5 million to repay a build-up of accounts payable from
prior periods.
Net cash used in investing activities for the six months ended September 30,
2000 was approximately $17.6 million, primarily due to capital expenditures for
the continued construction of Internet data centers. This compares to the net
cash used by investing activities for the six months ended September 30, 1999 of
approximately $190,000, primarily due to capital expenditures for the
construction of our first Internet data center in Austin, Texas. Unless
additional sources of outside capital become available on attractive terms to
fund the buildout of additional data centers, we expect cash used in investing
activities to decrease significantly once we have completed the buildout of our
Phoenix data center in the third quarter.
Net cash provided by financing activities for the six months ended September
30, 2000 was approximately $15.5 million, primarily due to approximately $15.3
million of proceeds from equipment financing and a note with Hewlett-Packard.
Additional cash of approximately $1.3 million resulted from the exercise of
warrants, stock options and a shareholder receivable. These amounts were offset
in part by approximately $1.0 million in repayments on notes payable and capital
leases.
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During the third quarter, we intend to make significant expenditures in
order to complete the buildout of our Phoenix data center. Until additional
sources of outside capital become available, we do not contemplate significant
additional expenditures to build new data centers. Over the next year at least,
we expect continued need for additional cash to fund our operations. We expect
to finance these needs from the cash described above and supplement that with
additional financing through lending institutions or strategic vendors. We
believe our currently estimated working capital and capital expenditure
requirements over the next twelve months can be met with existing cash and cash
equivalents, cash from sales of services and future equipment financing lines of
credit.
We may enter into additional equipment loans and capital leases. We may also
seek to raise additional funds through public or private financing, strategic
relationships and other arrangements. There can be no assurance that we will be
successful in generating sufficient cash flows from operations or raising
capital in sufficient amounts on acceptable terms.
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RISK FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
In addition to the other information in this report, you should carefully
consider the following factors in evaluating our business and us. The
discussions in this report and in our reports filed with the SEC contain
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to a
difference in our actual results are discussed below. Additionally, further
discussion of these risk factors and other risks may be found in the
"Management's Discussion and Analysis of Financial Condition and Results
Operations" and "Business" sections of this report.
RISKS RELATED TO OUR BUSINESS
Our forecasts are based on an unproven business model. If our model's
assumptions are not accurate we may fail to generate profits and may continue to
recognize losses.
The success of our business model depends on the development of a market for
unproven products and services. We generate revenues by providing customers with
bandwidth and related services, relatively new products and services. Our
success relies on our products and services achieving wide acceptance in the
market at competitive prices. Because of the relative novelty of our products
and services, our business model is based on limited and uncertain information
about future demand and costs. The tightening of available capital for our
industry has made it important that we recognize increased revenues from
existing facilities and control the growth of our expenses until capital
conditions improve. We may not successfully address any or all of these
challenges. The failure to do so may seriously damage our business plan,
operating results, and our ability to raise additional capital that may be
necessary for growth beyond the near term.
We have a history of losses and expect continuing losses. As a shareholder,
your investment may be lost if we fail to become profitable.
To date, we have had limited revenues and have not shown a profit in our
operations. During fiscal 2000, our total revenues were $1.8 million of which
only $1 million came from our new Internet infrastructure business. Revenues for
the six months ended September 30, 2000 were approximately $2.7 million, all of
which came from our Internet infrastructure business. Even with our recent
decision to change our near term focus from rapid buildout of additional data
centers to increasing revenues from our existing data centers, we expect our
losses, which were approximately $22.0 million in fiscal year 2000 and
approximately $12.4 million for the six months ended September 30, 2000 to
continue indefinitely. We do not expect our operations to generate sufficient
cash to fund our costs for at least the next year, and we cannot be certain that
our operations will ever generate a positive cash flow. We cannot predict when
profitability might be achieved, if at all. If we are able to become profitable,
we may not be able to sustain it. If we are unable to obtain profitability or
sustain it, we may have to discontinue operations.
We may be unable to manage complications that arise as the result of our
growth. Expansions may cost more than budgeted and not generate revenues as
quickly as anticipated.
We are in the process of completing our fifth data center in one year. Our
data centers span a wide range of geographic regions. The build out or
acquisition of data centers remains a key element of our long-term business
strategy. Our past and future growth may significantly strain our resources as
the result of the increase in the number of our employees, the number of
operating data centers and the more complex operating, administrative and
information management systems required. Many of the risks associated with
significant expansion projects are beyond our control and could delay the build
out of additional data centers. These risks include cost estimation errors or
overruns, equipment and material delays or shortages, and the inability to
obtain necessary permits on a timely basis, if at all. In addition, there can be
no assurance that revenues will be generated as quickly, or in the amounts
anticipated.
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You have limited information on which to evaluate us. Our future results may
vary significantly from our past performance.
Since March 1999, we have changed the focus of our business from providing
hardware and systems integration services to providing a suite of high-speed
Internet access, data transport and networking services, co-location services
and web site hosting services. Because of our limited operating history in
providing our current product mix, there is limited operating and financial data
about our business for you to use in evaluating our performance or us.
We have had recent changes in management. Our current management may be
unable to lead us into profitability.
Many of our senior managers have been hired within the past year. We are
continuing to build a new management team. This team has not had the opportunity
to work together in the past. There is no assurance the new management team will
be able to successfully lead us into profitability.
We will be unable to compete effectively if we are unable to attract and
retain key personnel.
Our future success depends on highly qualified technical, sales, marketing
and customer service personnel. The industry in which we compete has a high
level of employee mobility and aggressive recruiting of skilled personnel. We
face intense competition for qualified personnel in software development,
network engineering and product management. If we are unable to attract and
retain qualified personnel, our ability to compete will be compromised.
Our possible exposure to infringement claims may cause unexpected legal
expenses and divert management resources.
Our management personnel were previously employees of other
telecommunications companies. Our management personnel may have had contracts
with the prior companies. In many cases, these individuals conduct activities
for us in areas similar to those in which they were involved before joining us.
As a result, our employees or we could be subject to allegations of violation of
trade secrets, breach of contract or unfair competition. These claims may
distract our management and employees from their duties and require reallocation
of our resources. Moreover, an unfavorable ruling may hinder our ability to use
technology we need to conduct our business. Liability and defense costs under
these claims could increase our expenses and adversely affect our ability to
compete.
Our operations depend on our ability to maintain favorable relationships
with third party suppliers. We cannot assure the continuity of those
relationships.
We have entered into several alliance and contractual agreements to utilize
third parties' infrastructures and networks for our products and services. We
are dependent on the continued availability of these infrastructures and
networks for our growth and development. If we are unable to maintain or replace
our relationships with our suppliers, we will be unable to provide the current
level of services to our customers. Our failure to consistently provide our
current levels of service could result in a reduction of our client base and
sales volume.
System failures could disrupt our services and cause us to lose customers.
Our target market is particularly sensitive to service failures. Service
failures may reduce or terminate the services we supply to our customers. Any
reduction or termination of our services could cause our customers to switch
their business to our competitors and may hinder our ability to obtain new
customers. Our system is vulnerable to damage from human error, power loss,
facility failures, fire, earthquake, floods, telecommunications failure,
break-ins, sabotage and vandalism. Moreover, we do not have a disaster recovery
plan, carry any business interruption insurance or have any secondary off-site
systems.
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<PAGE> 15
RISKS RELATED TO OUR INDUSTRY
Our growth and performance may be hindered if the Internet use fails to
increase as predicted.
Demand for our services could be reduced if the market for business-related
Internet solutions fails to develop further. Critical issues concerning the
commercial use of the Internet remain unresolved and may hinder the growth of
Internet use. These issues are particularly critical in the business sector --
our target market. If demand for our services fails to materialize at the
anticipated levels, our revenues will also fail to reach expectations.
The market for our products and services is highly competitive, and we may
not be able to compete effectively.
The market for our products and services is rapidly evolving. Our market is
also intensely competitive, partly due to relatively low barriers to entry. Many
of our competitors and potential competitors have longer operating histories,
greater name recognition and substantially greater financial, technical and
marketing resources than us. Moreover, our competitors may be able to negotiate
contracts with suppliers on more favorable terms than we can. Some of these
competitors may also provide products with some performance advantages over our
products. Given the fierce competition in our industry and our comparatively
limited resources, we may not be able to compete effectively.
Our services are subject to uncertain government regulation. Changes in laws
or regulations could restrict the way we operate our business.
We operate in an environment of unstable and evolving laws and regulations.
Changes in applicable laws or regulations could impact our operations and impact
our costs, service requirements and the scope of competition. Incumbent local
carriers are likely to pursue efforts to affect the applicable laws and
regulations in a manner that would be more favorable to them and that may be
against our interests. The likely means to affect the laws include litigation in
courts, administrative proceedings with the Federal Communications Commission
and state telecommunications regulators and lobbying the U.S. Congress. We may
choose to expend significant resources to participate in regulatory proceedings
at the federal or state level. The expenses associated with participating in and
complying with an evolving regulatory framework may increase our operating
expenses beyond expectations. Despite our possible expenditures, we cannot
assure any favorable results.
Internet security concerns may hinder the development of electronic commerce
and demand for our products and services.
A significant barrier to commerce and communications over the Internet has
been the need for the secure transmission of confidential information. Security
breaches or the inadvertent transmission of computer viruses could expose us to
litigation and possible liability. We may incur significant costs to protect
against the threat of security breaches or to alleviate problems caused by
breaches. A party who is able to penetrate our network security could misuse our
users' personal information and our users might sue us or bring claims against
us. If any well-publicized compromise of security occurs, Internet usage and the
demand for our services could decline.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) On September 11, 2000, the articles of incorporation of our predecessor,
MSI Holdings, Inc. ("MSI") were amended to provide that each three shares of
common stock then outstanding would be combined into one share of common stock.
On that same day, MSI merged into Aperian, Inc., a Delaware corporation. The
effects of the stock combination and merger on holders of common stock,
including differences between the laws of Utah and Delaware and the charter
documents of MSI and Aperian, were described in our Proxy Statement dated August
17, 2000.
(b) The Convertible Secured U.S. $40,000,000 Promissory Note dated August
3, 2000 issued to Hewlett-Packard Company prohibits our paying any dividends
(other than stock dividends) on any of our capital stock.
(c) During the quarter ended September 30, 2000, we issued 333,333 shares
of common stock (after giving effect to the stock combination) to the
shareholders of OuterNet Connection Strategies, Incorporated.
The sale of the above securities was determined to be exempt from
registration under the Securities Act in reliance on Regulation D promulgated
under the Securities Act as a transaction by an issuer not involving any public
offering. In addition, the recipients of securities represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, or were informed of the
restrictions on resale of such securities, and appropriate legends were affixed
to the share certificates issued in these transactions. All recipients had
adequate access to information about us.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our Annual Meeting of Stockholders September 7, 2000. Following are
descriptions of the matters voted on and the results of such meeting (share
numbers do not reflect the one-for-three stock combination effected on September
11, 2000):
<TABLE>
<CAPTION>
Votes Votes Votes
Votes For Against Abstained Withheld
--------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
1. Election of Directors
Jack C. Baum 29,950,877 568
Christopher Brickler 25,149,682 4,801,763
Donald H. Brush 29,936,134 15,311
Daniel Dornier 27,353,934 2,597,511
Robert J. Gibbs 29,792,872 158,573
Stephen J. Metzger 29,950,445 1,000
Humbert B. Powell, III 29,755,437 196,008
Davinder Sethi 29,950,645 800
Raymond Wicki 29,950,945 500
Pat Malone 4,721,626
2. Approve the 2000 Stock Option Plan 18,885,332 10,326,373 1,367,334
3. Approve a one-for-three stock
combination 20,033,936 9,677,160 867,943
4. Approve reincorporation in Delaware 22,847,665 5,076,392 7,501
5. Approve limitation of director
monetary liability 20,569,075 6,976,828 385,655
</TABLE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
August 3, 2000 - Item 5. Other Events
August 9, 2000 - Item 5. Other Events
September 11, 2000 - Item 5. Other Events
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APERIAN, INC.
Date: November 14, 2000 By: /s/ Robert J. Gibbs
-------------------------------
Robert Gibbs, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of this
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert J. Gibbs Chairman and November 14, 2000
------------------------------- Chief Executive Officer
Robert J. Gibbs
/s/ Douglas W. Banister Chief Financial Officer November 14, 2000
-------------------------------
Douglas W. Banister
/s/ Elizabeth Montoya Controller November 14, 2000
-------------------------------
Elizabeth Montoya
</TABLE>
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
