UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to
Commission file number: 0-17973
I-LINK INCORPORATED
(Exact name of registrant as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13751 S. Wadsworth Park Drive, Suite 200, Draper, Utah 84020
(Address of principal executive offices)
(801) 576-5000
(Registrant's telephone number)
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 and Exchange
Act of 1934 during the preceding 12 months (or for such shorter time 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 November 16, 1998, the registrant had outstanding 18,754,352 shares of
$0.007 par value common stock.
PART I - FINANCIAL INFORMATION
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS September 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
Current assets:
Cash and cash equivalents $ 2,075,996 $ 1,643,805
Accounts receivable, less allowance for
doubtful accounts of $1,759,000 and
$1,385,000 as of September 30, 1998 and
December 31, 1997, respectively 5,066,966 3,233,207
Certificates of deposit - restricted 780,661 1,628,500
Other current assets 989,891 321,488
Net assets of discontinued operations 487,371 -
---------- ----------
Total current assets 9,400,885 6,827,000
Furniture, fixtures and equipment, net 5,912,859 3,551,917
Other assets:
Intangible assets, net 10,143,806 12,314,080
Certificates of deposit - restricted 217,624 259,000
Other assets 204,764 705,502
Net assets of discontinued operations - 595,377
---------- ----------
Total assets $ 25,879,938 $ 24,252,876
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,514,060 $ 4,833,452
Accrued liabilities 3,539,459 2,770,997
Current portion of long-term debt 10,234,850 2,008,416
Current portion of obligations under
capital leases 95,130 169,315
---------- ----------
Total current liabilities 18,383,499 9,782,180
Long-term debt - 1,854,341
Obligations under capital leases - 67,159
---------- ----------
Total liabilities 18,383,499 11,703,680
---------- ----------
Commitments and contingencies (note 6)
Redeemable preferred stock (note 4) 9,470,000 -
---------- ----------
Stockholders' equity (deficit):
Preferred stock, $10 par value, authorized
10,000,000 shares, issued and outstanding
50,951 and 119,926 at September 30, 1998
and December 31, 1997, respectively,
liquidation preference of $26,572,156
at September 30, 1998 509,510 1,199,260
Common stock, $.007 par value, authorized
75,000,000 shares, issued and outstanding
18,692,352 and 16,036,085 at September 30,
1998 and December 31, 1997, respectively 130,846 112,251
Additional paid-in capital 78,868,200 70,511,697
Deferred compensation ( 1,273,572) 2,289,765
Accumulated deficit (80,208,545) (56,984,247)
---------- ----------
Total stockholders' equity (deficit) ( 1,973,561) 12,549,196
---------- ----------
Total liabilities and stockholders'
equity (deficit) $ 25,879,938 $ 24,252,876
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues:
Telecommunication services $ 5,020,650 $ 2,705,135 $ 13,936,594 $ 7,119,960
Marketing services, net 1,328,949 902,736 3,634,158 1,623,226
Technology licensing and development 406,779 139,700 987,389 139,700
---------- ---------- ---------- ----------
Total revenues 6,756,378 3,747,571 18,558,141 8,882,886
---------- ---------- ---------- ----------
Operating costs and expenses:
Telecommunication network expense 5,095,263 3,500,867 14,605,813 10,566,657
Marketing services 1,364,110 1,082,543 4,575,067 1,723,282
Selling, general and administrative 2,591,078 2,290,498 7,523,170 6,442,415
Provision for doubtful accounts 875,651 440,000 2,324,313 785,000
Acquired in-process research
and development - 4,235,830 - 4,235,830
Depreciation and amortization 1,059,406 680,821 3,109,232 1,493,972
Research and development 607,903 282,320 1,752,058 627,654
---------- ---------- ---------- ----------
Total operating costs and expenses 11,593,411 12,512,879 33,889,653 25,874,810
---------- ---------- ---------- ----------
Operating loss ( 4,837,033) ( 8,765,308) (15,331,512) (16,991,924)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense ( 303,835) ( 1,270,508) ( 7,944,412) ( 1,843,779)
Interest and other income 96,168 43,973 159,632 184,697
---------- ---------- ---------- ----------
Total other income (expense) ( 207,667) ( 1,226,535) ( 7,784,780) ( 1,659,082)
---------- ---------- ---------- ----------
Loss from continuing operations ( 5,044,700) ( 9,991,843) (23,116,292) (18,651,006)
Loss from discontinued operations
(less applicable income tax
provision of $0 for the three- and
nine-month periods ended September
30, 1998 and 1997) - ( 12,865) ( 108,006) ( 103,342)
---------- ---------- ---------- ----------
Net loss $( 5,044,700) $(10,004,708) $(23,224,298) $(18,754,348)
========== ========== ========== ==========
Net loss per common share - basic and diluted:
Loss from continuing operations $( 0.71) $( 0.88) $( 1.86) $( 1.78)
Loss from discontinued operations - - ( 0.01) ( 0.01)
---------- ---------- ---------- ----------
Net loss per common share $( 0.71) $( 0.88) $( 1.87) $( 1.79)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
Preferred Stock Common Stock Additional
------------------- -------------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
------- ---------- ---------- -------- ----------- ------------ -------------
Balance at
December 31, 1997 119,926 $1,199,260 16,036,085 $112,251 $70,511,697 $(2,289,765) $(56,984,247)
Conversion of
preferred stock
into common stock (68,975) ( 689,750) 2,256,727 15,798 673,952 - -
Amortization of
deferred
compensation on
stock options
issued for
services - - - - - 742,598 -
Forfeiture of
stock options
issued for
services - - - - (273,595) 273,595 -
Exercise of stock
options - - 399,540 2,797 682,146 - -
Warrants issued in
connection with
certain convertible
notes payable - - - - 7,274,000 - -
Net loss - - - - - - (23,224,298)
------- ---------- ---------- -------- ----------- ------------ -------------
Balance at
September 30,1998 50,951 $ 509,510 18,692,352 $130,846 $78,868,200 $(1,273,572) $(80,208,545)
======= ========== ========== ======== =========== ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
----------------------------
1998 1997
------------- -------------
Cash flows from operating activities:
Net loss $(23,224,298) $(18,754,348)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,109,232 1,493,972
Provision for doubtful accounts 2,324,313 785,000
Provision for asset valuation - 213,944
Amortization of discount on notes payable 7,274,000 1,299,600
Amortization of deferred compensation
on stock options issued for services 742,598 435,583
Interest expense associated with
issuance of convertible notes - 320,000
Acquired in-process research and development - 4,235,830
Increase (decrease) from changes in
operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable ( 4,158,072) ( 2,310,137)
Other assets ( 167,665) ( 848,532)
Accounts payable and accrued liabilities 449,070 5,355,537
Discontinued operations ( 48,944) 165,148
---------- ----------
Net cash used in operating activities (13,699,766) ( 7,608,403)
---------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment ( 3,299,900) ( 1,176,428)
Cash received from the purchase of I-Link
Communications, Inc. - 435,312
Cash received from the purchase of MiBridge, Inc. - 79,574
Maturity of restricted certificates of deposit 889,215 -
Investing activities of discontinued operations 310,000 -
---------- ----------
Net cash used in investing activities ( 2,100,685) ( 661,542)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable
and warrants 7,768,000 5,000,000
Payment of long-term debt ( 1,395,907) ( 499,435)
Payment of capital lease obligations ( 141,344) ( 137,670)
Proceeds from issuance of redeemable preferred
stock and warrants 10,000,000 -
Offering costs from issuance of preferred stock ( 530,000) -
Proceeds from exercise of common stock
warrants and options 684,943 50,625
Financing activities of discontinued operations ( 170,465) ( 85,791)
---------- ----------
Net cash provided by financing activities 16,215,227 4,327,729
---------- ----------
Increase (decrease) in cash and cash equivalents 414,776 ( 3,942,216)
Cash and cash equivalents at beginning of period 1,727,855 4,500,227
---------- ----------
Cash and cash equivalents at end of period $ 2,142,631 $ 558,011
========== ==========
Cash and cash equivalents at end of period:
Continuing operations $ 2,075,996 $ 489,237
Discontinued operations 66,635 68,774
---------- ----------
Total cash and cash equivalents at end of period $ 2,142,631 $ 558,011
========== ==========
Continued
The accompanying notes are an integral part of these consolidated financial
statements.
4
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
For the Nine Months Ended
September 30,
----------------------------
1998 1997
------------- -------------
Supplemental schedule of non-cash investing
and financing activities:
Common stock issued in connection with the
acquisition of I-Link Communications $ - $ 2,414,583
Preferred stock and note payable issued in
connection with the acquisition of MiBridge, Inc. - 8,250,000
Common stock issued in connection with the
acquisition of I-Link Worldwide, Inc. - 8,875,000
Stock warrants issued in connection with
litigation settlement - 821,000
Stock options issued for services - 5,342,155
The accompanying notes are an integral part of these consolidated financial
statements.
5
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 1 - Description of Business, Principles of Consolidation and Liquidity
The consolidated financial statements include the accounts of I-Link
Incorporated and its subsidiaries (the "Company"). The Company's principal
operation is the development, sale and delivery of enhanced communications
products and services utilizing its own private intranet and both owned and
leased network switching and transmission facilities. The Company provides
unique communications solutions through its use of proprietary technology
developed by its wholly-owned subsidiaries I-Link Systems, Inc., MiBridge,
Inc. and Vianet Technologies, Inc. Telecommunications services are
marketed primarily through independent representatives to subscribers
throughout the United States.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
On March 23, 1998, the Company's Board of Directors approved a plan to
dispose of the Company's medical services businesses in order to focus its
efforts on the sale of telecommunication services and technology licensing.
The Company intends to sell all of the assets of the medical services
subsidiaries, with the proceeds being used to satisfy outstanding
obligations of the medical services subsidiaries. The Company recognized a
$1,007,453 loss on disposal of these subsidiaries during the quarter ended
December 31, 1997. The results of the medical services operations have
been classified as discontinued operations for all periods presented in the
Consolidated Statements of Operations. The assets and liabilities of the
discontinued operations have been classified in the Consolidated Balance
Sheets as "Net assets - discontinued operations". Discontinued operations have
also been segregated for all periods presented in the Consolidated Statements of
Cash Flows.
The interim financial data are unaudited; however, in the opinion of the
management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of (a) the results of operations for the three-month and nine-
month periods ended September 30, 1998 and 1997, (b) the financial position
at September 30, 1998, and (c) cash flows for the nine-month periods ended
September 30, 1998 and 1997. The year-end balance sheet was derived from
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. The financial statements
should be read in conjunction with the Company's annual report on Form 10-K
for the year ended December 31, 1997 and its quarterly reports on Form 10-Q
for the three months ended March 31, 1998 and for the six months ended June
30, 1998.
The results of operations for the three-month and nine-month periods ended
September 30, 1998 are not necessarily indicative of those to be expected
for the entire year.
The Company incurred a net loss from continuing operations of $23,116,292 and
$5,044,700 for the nine and three-month periods ended September 30, 1998, and
as of September 30, 1998 had an accumulated deficit of $80,208,545 and
negative working capital of $8,982,614. Revenues generated from continuing
operations will not be sufficient during the remainder of 1998 to fund ongoing
operations or, the continued expansion of the Company's private
telecommunications network facilities, and anticipated growth in subscriber
base. To provide a portion of the required capital, the Company has entered into
two financing arrangements as follows: (1) during the first six months of 1998,
the Company obtained an aggregate of $7.768 million in new interim debt
financing from Winter Harbor, L.L.C. and (2) in July 1998, the Company entered
into an agreement for the sale of a new series of Preferred Stock for
consideration in the amount of $10,000,000 (net proceeds received of $9.47
million) with JNC Opportunity Fund Ltd. ("JNC") (see note 4). The $7.768
million Winter Harbor debt financing is due on demand. Additional funds will be
necessary from public or private financing markets to fund continued operations
and to successfully integrate and finance the planned expansion of the business
communications services and to discharge the financial obligations of the
Company.
6
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 2 - Summary of Significant Accounting Policies
Net loss per share
The Company has adopted SFAS No. 128, "Earnings per Share" for 1998 and
1997. The standard requires presentation of basic and diluted earnings per
share. Basic earnings per share is computed based on the weighted
average number of common shares outstanding during the period. Options,
warrants, convertible preferred stock and convertible debt are included in
the calculation of diluted earnings per share, except when their effect
would be anti-dilutive. As the Company had a net loss from continuing
operations for the nine-month and three-month periods ended September 30,
1998 and 1997, basic and diluted loss per share are the same. Basic and
diluted loss per common share were calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Loss from continuing operations $( 5,044,700) $( 9,991,843) $(23,116,292) $(18,651,006)
Deemed preferred stock dividends
on Class E and Class F convertible
redeemable preferred stock ( 7,472,737) - ( 7,472,737) -
Cumulative preferred stock
dividends not paid in the
current period ( 678,679) ( 288,815) ( 1,580,903) ( 866,738)
---------- ---------- ---------- ----------
Loss from continuing operations
applicable to common stock $(13,196,116) $(10,280,658) $(32,169,932) $(19,517,744)
========== ========== ========== ==========
Loss from discontinued operations $ - $( 12,865) $( 108,006) $( 103,342)
========== ========== ========== ==========
Weighted average shares outstanding 18,492,434 11,684,775 17,248,713 10,989,906
========== ========== ========== ==========
Loss from continuing operations $( 0.71) $( 0.88) $( 1.86) $( 1.78)
Loss from discontinued operations - - ( 0.01) ( 0.01)
---------- ---------- ---------- ----------
Net loss per common share $( 0.71) $( 0.88) $( 1.87) $( 1.79)
========== ========== ========== ==========
The deemed preferred stock dividends on Class E and Class F convertible
cumulative redeemable preferred stock equal the sum of the difference
between the conversion price per common share per the agreements and the
market price of the common stock as of the date the agreements were
finalized and the difference between the fair value of the Class F
preferred stock issued and the carrying value of the Class E stock at the
date of redemption (see note 4). The deemed dividends are implied only and do
not represent obligations to pay a dividend.
Net loss per share
Potential common shares that were not included in the computation of
diluted EPS because they would have been anti-dilutive are as follows as of
September 30:
7
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 2 - Summary of Significant Accounting Policies, continued
1998 1997
------------ ------------
Assumed conversion of Class B preferred stock - 183,542
Assumed conversion of Class C preferred stock 1,093,224 5,232,432
Assumed conversion of Class D preferred stock - 738,003
Assumed conversion of Class F preferred stock 4,364,233 -
Assumed conversion of Class M preferred stock 4,400,000 -
Assumed conversion of convertible debt 3,107,200 286,800
Shares to be issued - acquisition of ILC - 400,000
Assumed exercise of options and warrants to
purchase shares of common stock 33,095,042 11,013,872
---------- ----------
46,059,699 17,854,649
========== ==========
As of September 30, 1998, Winter Harbor, the sole holder of Series M
Preferred Stock, held warrants, exercisable at any time, for the purchase
of up to 17,540,000 shares of common stock. In addition, should Winter
Harbor elect to convert its $7.768 million in promissory notes into
additional shares of Series M Preferred Stock, it is entitled to receive
additional warrants to purchase 5,000,000 shares of common stock. The
exercise prices of all of such warrants varied at the time of their
respective, however, all are subject to adjustment downward to
equal the market price of common stock in the event the common stock market
price is below the original exercise price at the time of exercise, subject
to an exercise price lower limit of the lesser of the original exercise
price or $2.75 per share.
Recently issued financial accounting standards
The Accounting Standards Executive Committee issued Statement of Position
No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". The SOP was issued to address the
diversity in practice regarding whether and under what conditions the costs
of internal-use software should be capitalized. SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The
Company has not determined the effect that SOP 98-1 will have on its
consolidated financial position or results of operations.
Reclassifications
Certain balances in the September 30, 1997 financial statements have been
reclassified to conform to the current year presentation. These changes had
no effect on previously reported net loss, net assets or stockholders' equity.
8
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 3 - Discontinued Operations
Net assets of the Company's discontinued operations (excluding intercompany
balances which have been eliminated against the net equity of the
discontinued operations) are as follows as of September 30, 1998 and
December 31, 1997:
1998 1997
(Unaudited)
----------- -----------
Assets:
Current assets:
Cash and cash equivalents $ 66,635 $ 84,050
Accounts receivable 1,071,135 1,033,376
Inventory 555,291 555,939
Other 18,962 24,951
--------- ---------
Total current assets 1,712,023 1,698,316
Furniture, fixtures and equipment, net 386,510 958,153
Intangible assets 391,757 391,757
Other non-current assets 6,230 8,706
--------- ---------
Total assets 2,496,520 3,056,932
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,555,878 1,781,541
Notes payable 241,661 412,126
--------- ---------
Total current liabilities 1,797,539 2,193,667
Other liabilities 211,610 267,888
--------- ---------
Total liabilities 2,009,149 2,461,555
--------- ---------
Net assets - discontinued operations $ 487,371 $ 595,377
========= =========
The net assets of the discontinued operations as of September 30, 1998 are shown
as a current asset in the consolidated balance sheet as it is anticipated that
the disposal of the medical services business will be completed by the first
quarter of 1999. Revenues of the discontinued operations were $296,835 and
$1,259,763 and $620,566 and $1,800,121 for the three-month and nine-month
periods ending September 30, 1998 and 1997, respectively.
Note 4 - Capital Financing
During the first and second quarters of 1998 the Company obtained an
aggregate of $7.768 million in new interim debt financing from Winter
Harbor, L.L.C. As consideration for Winter Harbor's commitment to make the
loan, the Company agreed to issue 6,740,000 warrants (Loan Warrants) to
purchase common stock of the Company at exercise prices ranging from $5.50
to $7.22 based upon 110% of the closing price of the common stock on the
day loan funds were advanced. The warrants have exercise periods of 7.5
years from issuance. The Company also agreed to extend the exercise period
on all warrants previously issued to Winter Harbor (10,800,000) to seven
and one-half years. Pursuant to the terms of the loan agreement with
Winter Harbor, the initial borrowings of $5,768,000 were payable upon
demand by Winter Harbor no earlier than May 15, 1998, and were
collateralized by essentially all of the assets of the Company's
subsidiaries. Because the loan was not repaid by May 15, 1998, the total
loan, including additional borrowings of $2,000,000 obtained in the second
quarter, continues on a demand basis with interest accruing at prime plus
four percent. Additionally, Winter Harbor has the right at any time until
the loan is repaid to elect to convert the unpaid balance of the loan into
additional shares of the Company's Series M Preferred Stock, reduce the exercise
9
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 4 - Capital Financing, continued
price of the 6,740,000 Loan Warrants to $2.50 per share, and
receive an additional 5,000,000 warrants to purchase common stock of the
Company at an exercise price of $2.50 per share.
During the six-month period ended June 30, 1998, the Company recorded
$7,274,000 as a discount against the new debt representing the relative
fair value attributed to the new warrants, the change of the exercise
period on prior warrants and the equity instruments associated with the
assumed conversion of the debt into equity. The debt discount was
amortized over the original terms of the respective borrowings. The debt
discount was fully amortized during the six-month period ended June 30, 1998.
On July 9, 1998 the Company obtained a $10 million equity investment, net
of $530,000 in closing costs, from JNC Opportunity Fund Ltd. ("JNC").
Under the original terms of the equity investment, JNC purchased shares of
the Company's newly created 5% Series E Convertible Preferred Stock (the
"Series E Preferred Stock"), which were convertible into the Company's
common shares at a conversion price of the lesser of 110% of the market
price of the Company's publicly traded common shares as of the date of
closing, and 90% of a moving average market price at the time of conversion.
In addition, JNC obtained a warrant to purchase 250,000 shares of the
Company's common stock at an exercise price of $5.873 (equal to 120% of the
market price of the Company's publicly traded common shares as of the date
of closing).
On July 28, 1998, the terms of the JNC equity investment were amended to
provide a floor to the conversion price, and to effect the amendment the
Company created a 5% Series F Convertible Preferred Stock (the "Series F
Preferred Stock") with which the Series E Preferred Shares originally
issued to JNC were exchanged. Pursuant to the amendment, the Series F
Preferred Shares were originally convertible into common shares at a
conversion price of the lesser of $4.00 per common share or 87% of a moving
average market price of the Company's common shares at the time of conversion,
subject to a $2.50 floor. The Series F Preferred Shares provide for
adjustments in the initial conversion price and as of November 6, 1998, the
conversion price has been adjusted to the lesser of $3.76 or 81% of a moving
average market price of the Company's common shares at the time of conversion.
In the event the market price remains below $2.50 for five consecutive trading
days, the floor will be re-set to the lower rate, provided, however, that
the floor shall not be less than $1.25. As of November 6, 1998, the floor
was reset to $2.163. JNC also received an additional warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $4.00
per common share. The Series F Preferred shares may be converted at any
time, are automatically converted at the end of three years, and are
subject to specific provisions that would prevent any issuance of I-Link
common stock at a discount if and to the extent that such shares would
equal or exceed in the aggregate 20% percent of the number of common shares
outstanding on July 9, 1998 absent shareholder approval as contemplated by
the Nasdaq Stock Market Non-Quantitative Designation Criteria.
In certain instances, including the Company's failure to have a registration
statement covering the conversion shares declared effective within 180 days of
the original issuance date or the stock is not listed on NASDAQ or a subsequent
market or is suspended for more than three non-consecutive trading days, the
holders of the Series F Preferred Stock may require that the Company redeem
their Series F Preferred Stock. Because these redemption provisions are not
entirely within the control of the Company, the Series F Preferred Stock is
presented as a spearate line item above stockholders' equity.
In addition, the Company issued warrants to purchase 75,000 shares of the
Company's common stock at a price of $4.89 per share to two individuals as
a brokerage fee in connection with the JNC equity investment.
In November 1998, Winter Harbor loaned an additional $1,041,712 to the
Company which was used to pay the second of two installment payments which
were part of the MCI arbitration settlement. Terms concerning the loan
have not been finalized, but it is anticipated that repayment will be on a
demand basis.
10
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 5 - Income Taxes
The Company recognized no income tax benefit from the losses generated in
1998 and 1997 because of the uncertainty of the realization of the related
deferred tax asset.
Note 6 - Purchase commitments
In November 1998 the Company amended the terms of its contract with Sprint
for the supply of inbound and outbound telephone services. Among other
things, the new agreement, which is effective through May 2000, reduces
the minimum monthly usage amounts for the remaining term of the agreement to
$550,000. Failure to achieve the minimum will require shortfall payments by
the Company equal to 50% of the remaining monthly minimum usage amounts.
11
Item 2- Management's Discussion and Analysis and Results of Operations
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto
appearing elsewhere herein and in conjunction with the Management's
Discussion and Analysis set forth in the Company's Form 10-K for the year
ended December 31, 1997 and Form 10-Q for the quarters ended June 30 and
March 31, 1998.
Forward Looking Information
This report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of management as well
as assumptions made by and information currently available to management.
When used in this document, the words "anticipate", "believe", "estimate",
"expect", and "intend" and similar expressions, as they relate to the
Company or its management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company
respecting future events and are subject to certain risks and uncertainties
as noted. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, or intended.
Among many factors that could cause actual results to differ materially are
the following: the Company's ability to finance and manage expected rapid
growth; the Company's ability to attract, support and motivate a rapidly
growing number of independent representatives; competition in the long
distance telecommunications and ancillary industries; the Company's ongoing
relationship with its long distance carriers and vendors; dependence upon
key personnel; subscriber attrition; the adoption of new, or changes in,
accounting policies, litigation, federal and state governmental regulation
of the long distance telecommunications and internet industries; the
Company's ability to maintain, operate and upgrade its information systems
and network; the Company's success in deploying its Communication Engine
network in internet telephony and the Company's success in the offering of
other enhanced service products.
Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements. The
Company's ability to consummate such transactions and achieve such results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance
of the Company's products and services, regulatory approvals and
developments, economic conditions, the impact of competition and pricing,
results of the Company's financing efforts and other factors affecting the
Company's business that are beyond the Company's control. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
Operations
In January 1997 the Company acquired I-Link Communications ( "ILC") and in
August 1997 the Company acquired MiBridge, Inc. In 1997, the Company
launched operations of a network marketing program through I-Link
Worldwide, L.L.C., to market its products. In March 1998, the Company made
the decision to dispose of the operations of the subsidiaries of the
Company operating in the medical services industry in order to concentrate
on its telecommunications and technology sectors. Accordingly, medical
services operations during the nine and three-month periods ending
September 30, 1998 and 1997 have been reported as discontinued operations.
In the first quarter of 1998, the Company formed ViaNet Technologies, Ltd.
("ViaNet"), its third research and development group.
The Company's principal operation is the development, sale and delivery of
enhanced communications products and services utilizing its own private
intranet and both owned and leased network switching and transmission
facilities. The Company provides unique communications solutions through
its use of proprietary technology acquired and developed by its
subsidiaries, I-Link Systems, Inc., ViaNet and MiBridge, Inc.
Telecommunications services are marketed primarily through independent
representatives to subscribers throughout the United States. The Company's
telecommunication services operations began primarily with the acquisition
12
of ILC, an FCC licensed long-distance carrier.
The technology that distinguishes I-Link from other telecommunications
companies is the capability to carry high volumes of long-distance traffic
at significantly reduced cost and provide enhanced services through its
proprietary combination of Internet Protocol (IP) and compression
technologies, while maintaining the ease of use, high quality, and
reliability of traditional phone systems. During the first and second
quarters of 1998, the Company benefited from the commercial deployment of
its technology through its Communication Engines established at its
facilities in Los Angeles, Dallas/Ft. Worth, Phoenix and Salt Lake City,
and steadily increased the commercial telecommunications traffic carried
over its Communications Engines. In Addition, in March 1998, the Company
announced the nationwide availability of V-Link[TM]. V-Link[TM] is a fully
integrated communications service that enhances the utilization of
telephones, cellular phones, pagers and fax machines by combining them into
a single communications environment. V-Link also provides conference
calling, e-mail, fax-on-demand and V-Link One Number[TM] calling features.
This permitted the Company to announce a new 4.9-cent-per-minute long-
distance calling rate to customers whose long distance calls both originate
and terminate in the more than 25 calling areas located in these
metropolitan markets. The Company intends to continue to expand the
geographic areas covered by its Communications Engines.
During the second quarter of 1998, the Company announced the development of
a communications product that would increase the telephone line capacity in
any household or business. Initially dubbed "C4" (Customer Communications
Control Center), the product will provide home and small business customers
the capacity of up to 24 phone lines using the existing telephone lines and
wires that are connected to their homes or offices today. In addition, C4
will provide around-the-clock Internet access and access to the enhanced
services I-Link currently offers, including voice mail, fax, paging, e-mail,
conference calling and follow-me-anywhere One-Number service. C4 uses
existing telecommunications networks, including the standard copper-wire
lines currently installed in nearly every home and business, as well as
high-speed data lines and infrastructure that have been announced or are
being installed by local and long-distance telecommunications companies.
C4 is expected to undergo early field trials in the fourth quarter of 1998
and the Company anticipates shipping in 1999.
Liquidity and Capital Resources
Cash and cash equivalents as of September 30, 1998 were $2,075,996,
restricted certificates of deposits were $780,661 and the working capital
deficit was $8,982,614. Cash used by operating activities during the nine-
month period ended September 30, 1998 was $13,699,766 as compared to
$7,608,403 during the same period ended September 30, 1997. The increase in
cash used by operating activities in 1998 was primarily due to an increase
in accounts receivable and the increased operating loss as the Company
continued to develop its infrastructure and product base.
Net cash used by investing activities in the nine-month period ended
September 30, 1998 was $2,100,685 as compared to net cash used of $661,542
in the same period ended September 30, 1997. Cash used by investing
activities in 1998 was attributable to the purchase of furniture, fixtures
and equipment of $3,299,900 which was offset by $310,000 received from the sale
of certain assets from discontinued operations and the maturity of certificates
of deposits in the amount of $889,215. In the first nine months of 1997
cash used by investing activities was primarily due to purchase of
furniture, fixtures and equipment of $1,176,428 which was offset by cash
received of $514,886 in the acquisition of ILC and MiBridge, Inc.
Financing activities provided net cash of $16,215,227 in the first nine
months of 1998 as compared to cash provided of $4,327,729 in the same
period of 1997. Cash provided in 1998 included proceeds of $7,768,000 from
short-term debt and common stock warrants, and $9,470,000 in net proceeds from
the issuance of preferred stock and common stock warrants, $684,943 in proceeds
from exercises of common stock warrants and options. Repayments of $1,537,251
on long-term debt, notes payable and capital lease obligations from continuing
operations and $170,465 from discontinued operations offset these proceeds.
During the same nine months in 1997, cash provided by financing activities
included $5,000,000 in proceeds from issuance of long-term debt and warrants and
$50,625 from the exercise of common stock warrants and options which sources
were offset by repayments of $637,105 on long-term debt and capital
13
lease obligations from continuing operations and $85,791 from discontinued
operations.
The Company incurred a net loss from continuing operations of $23,116,292
for the first nine months of 1998, and as of September 30, 1998 had an
accumulated deficit of $80,208,545. Revenue generated from continuing
operations will not be sufficient during the remainder of 1998 to fund the
Company's operations or, continued expansion of its private telecommunications
network facilities and anticipated growth in subscriber base. To provide a
portion of its capital needs, the Company has entered into financing
arrangements as described below. Additional funds will be necessary from public
or private financing markets to fund continued operations and to successfully
integrate and finance the planned expansion of the business communications
services and to discharge the financial obligations of the Company.
Current Position/Future Requirements
During the remainder of 1998, the Company plans to use available cash and
funds raised from the sale of debt or equity securities to fund the
development and marketing of I-Link products and services. During the
third quarter of 1998 revenue from continuing operations increased
$1,282,789 (23.4%) from the second quarter of 1998 as shown below:
Three Months Ended
----------------------
9/30/98 6/30/98 Increase % Increase
---------- ---------- ---------- ----------
Telecommunications services $5,020,650 $4,134,967 $ 885,683 21.4%
Marketing services 1,328,949 963,962 364,987 37.9%
Technology licensing
and development 406,779 374,660 32,119 8.6%
--------- --------- ---------
Net operating revenue $6,756,378 $5,473,589 $1,282,789 23.4%
========= ========= =========
The increase in telecommunications services was a direct result of the
growth in the Company's Network Marketing channel of distribution. In
early 1998 the Company decided to refocus its resources to concentrate on
the channels of product distribution with better profit margins (primarily
Network Marketing). The effect of this decision was to terminate the
Company's relationship with several accounts during the second quarter of
1998 including its single largest wholesale marketing group. Terminating
these relationships resulted in decreased revenue of $852,000 in the second
quarter as compared to the first quarter of 1998. Continued growth in the
Network Marketing channel has resulted in third quarter telecommunications
services revenue which is greater than the first quarter of 1998 ($4.8
million) in effect overcoming the $852,000 decrease in the second quarter.
The increase in marketing services revenue was primarily due to an increase
in revenue from independent representatives for the national convention
(which occurs in the first and third quarters) and training, promotional
and presentation materials. The Company anticipates that revenues from
marketing services will decrease somewhat during the fourth quarter as
there will be no national convention revenues and due to cyclical downturns
in network marketing activities during that time of the year. Technology
licensing and development revenue was up slightly from the second quarter
and it is anticipated that they will continue to increase from new
development agreements and royalties on existing software licensing
contracts.
The Company believes that total revenue from all sources of continuing
operations will continue to grow in the fourth quarter of 1998 and will
increasingly contribute to the cash requirements of the Company. The
Company released V-Link in early 1998 and has deployed several of its
Communication Engines (CE's) both of which continue to increase revenues and/or
profit margins. The Company also believes that revenue and cash flows from
software sales and development will continue to increase in 1998 due to
maturation of its products and development and licensing agreements.
14
The Company anticipates that cash requirements for operations and the
continued market penetration, deployment of I-Link products and services,
and anticipated deployment of the Company's CE's will be at increasingly
higher levels than those experienced in 1997. The Company also expects
that expenditures for research and development will continue at
approximately the same level as the first nine months for the remainder of
1998 as it continues development of new technology. In March 1998, the
Company committed approximately $2.2 million (of which $1.32 million had
been paid as of September 30, 1998) to development of a new internal
information system that will encompass nearly all computer systems.
In order to provide for capital expenditure and working capital needs,
during the first six months of 1998 the Company obtained a total of $7.768
million in new interim debt financing from Winter Harbor, L.L.C. On July
9, 1998 the Company obtained a $10 million equity investment by JNC
Opportunity Fund Ltd. which resulted in net proceeds to the Company of
$9.470 million.
In November 1998, Winter Harbor loaned an additional $1,041,712 to the
Company which was used to pay the second of two installment payments which
were part of the MCI arbitration settlement. Terms concerning the loan
have not been finalized, but it is anticipated that repayment will be on a
demand basis.
Additional funds will be necessary from public or private financing markets
to fund continued operations and to successfully integrate and finance the
planned expansion of the business communications services and to discharge
the financial obligations of the Company. The availability of such capital
sources will depend on prevailing market conditions, interest rates, and
financial position and results of operations of the Company. There can be
no assurance that such financing will be available, that the Company will
receive any proceeds from the exercise of outstanding options and warrants
or that the Company will not be required to arrange for additional debt,
equity or other type of financing.
Three-Month Period Ended September 30, 1998 Compared to the Three-Month
Period Ended September 30, 1997
In March 1998, the Company made the decision to dispose of the operations
of the subsidiaries of the Company operating in the medical services
industry in order to concentrate on its telecommunications and technology
sectors. Accordingly, medical services operations during the three-month
periods ending September 30, 1998 and 1997 have been reported as
discontinued operations.
Revenue
Telecommunications service revenue increased $2,315,515 to $5,020,650 in
the third quarter of 1998 as compared to $2,705,135 in the third quarter of
1997. The increase was a direct result of customer growth from the
Company's Network Marketing channel of distribution and increased sales
from the Company's V-Link products. The Network Marketing channel was
started in the second quarter of 1997 with telecommunications revenue from
these new customers beginning in the third quarter of 1997.
Marketing services revenue, which includes revenue recognized from
independent representatives for national conventions, training, promotional
and presentation materials, and ongoing administrative support increased
$426,213 to $1,328,949 in the third quarter of 1998 as compared to $
902,736 in the same quarter of 1997. The increase reflects the continued
growth of the network marketing channel and its related product offerings
which began late in the second quarter of 1997.
Technology licensing and development revenue was $406,779 in the third
quarter of 1998 as compared to $139,700 in the same quarter of 1997, an
increase of $267,079. These revenues are from the licensing and
development of technology through MiBridge, Inc., which was acquired in
September 1997. Accordingly there was three months of revenue reported in
the quarter ended September 30, 1998 as compared to only one month in the
same quarter of 1997.
15
Operating costs and expenses
Telecommunications network expenses increased $1,594,396 in the third
quarter of 1998 to $5,095,263 as compared to $3,500,867 for the same
quarter of 1997. These expenses include the costs related to the continued
development and deployment of the Company's communication network and
expenses related to providing telecommunication services. The increase in
expense was primarily due to the increase in telecommunications service
revenue. The Company expects that telecommunications network expense will
increase as telecommunications service revenue increases, but at a lesser
rate of growth due to economies of scale and increased traffic on the
Company's enhanced IP (internet protocol) telephony network.
Marketing service costs were $1,364,110 for the third quarter of 1998 as
compared to $1,082,543 for the same quarter of 1997, an increase of
$281,567. The increase in costs relates directly to the Company's
continued growth in marketing service revenue that began late in the second
quarter of 1997. Marketing service expenses include commissions and the
costs of national conventions, providing training, promotional and
presentation materials and ongoing administrative support.
Selling, general and administrative expense increased $300,580 to
$2,591,078 in the third quarter of 1998 as compared to $2,290,498 in the
third quarter of 1997. The increase is primarily due to increased overhead
and personnel costs associated with growth of the Company's
telecommunications business. The Company expects that these expenses will
continue to increase as the Company grows and expands.
The provision for doubtful accounts increased $435,651 to $875,651 in the
third quarter of 1998 as compared to $440,000 in the same quarter of 1997.
This increase is primarily due to growth in the Company's telecommunication
service revenue.
Acquired in-process research and development of $4,235,830 in the third
quarter of 1997 related to the acquisition of MiBridge, Inc. in September
1997. This non-cash amount was expensed because technological feasibility
had not yet been established and the technology had no alternative future
use. No such expense existed in the third quarter of 1998.
Depreciation and amortization increased $378,585 to $1,059,406 in the third
quarter of 1998 as compared to $680,821 in the third quarter of 1997. The
increase in amortization expense is primarily due to increased amortization
of intangible assets associated with the acquisition of MiBridge, Inc. in
the third quarter of 1997. This resulted in $3,461,410 of additional
intangible assets. Depreciation expense also increased due to continued
acquisition of telecommunication equipment.
Research and development increased $325,583 to $607,903 in the third
quarter of 1998 as compared to $282,320 in the same period of 1997. The
increase is associated with the Company's acquisition of MiBridge, Inc in
the third quarter of 1997 and the formation of ViaNet, in early 1998. Both
subsidiaries perform research and development activities for the Company.
Interest expense decreased $966,673 to $303,835 in the third quarter of
1998 as compared to $1,270,508 in the same quarter of 1997. The net
decrease is primarily due to a decrease of $1,100,000 (non-cash) in
amortization of debt issuance costs related to certain warrants granted in
connection with certain loans to the Company in the second and third
quarters of 1997 and interest of $91,000 on the loans which did not recur
in the third quarter of 1998. The decrease was offset by interest of
$249,000 on loans to the Company in 1998 from Winter Harbor L.L.C. of
$7,678,000 during the first six months of 1998.
Interest and other income increased $52,195 to $96,168 in the third quarter
of 1998 as compared to $43,973 in the same quarter of 1997. The increase
was primarily a result of an increase in the average balance of cash on
hand in the third quarter of 1998 compared to the same quarter of 1997, due
to proceeds from the Series F Cumulative Preferred Stock issued in the
third quarter of 1998.
16
Nine-Month Period Ended September 30, 1998 Compared to the Nine-Month
Period Ended September 30, 1997
In March 1998, the Company made the decision to dispose of the operations
of the subsidiaries of the Company operating in the medical services
industry in order to concentrate on its telecommunications and technology
sectors. Accordingly, medical services operations during the nine-month
periods ending September 30, 1998 and 1997 have been reported as
discontinued operations.
Revenue
Telecommunications service revenue increased $6,816,634 to $13,936,594 in
the first nine months of 1998 as compared to $7,119,960 in the first nine
months of 1997. The increase is due primarily to the new customers
obtained through the Network Marketing channel, which channel's
telecommunications service revenues didn't begin until the third quarter of
1997.
Marketing services revenue, which includes revenues recognized from
independent representatives for the national conventions, training,
promotional and presentation materials, V-Phone and Netlink 1+ product
sales, and ongoing administrative support was $3,634,158 in the first nine
months of 1998 as compared to $1,623,226 in the same period of 1997, an
increase of $2,010,932. The primary reason for the increase is that the
network marketing channel began late in the second quarter of 1997, and
thus 1998 year-to-date revenues include nine months of product sales
whereas 1997 year to date revenues include approximately four months of
product sales.
Technology licensing and development revenue increased $847,689 to $987,389
in the first nine months of 1998 as compared to $139,700 in the same period
of 1997. These revenues are from the licensing and development of
technology through MiBridge, Inc., which was acquired in September 1997.
Accordingly, 1998 year-to-date revenue represents nine months of revenue
whereas year-to-date 1997 revenue represents only one month of revenue.
Operating costs and expenses
Telecommunications network expenses increased $4,039,156 in the first nine
months of 1998 to $14,605,813 as compared to $10,566,657 for the same
period in 1997. These expenses include the costs related to the continued
development and deployment of the Company's communication network and
expenses related to providing telecommunication services. The increase in
expense was primarily due to the increase in telecommunications service
revenue. The Company expects that telecommunications network expense will
increase as telecommunications service revenue increases, but at a lesser
rate of growth due to economies of scale and increased traffic on the
Company's enhanced IP (Internet protocol) telephony network.
Marketing service costs increased $2,851,785 to $4,575,067 in the first
nine months of 1998 as compared to $1,723,282 for the same period in 1997.
The expenses relate directly to the Company's marketing service revenue
that began late in the second quarter of 1997 and accordingly expenses
incurred in the first nine months of 1998 and 1997 are not directly
comparable. Marketing service expenses include commissions, the costs of
national conventions, providing training, promotional and presentation
materials and ongoing administrative support.
Selling, general and administrative expense increased $1,080,755 to
$7,523,170 in the first nine months of 1998 as compared to $6,442,415 in
the first nine months in 1997. The increase is primarily due to increased
overhead and personnel costs associated with growing the Company's
telecommunications business. The Company expects that these expenses will
continue to increase as the Company grows and expands.
The provision for doubtful accounts increased $1,539,313 to $2,324,313 in
the first nine months of 1998 as compared to $785,000 in the same period in
1997. This increase is primarily due to the following: (1) the growth in
the Company's telecommunication service revenue, and (2) an increase in
uncollectible accounts receivable associated with the Company's decision in
early 1998 to concentrate its resources on those channels of distribution
of its products with higher profit margins (primarily Network Marketing),
the effect of which was to terminate relationships with several accounts in
17
the second quarter of 1998, including the Company's single largest
wholesale marketing group.
Acquired in-process research and development of $4,235,830 in the nine-
month period ended September 30, 1997 related to the acquisition of
MiBridge, Inc. in September 1997. This non-cash amount was expensed
because technological feasibility had not yet been established and the
technology had no alternative future use. No such expense existed in the
same period of 1998.
Depreciation and amortization increased $1,615,260 to $3,109,232 in the
first nine months of 1998 as compared to $1,493,972 in the first nine
months of 1997. The increase is primarily due to increased amortization of
intangible assets associated with the issuance of the final 1,000,000
shares of common stock in the third quarter of 1997 in connection with the
acquisition of I-Link Worldwide Inc. in 1996 and the acquisition of
MiBridge in the third quarter of 1997. This resulted in $12,336,410 of
additional intangible assets. Depreciation expense also increased due to
continued acquisition of telecommunication equipment.
Research and development increased $1,124,404 to $1,752,058 in the first
nine months of 1998 as compared to $627,654 in the same period in 1997. The
increase is associated with the Company's acquisition of MiBridge, Inc in
the third quarter of 1997 and the formation of ViaNet, in early 1998. Both
subsidiaries perform research and development activities for the Company.
Interest expense increased $6,100,633 to $7,944,412 in the first nine
months of 1998 as compared to $1,843,779 in the same period in 1997. The
net increase is primarily due to $7,274,000 (non-cash) in amortization of
debt discount related to certain warrants granted in connection with
$7,768,000 in loans to the Company in the first nine months of 1998. In
the same period of 1997, interest expense included $1,299,600 (non-cash) in
amortization of debt discount related to certain warrants granted in
connection with $5,000,000 in loans to the Company in the first nine months
of 1997 and $320,000 (non-cash) imputed interest on certain convertible
notes.
Interest and other income decreased $25,065 to $159,632 in the first nine
months of 1998 as compared to $184,697 in the same period of 1997. The
decrease was primarily due to a decrease in the average balance of cash on
hand in the first nine months of 1998.
Year 2000 Issues
The "Year 2000" issue results from computer programs and embedded computer
chips that do not differentiate between the 1900 century and the 2000
century because they are written using two digit rather than four digit
dates to define the applicable year. If not corrected, many computer
applications and date-sensitive devices could fail or produce erroneous
results when processing data involving dates after December 31, 1999. The
Year 2000 issue affects virtually all companies and organizations,
including the Company. The Company has formed a Year 2000 team whose
responsibility it is to evaluate its information technology (IT) systems as
well as its non-IT devices (such as building security, heating and air-
conditioning, safety devices and other devices containing embedded
electronic circuits). Both IT systems and non-IT devices are subject to
failure due to the Year 2000 issue.
The Company is in the "inventory and assessment" phases of its Year 2000
project with regard to its state of readiness related to IT and non-IT
devices and issues related to third parties with which the Company has
material relationships. While the Company has its own communications
network to carry some of its traffic, the Company's system (as it is for
all telecommunications companies) is completely dependent upon origination
or termination of that traffic on significant third party vendors such as
Sprint (the Company's current underlying carrier) and LECs (local exchange
carriers) such as U.S. West. The Company is watching closely the progress
of these significant third party vendors. In the event its third party
vendors do not become Year 2000 compliant, the Company would need to switch
vendors or face a significant negative impact on its ability to deliver its
telecommunication services. The inability to deliver these services would
have a substantial negative impact on the Company and its results of
operations, liquidity and financial position.
18
Upon completion of the inventory and assessment phases of the Year 2000
project, the Company will explore alternative solutions and develop
contingency plans for handling critical areas in the event a remedy is not
identified or is unsuccessful. Such plans have not yet been developed, but
the Company intends to develop them as necessary to address each area of
the Year 2000 risk. Completion of the Year 2000 project, including
contingency plans, is expected by September 30, 1999.
Costs. The Company is using both internal and external resources to
identify, correct or reprogram, and test its systems for minimizing Year
2000 consequences and expects to incur consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare
its systems for the Year 2000. The total cost of modifications and
conversions is not known at this time; however, it is not expected, at this
time, to be material to the Company's financial position, results of
operations or cash flows and will be expensed as incurred. As of
September 30, 1998 the Company has not expended any funds but anticipates
expending approximately $40,000 before December 31, 1998 which amount may
vary subject to the results of the inventory and assessment phases in
progress. Funds related to Year 2000 expenditures are expected to come
from operations.
Risks. The failure to correct a material Year 2000 problem could result in
an interruption to or a failure of normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party
suppliers, the Company is unable to determine at this time whether the
consequences of Year 2000 failure will have a material impact on the
Company's results of operation, liquidity or financial condition. The
Company's Year 2000 project to inventory and assess Year 2000 issues and
implement plans to fix identified Year 2000 issues is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problems and, in particular, about the Year 2000 compliance and readiness
of its major suppliers such as Sprint. The Company believes that, with the
implementation of its enhanced services billing platform (which is being
designed to be Year 2000 compliant) and completion of the Year 2000 project
as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 6(a) - Exhibits
Exhibit
Number Item
- ------ ----
3.2 By-laws.
27 Financial data schedule.
Item 6(b) - Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
I-Link Incorporated
(Registrant)
Date: November 18, 1998 By: /s/ John W. Edwards
John W. Edwards
President, Chief Executive Officer
By: /s/ Karl S. Ryser, Jr.
Karl S. Ryser, Jr.
Chief Financial Officer, Chief
Accounting Officer, and Treasurer