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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, 1999
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 4, 1999, the registrant had outstanding 23,042,098 shares of
$0.007 par value common stock.
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PART I - FINANCIAL INFORMATION
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
1999 December 31,
ASSETS (Unaudited) 1998
------------- -------------
Current assets:
Cash and cash equivalents $ 6,970,202 $ 1,311,003
Accounts receivable, less allowance for doubtful accounts of $3,035,000 and
$1,941,000 as of September 30, 1999 and December 31, 1998, respectively 4,769,327 4,402,016
Certificates of deposit - restricted 53,500 378,160
Other current assets 192,511 293,789
Net assets of discontinued operations 67,371 417,371
------------- -------------
Total current assets 12,052,911 6,802,339
Furniture, fixtures, equipment and software, net 6,009,269 7,262,781
Other assets:
Intangible assets, net 7,250,113 9,420,383
Certificates of deposit - restricted 129,636 164,125
Other assets 508,166 205,735
------------- -------------
$25,950,095 $23,855,363
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,056,211 $ 2,792,651
Accrued liabilities 4,909,500 3,436,989
Current portion of long-term debt 766,639 1,050,431
Current portion of notes payable to related parties, net of discount 7,768,000 3,437,138
Current portion of obligations under capital leases 1,062,236 573,044
------------- -------------
Total current liabilities 16,562,586 11,290,253
Notes payable to a related party - 7,768,000
Obligations under capital leases 995,416 603,933
------------- -------------
Commitments and contingencies (note 7) 17,558,002 19,662,186
------------- -------------
Redeemable preferred stock - Class M 11,734,820 11,734,820
Redeemable preferred stock - Class F 4,055,149 9,411,720
------------- -------------
15,789,969 21,146,540
------------- -------------
Stockholders' deficit:
Preferred stock, $10 par value, authorized 10,000,000 shares, issued and
outstanding 51,131 and 44,051 at September 30, 1999 and December 31, 1998,
respectively, liquidation preference of $19,425,229
and $2,675,259 at September 30, 1999 and December 31, 1998, respectively 511,310 440,510
Common stock, $.007 par value, authorized 150,000,000 shares,
issued and outstanding 22,717,326 and 18,762,596 at September 30,
1999 and December 31, 1998, respectively 159,020 131,338
Additional paid-in capital 96,910,955 68,632,195
Deferred compensation (512,423) (1,214,591)
Accumulated deficit (104,466,738) (84,942,815)
------------- -------------
Total stockholders' deficit (7,397,876) (16,953,363)
------------- -------------
$25,950,095 $23,855,363
============= =============
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 September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
Revenues:
Telecommunication services $ 6,986,968 $ 5,020,650 $ 19,395,218 $ 13,936,594
Marketing services, net 989,157 1,328,949 3,225,119 3,634,158
Technology licensing and development 853,343 406,779 1,902,316 987,389
------------- ------------- ------------ -------------
Total revenues 8,829,468 6,756,378 24,522,653 18,558,141
------------- ------------- ------------ -------------
Operating costs and expenses:
Telecommunication network expense 5,224,851 5,095,263 14,288,905 14,605,813
Marketing services 1,584,356 1,364,110 4,564,112 4,575,067
Selling, general and administrative 3,085,766 2,591,078 9,010,585 7,523,170
Provision for doubtful accounts 997,788 875,651 2,941,803 2,324,313
Depreciation and amortization 1,564,774 1,059,406 4,345,597 3,109,232
Write-down of capitalized software costs - - 1,847,288 -
Research and development 778,638 607,903 1,852,743 1,752,058
------------- ------------- ------------ -------------
Total operating costs and expenses 13,236,173 11,593,411 38,851,033 33,889,653
------------- ------------- ------------ -------------
Operating loss (4,406,705) (4,837,033) (14,328,380) (15,331,512)
------------- ------------- ------------ -------------
Other income (expense):
Interest expense (1,878,978) (303,835) (4,747,410) (7,944,412)
Interest and other income 69,182 96,168 125,933 159,632
------------- ------------- ------------ -------------
Total other income (expense) (1,809,796) (207,667) (4,621,477) (7,784,780)
------------- ------------- ------------ -------------
Loss from continuing operations (6,216,501) (5,044,700) (18,949,857) (23,116,292)
Loss from discontinued operations (less applicable
income tax provision of $0 for the nine month
periods ended September 30, 1999 and 1998) - - (350,000) (108,006)
------------- ------------- ------------ -------------
Net loss $ (6,216,501) $ (5,044,700) $(19,299,857) $(23,224,298)
============= ============= ============ =============
CALCULATION OF NET LOSS PER COMMON SHARE:
Loss from continuing operations $ (6,216,501) $ (5,044,700) $(18,949,857) $(23,116,292)
Deemed preferred stock dividends on Class E , Class F
and Class N convertible preferred stock (6,978,417) (7,472,737) (6,978,417) (7,472,737)
Cumulative preferred stock dividends (400,675) (678,679) (1,274,034) (1,580,903)
------------- ------------- ------------ -------------
Loss from continuing operations applicable to
common stock $(13,595,593) $(13,196,116) $(27,202,308) $(32,169,932)
============= ============= ============ =============
Basic and diluted weighted average shares
outstanding 22,205,970 18,492,434 20,768,051 17,248,713
============= ============= ============ =============
Net loss per common share - basic and diluted:
Loss from continuing operations $(0.61) $(0.71) $(1.31) $(1.86)
Loss from discontinued operations - - (0.02) (0.01)
------------- ------------- ------------ -------------
Net loss per common share $(0.61) $(0.71) $(1.33) $(1.87)
============= ============= ============ =============
The accompanying notes are an integral part of
these consolidated financial statements
2
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
Preferred Stock Common Stock
--------------------------- -----------------------------
Shares Amount Shares Amount
----------- --------- ----------- ----------
BALANCE AT DECEMBER 31, 1998 44,051 $440,510 18,762,596 $131,338
Conversion of preferred stock into
common stock (13,299) (132,990) 3,808,570 26,659
Reclassification of Class F redeemable
preferred stock from mezzanine due to
conversion to common stock 379 3,790 - -
Common stock dividend paid to holders of
Class F redeemable preferred stock - - 103,543 725
Issuance of Class N convertible preferred
stock, net of issuance costs of $164,678 20,000 200,000 - -
Exercise of stock options - - 42,617 298
Warrants issued in connection with certain
notes payable - - - -
Warrants issued in connection with a standby
letter of credit - - - -
Amortization of deferred compensation on
stock options issued for services - - - -
Net loss - - - -
----------- --------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1999 51,131 $511,310 22,717,326 $159,020
=========== ========= =========== ==========
Additional
Paid-in Deferred Accumulated
Capital Compensation Deficit
------------- ------------ -------------
BALANCE AT DECEMBER 31, 1998 $68,632,195 $(1,214,591) $ (84,942,815)
Conversion of preferred stock into
common stock 106,331 - -
Reclassification of Class F redeemable
preferred stock from mezzanine due to
conversion to common stock 5,352,781 - -
Common stock dividend paid to holders of
Class F redeemable preferred stock 223,341 - (224,066)
Issuance of Class N convertible preferred
stock, net of issuance costs of $164,678 19,635,322 - -
Exercise of stock options 4,702 - -
Warrants issued in connection with certain
notes payable 2,220,563 - -
Warrants issued in connection with a standby
letter of credit 735,720 - -
Amortization of deferred compensation on
stock options issued for services - 702,168 -
Net loss - - (19,299,857)
------------- ------------ -------------
BALANCE AT SEPTEMBER 30, 1999 $96,910,955 $(512,423) $(104,466,738)
============= ============ =============
The accompanying notes are an integral part of
these consolidated financial statements
3
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net loss $(19,299,857) $(23,224,298)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,345,597 3,109,232
Provision for doubtful accounts 2,941,803 2,324,313
Amortization of discount on notes payable 3,295,042 7,274,000
Write-down of capitalized software costs 1,847,288 -
Loss on disposal of assets 7,494 -
Amortization of deferred compensation on stock options issued for services 702,168 742,598
Increase (decrease) from changes in operating assets and liabilities:
Accounts receivable (3,309,114) (4,158,072)
Other assets (114,079) (167,665)
Accounts payable and accrued liabilities 1,413,273 449,070
Discontinued operations - noncash charges and working capital changes 315,483 (48,944)
--------------- ---------------
Net cash used in operating activities (7,854,902) (13,699,766)
--------------- ---------------
Cash flows from investing activities:
Purchases of furniture, fixtures, equipment and software (839,505) (3,299,900)
Maturity of restricted certificates of deposit 359,149 889,215
Investing activities of discontinued operations 30,000 310,000
--------------- ---------------
Net cash used in investing activities (450,356) (2,100,685)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and warrants 8,200,000 7,768,000
Payment of long-term debt (283,793) (645,907)
Payment of related party debt (500,000) (750,000)
Payment of capital lease obligations (577,675) (141,344)
Proceeds from issuance of convertible preferred stock 7,281,086 -
Proceeds from issuance of redeemable preferred stock and warrants - 10,000,000
Offering costs from issuance of redeemable preferred stock and warrants (164,678) (530,000)
Proceeds from exercise of common stock warrants and options 5,000 684,943
Financing activities of discontinued operations - (170,465)
--------------- ---------------
Net cash provided by financing activities 13,959,940 16,215,227
--------------- ---------------
Increase in cash and cash equivalents 5,654,682 414,776
Cash and cash equivalents at beginning of period 1,368,927 1,727,855
--------------- ---------------
Cash and cash equivalents at end of period $7,023,609 $2,142,631
=============== ===============
Cash and cash equivalents at end of period:
Continuing operations $6,970,202 $2,075,996
Discontinued operations 53,407 66,635
--------------- ---------------
Total cash and cash equivalents at end of period $7,023,609 $2,142,631
=============== ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of Class F redeemable preferred stock from mezzanine $5,356,571 $ -
Warrants issued in connection with a standby letter of credit 735,720 -
Equipment acquired under capital lease obligations 1,937,091 -
Accrued interest and debt exchanged for Series N preferred stock 12,718,914 -
Sale of assets of discontinued operations for note receivable 35,000 -
The accompanying notes are an integral part of
these consolidated financial statements
4
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 internally and acquired in the acquisitions of I-Link Worldwide,
Inc. 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 first quarter of 1997 acquisition of I-Link Communications, Inc., an
FCC licensed long-distance carrier.
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 has sold or 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. During 1998, the Company
received $310,000 from the sale of assets from the medical service
subsidiaries. In January 1999, the Company sold additional assets for $15,000
and a note receivable of $35,000. The Company has experienced unexpected
delays in disposing of the remaining non-operating assets, including certain
assets located in China. Additionally, the Company's best estimate of
proceeds from the remaining assets is expected to be less than originally
estimated by management. As the remaining asset disposals have not occurred
as expected, during the first quarter of 1999, the Company revised its best
estimate of the ultimate loss on disposal and recognized an additional loss
on disposal of $350,000. As of September 30, 1999, there were no significant
revenue generating activities remaining from the medical services operations.
On-going administrative costs include payroll and office rent associated with
collecting outstanding accounts receivable and oversight of the final close
out procedures. These anticipated costs have been accrued for as part of
management's best estimate of the expected ultimate loss on disposal. 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 nine-month and
three-month periods ended September 30, 1999 and 1998, (b) the financial
position at September 30, 1999, and (c) cash flows for the nine-month periods
ended September 30, 1999 and 1998. 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, 1998 and quarterly reports on Form
10-Q for the six and three-month periods ended June 30, 1999 and March 31,
1999, respectively.
The results of operations for the three-month and nine-month periods ended
September 30, 1999 are not necessarily indicative of those to be expected for
the entire year.
The Company incurred a net loss from continuing operations of $18,949,857 for
the nine-month period ended September 30, 1999, and as of September 30, 1999
had an accumulated deficit of $104,466,738 and negative working capital of
$4,509,675. While the Company believes that current cash balances and
collections from ongoing operations will be sufficient to fund operations in
1999, the Company anticipates that additional funds will be necessary from
public or private financing markets to successfully integrate and finance the
planned expansion of the business communications services, product
development and manufacturing, and to discharge the financial obligations of
the Company. The availability of such capital sources will depend on
prevailing market conditions, interest rates, and the financial position and
results of operations of the Company. There can be no assurance that such
financing will be available.
5
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET LOSS 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 and
three-month periods ending September 30, 1999 and 1998, basic and diluted
loss per share are the same. During the nine and three-month periods ending
September 30, 1999, holders of the Series F Redeemable preferred stock
converted 568 and 20 of those shares, respectively. Accordingly, they were
paid stock dividends of 103,543 and 3,540 shares of common stock on the
converted shares.
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:
1999 1998
---------- ----------
Assumed conversion of Class C preferred stock 808,248 1,222,824
Assumed conversion of Class F redeemable preferred stock 2,243,770 4,918,839
Assumed conversion of Class M redeemable preferred stock 5,951,795 5,951,795
Assumed conversion of Class N preferred stock 6,278,417 -
Assumed conversion of convertible debt 4,344,488 4,057,380
Assumed exercise of warrants issued on convertible debt 5,000,000 5,000,000
Assumed exercise of warrants to purchase shares of common stock
held by Winter Harbor 28,540,000 17,540,000
Assumed exercise of options and warrants to purchase
shares of common stock held by employees and consultants 13,133,678 10,555,042
---------- ----------
66,300,396 49,245,880
========== ==========
REVENUE RECOGNITION
During the second quarter of 1999, the Company began offering its WebCentre
product to Independent Representatives ("IR") in the network marketing
channel. WebCentre is a personalized web page that can be used for business
promotion and back-office support. Each user pays a set-up fee of between
$395 - $495, plus a monthly recurring charge of $15.95. Revenue relating to
the set-up fee is partially recognized at the time the WebCentre product is
made available to the user. The portion of the set-up fee, plus a normal
profit margin, relating to ongoing support of the WebCentre is deferred over
the estimated life of the IR agreement. Revenue related to the monthly
recurring charge is recognized in the month the services are provided.
6
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:
September 30, 1999
(Unaudited) December 31, 1998
------------------ -----------------
Assets:
Current assets:
Cash and cash equivalents $ 53,407 $ 57,924
Accounts receivable 752,898 941,508
Inventory 555,291 555,291
Other 24,585 15,217
------------ -----------
Total current assets 1,386,181 1,569,940
Furniture, fixtures and equipment, net 36,649 363,345
Other non-current assets 1,054 6,230
------------ -----------
Total assets 1,423,884 1,939,515
------------ -----------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,114,852 1,280,483
Notes payable 241,661 241,661
------------ -----------
Total current liabilities 1,356,513 1,522,144
------------ -----------
Net assets - discontinued operations $ 67,371 $ 417,371
============ ===========
The net assets of the discontinued operations as of September 30, 1999 and
December 31, 1998 are shown as a current asset in the consolidated balance
sheet as it is anticipated that the disposal of the medical services
businesses will be completed in the fourth quarter of 1999. Revenues of the
discontinued operations were $45,358 and $280,479 and $296,835 and $1,259,763
for the three-month and nine-month periods ending September 30, 1999 and
1998, respectively.
NOTE 4 - WRITE-DOWN OF CAPITALIZED SOFTWARE COSTS
During 1998, the Company contracted with an outside consulting firm to
develop a billing and operations information system and capitalized as a
component of furniture, fixture, equipment and software $2,284,574 in costs
(including amounts in accounts payable of $437,286) associated with this
in-process system development. The Company continually evaluated the
functionality and progress of the in-process system development. In May 1999,
the Company's management and its Board of Directors concluded that the new
system would not significantly enhance the Company's existing billing and
information systems, would not meet its ultimate needs and had no alternative
future use and accordingly did not justify paying additional billed and
contracted expenses of approximately $1,000,000. Negotiations to discontinue
work under the contract were concluded in May 1999, with the consulting
company forgoing any future payments on the project while retaining amounts
paid to date of $1,847,288. Accordingly, in March 31, 1999, the Company
recorded a write-down of capitalized software costs on the in-process system
development of $1,847,288.
7
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
NOTE 5 - CAPITAL FINANCING
On January 15, 1999, I-Link finalized an agreement that had been negotiated
in November 1998 with Winter Harbor for additional financing. The financing
arrangement consisted of an $8.0 million bridge loan facility (Bridge Loan)
and a $3,000,000 standby letter of credit to secure additional capital leases
of equipment and telephone lines relative to the expansion of the Company's
telecommunications network. Amounts outstanding under the Bridge Loan were
originally due on October 31, 1999. In July 1999, the Company exercised its
right to exchange the $8.0 million in outstanding notes payable along with
accrued interest for Series N preferred stock.
As additional consideration for making the $8.0 million Bridge Loan and $3.0
million standby letter of credit, the Company granted warrants to purchase
common stock to Winter Harbor. Initially, Winter Harbor received one warrant
for every $10 borrowed from Winter Harbor. On April 14, 1999, the
shareholders voted to approve a plan of financing which included issuing 10
warrants for each $10 borrowed under the Bridge Loan and standby letter of
credit if management were to not repay the bridge loan on April 26, 1999. As
the loan was not repaid by April 26, 1999, the number of warrants increased
in total to 10 warrants for every $10 borrowed. The warrants have 7.5 year
exercise periods with an exercise price of the lower of (a) $2.78, (b) the
average trading price for any 20 day period subsequent to the issuance of the
warrants, (c) the price at which new shares of common stock or common stock
equivalents are issued, or (d) the exercise price of any new options,
warrants, preferred stock or other convertible security. The exercise price
is subject to a $1.25 floor.
The Company has recorded $3,253,196 (of which $2,220,563 was recorded in
1999) as a discount against borrowings on the $8.0 million Bridge Loan
representing the relative fair value attributed to the Bridge Loan warrants.
The debt discount was being amortized over the term of the Bridge Loan. As
the $8.0 million loan was exchanged for Series N preferred stock, the debt
discount has been fully amortized. In addition, the Company recorded $735,720
as debt issuance costs related to obligations under certain capital leases
guaranteed by the Winter Harbor letter of credit representing the fair value
of the warrants associated with the letter of credit warrants. The debt
issuance costs are being amortized over the term of the lease agreements.
During the nine-month and three-month periods ending September 30, 1999,
$3,295,042 and $1,506,242 of debt discount and lease obligation issuance
costs were amortized.
On April 14, 1999, the shareholders approved an amendment to the Articles of
Incorporation increasing the authorized common stock from 75,000,000 shares
to 150,000,000 shares.
On April 15, 1999, the Company entered into a new financing agreement with
Winter Harbor. Winter Harbor agreed to loan to the Company up to $4 million
under a note originally due September 30, 1999. In July 1999, the Company
exercised its right to exchange the loan for Series N preferred Stock. As
partial consideration for Winter Harbor making the loan, the Company agreed
to seek shareholder approval at its next shareholders' meeting of a
modification to the conversion terms of the Series N preferred shares.
On July 19, 1999, the Company's shareholders approved a modification of the
terms of the Series N preferred stock to establish a conversion price floor
of $1.25 and to link the Series N conversion price to the price at which
common stock is issued upon the exercise or conversion of any new options,
warrants, preferred stock or other convertible security, including the
conversion rate of the Series F preferred stock. The conversion price is
discussed in more detail below.
8
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
NOTE 5 - CAPITAL FINANCING, CONTINUED
On July 23, 1999 the Company completed its offering of 20,000 shares of
Series N preferred stock. The offering was fully subscribed through cash
subscriptions and the Company exercising its rights to exchange notes payable
to Winter Harbor of $8.0 million and $4.0 million, plus accrued interest. In
total the Company received $7,281,086 in cash (before expenses of $164,678)
and exchanged $12,718,914 in debt and accrued interest. The Series N
conversion price was initially set at $2.78, but may be reset to the lowest
of: (1) 110% of the average trading price for any 20 day period following the
date that Series N preferred stock is first issued; (2) the price at which
any new common stock or common stock equivalent is issued; (3) the price at
which common stock is issued upon the exercise or conversion of any new
options, warrants, preferred stock or other convertible security; (4) the
conversion price of any Series F preferred stock converted after the date
that Series N preferred stock is first issued; and (5) a conversion price
floor of $1.25. The Series N preferred stock votes with the common stock on
an as converted basis and is senior to all other preferred stock of the
Company, except that the Series N preferred stock will in all rights be equal
in seniority to the already outstanding Series F preferred stock. Dividends
will be paid on an as converted basis equal to common stock dividends.
As the conversion price of the Series N preferred stock at issuance was less
than the market price, the Company recognized a deemed preferred stock
dividend in the third quarter of $6,978,417. The deemed preferred stock
dividend is calculated as the difference between the conversion price per
share of common share per the Series N agreement and the market price of the
common stock on the date the proceeds from the offering were received and the
debt was exchanged.
NOTE 6 - INCOME TAXES
The Company recognized no income tax benefit from the losses generated in
1999 and 1998 because of the uncertainty of the realization of the related
deferred tax asset.
NOTE 7 - PURCHASE COMMITMENTS
The Company has commitments to purchase long-distance telecommunications
capacity on lines from a national provider in order to provide long-distance
telecommunications services to the Company's customers who reside in areas
not yet serviced by the Company's dedicated telecommunications network. The
Company's minimum monthly commitment is approximately $550,000. The new
agreement is effective through May 2000. Failure to achieve the minimum will
require shortfall payments by the Company equal to 50% of the remaining
monthly minimum usage amounts.
In January 1999, the Company entered into an agreement with a national
carrier to lease local access spans. The three-year agreement includes
minimum usage commitments of $1,512,000 during the first year and $2,160,000
in the second and third years. If the Company were to terminate the agreement
early, it would be required to pay any remaining first year minimum monthly
usage requirements and pay 25 percent of any remaining second and third year
minimum monthly usage requirements.
NOTE 8- SEGMENT OF BUSINESS REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. FAS 131 supersedes FAS 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of FAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
9
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
NOTE 8- SEGMENT OF BUSINESS REPORTING, CONTINUED
The prior year's segment information has been restated to present the
Company's three reportable segments as follows:
- - Telecommunications services - includes long-distance toll services and
enhanced calling features such as V-Link. The telecommunications services
products are marketed primarily to residential and small business
customers.
- - Marketing services - includes training and promotional materials to
independent sales representatives (IRs) in the network marketing sales
channel and WebCentre set-up and monthly recurring fees. Additionally,
revenues are generated from registration fees paid by IRs to attend
regional and national sales conferences.
- - Technology licensing and development - provides research and development to
enhance the Company's product and technology offerings. Products developed
by this segment include V-Link, NetLink IP and other proprietary
technology. The Company licenses certain developed technology to third
party users, such as Lucent, Brooktrout and others.
There are no intersegment revenues. The Company's business is conducted
principally in the U.S.; foreign operations are not significant. The table
below presents information about revenues from external customers and net
loss for the three-month and nine-month periods ended September 30, 1999 and
1998. The Company has no intersegment revenues/expenses. There has been no
material change in segment assets from the amounts reported in the Company's
annual report on Form 10-K for the year ended December 31, 1998.
FOR THE THREE-MONTH FOR THE NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(IN THOUSANDS) 1999 1998 1999 1998
---------- ---------- ---------- ----------
REVENUES FROM EXTERNAL CUSTOMERS:
Telecommunications services $6,987 $ 5,021 $ 19,395 $ 13,937
Marketing services 989 1,329 3,225 3,634
Technology licensing and development 853 406 1,902 987
---------- ---------- ---------- ----------
Total revenues from external customers for reportable segments $8,829 $ 6,756 $ 24,522 $ 18,558
========== ========== ========== ==========
SEGMENT INCOME ( LOSS):
Telecommunications services $ (96) $(1,386) $ (29) $ (5,012)
Marketing services (613) (42) (1,383) (960)
Technology licensing and development (120) (535) (465) (1,481)
---------- ---------- ---------- ----------
Total segment loss for reportable segments (829) (1,963) (1,877) (7,453)
Unallocated non-cash amounts in consolidated net loss:
Amortization of discount on notes payable (1,506) - (3,295) (7,274)
Write-down of capitalized software costs - - (1,847) -
Amortization of deferred compensation on stock options
issued for services (93) (219) (702) (743)
Amortization of intangible assets (723) (723) (2,170) (2,170)
Other corporate expenses (3,066) (2,139) (9,059) (5,476)
Loss from discontinued operations - - (350) (108)
---------- ---------- ---------- ----------
$(6,217) $(5,044) $(19,300) $(23,224)
========== ========== ========== ==========
10
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, 1998 and Form 10-Q for the quarters ended June 30 and
March 31, 1999.
FORWARD LOOKING INFORMATION
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO THE COMPANY THAT ARE 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," "MAY," "WILL," "BELIEVE,"
"ESTIMATE," "EXPECT," "PLAN," AND "INTENDED" 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 BELOW. 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.
Although the Company believes that its expectations are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
Among many factors that could cause actual results to differ materially from
the forward looking statements herein include, without limitation, the
following: the Company's ability to finance and manage expected rapid growth;
the Company's ability to attract, support, retain and motivate a growing
number of independent representatives; the impact of competitive services and
pricing; 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 network; the Company's success in deploying it's
Communication Engine network in internet telephony; the existence of demand
for and acceptance of the Company's products and services; as well as other
risks referenced from time to time in the Company's filings with the SEC.
The Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OPERATIONS
I-Link Incorporated (the "Company") provides basic and enhanced
telecommunications services to its customers and subscribers nationwide
utilizing IP (Internet Protocol)-enabled technology developed by the Company
that permits the delivery of these services in a manner that dramatically
lowers cost and increases utility, while fully maintaining the high
sound/transmission quality and reliability of calls placed over traditional
telecommunications networks. The technology model that permits the Company to
provide its services at a lower cost and with increased utility is similar to
the Internet and its capability to provide users virtually unlimited access
to the Internet at costs that are a fraction of standard long distance rates;
however, I-Link's technology and network infrastructure provide distinct
enhancements and advantages to carrying communications traffic over the
Internet. The Company is also engaged in the research and development of
advanced telecommunications products and equipment, such as V-Link and
NetLink IP, described more fully below.
Through its wholly-owned subsidiaries I-Link Worldwide, LLC, I-Link
Communications, Inc., and I-Link Systems, Inc., the Company provides
telecommunications products and services to residential, business and
wholesale customers. Through its wholly-owned subsidiaries MiBridge, Inc.,
and ViaNet Technologies Ltd., the Company undertakes the research and
development of new telecommunications products and technologies, and the
licensing of certain of these products and technologies to other
telecommunications companies. I-Link Incorporated and its subsidiaries are
sometimes collectively referred to herein as the "Company" or "I-Link."
11
Unlike other providers of telecommunications services utilizing IP
technology, I-LINK DOES NOT USE THE PUBLIC INTERNET TO DELIVER ITS SERVICES.
Rather, I-Link's communications services and products are carried over a new
telecommunications network established by I-Link (the "I-Link Network"). The
I-Link Network is made up of multiple routing facilities or "Hubs"
strategically established in large metropolitan areas nationwide. During the
third quarter of 1999 the Company established two new Hub's in San Francisco
and Atlanta increasing the total number of Hubs to ten. Previously, Hubs were
established in Phoenix, Salt Lake City, Chicago, Orlando, Dallas, Los
Angeles, Seattle and New York. The Hubs are comprised of sophisticated
equipment and proprietary software containing I-Link's IP technology
("Communication Engines-TM-") and interconnected by leased telecommunications
spans and lines (similar to the Internet, but private - an "INTRANET"),
complemented by access to the existing public switched telecommunications
network where needed to complete the delivery of I-Link's services to
geographic areas outside of I-Link's Intranet. From these Hubs, the I-Link
Network spans out to other geographic areas via additional dedicated spans
and lines. The Company plans continued deployments during the remainder of
1999 to continue the build out of the Company's IP Telephony network.
Continued deployment of the Company's Communications Engines (Hubs) should
result in a decrease in telecommunications costs as more traffic is carried
on the Company's network infrastructure and an increase in revenues from
subscribers as the Company extends the geographic areas where it can offer
increasingly competitive rates for long-distance and enhanced
telecommunications services.
In 1997 the Company started providing telecommunications products and
services over the traditional public switched telephone network and began the
creation of the I-Link Network through the deployment of its IP technology.
Also in 1997, the Company launched it's direct-sales marketing company,
I-Link Worldwide, LLC, to market its products and services to the residential
and small business markets.
In August 1997 the Company acquired MiBridge, Inc. ("MiBridge"), a New
Jersey-based communications technology company engaged in the design,
development, integration and marketing of a range of software
telecommunication products that support multimedia communications over the
public switched telephone network (PSTN), local area networks (LAN), and the
Internet. Historically, MiBridge has concentrated its development efforts on
compression systems such as voice and fax over IP. MiBridge has developed
patent-pending technologies which combine sophisticated compression
capabilities with IP telephony technology. The acquisition of MiBridge
permitted I-Link to accelerate the development and deployment of its own IP
technology and add strength and depth to its research and development team,
and provides I-Link with the opportunity to generate income and develop
industry alliances through the strategic licensing of its technologies to
other companies within the industry, such as Lucent Technologies, Nortel,
Cisco and others. In late 1997 the Company formed ViaNet Technologies, Ltd.,
headquartered in Tel Aviv, Israel, to undertake advanced research and
development of NetLink IP (preliminarily called "C-4" and described in
greater detail below).
During the first quarter of 1999, the Company began field-testing of its
communication product initially dubbed "C-4" (Customer Communications Control
Center). The product will be marketed under the name NETLINK IP. The product
will provide small business and home customers the capacity of up to 24 phone
lines using the existing telephone lines and wires that are connected to
their offices or homes today. In addition, NetLink IP 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. NetLink IP 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. Field trials
continue and are expected to continue into the first quarter of 2000 with
anticipated sales beginning in early 2000.
On July 30, 1999, the Company and Casio Phonemate, Inc announced their
signing of a Memorandum of Understanding to form a business relationship to
manufacture and jointly market the Company's NetLink IP product. The Company
believes that this relationship will accelerate the distribution of the
Company's NetLink IP product in conjunction with the Company's
telecommunication and internet services through Casio Phonemate's channels of
distribution in addition to the Company's channels. The Company expects to
start selling Netlink IP in early 2000.
In September 1999, the Company released V-Link 3.0. V-Link 3.0 allows
business and home users to centralize all of their voice/data communications
using one telephone number. V-Link 3.0 offers a wide range of services
including:
- A one number "follow-me service" that lets callers reach a V-Link
subscriber anywhere with just one phone
12
number. In one-step V-Link automatically dials numerous follow me
numbers and a pager. Anyone can connect instantly to V-Link users no
matter where they are - in the office, at home, or on the road;
- Boomerang calling: V-Link users can dial out to a caller while in
voicemail to respond to a message left. After completing the call they
can instantly return to their messages. Checking voicemail and
responding to calls from a car is now easy and safer. Usually when
driving, you can't call someone back if you don't know their number and
if you are able to call out, you then have to place another call to get
back into your voicemail. V-Link allows you to do everything just by
dialing into your one number;
- Prioritize and screen incoming calls to accept certain calls and
forward-unwanted callers automatically to a voicemail or another
person;
- Enhanced conference calling on the fly: V-Link subscribers can initiate
a conference call from any phone, anywhere and connect to nine people.
At the same time, they have access to all their additional enhanced
services and an unlimited number of incoming calls. All of this can be
done for a much lower cost than traditional phone systems and at the
same time there are no associated hardware costs;
- A Web browser tool (Visual V-Link) for organizing communications and
accessing voice, fax and email enables V-Link users to access their
system from any computer or Web kiosk;
- Personal voice on demand that allows callers to access the V-Link
user's pre-recorded menu of up to 90 messages. Fax on demand:
anyone can call a subscriber's V-Link number and retrieve a fax
back document;
- Music on hold.
This service is designed to increase both reliability and control of
communications.
In the fourth quarter of 1999, the Company will begin selling its suite of
enhanced communications services through affinity group master agent
resellers. The master agents function as an intermediary between employee
associations and product vendors to provide employees of large corporations
products and services at lowest available prices. The Company anticipates
that this marketing channel will contribute to the continuing growth in
telecommunication services revenue.
In the fourth quarter of 1999, the Company will begin hosting third party
vendor applications on I-Link's real-time IP network. The third party
applications are seamlessly integrated and layered onto the I-Link IP network
through the Company's proprietary technology. The application vendors pay a
per customer fee for use of the I-Link network. The Company will begin
selling these services in the fourth quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 1999 were $6,970,202,
short-term certificates of deposits were $53,500 and the working capital
deficit was $4,509,675. Cash used by operating activities during the
nine-month period ended September 30, 1999 was $7,854,902 as compared to
$13,699,766 during the same period ended September 30, 1998. The decrease in
cash used by operating activities in 1999 was primarily due to a decrease of
approximately $2,994,000 in the Company's net loss after allowance for
non-cash expenses, with the balance of the decrease associated with timing of
collections and payments related to accounts receivable, other assets,
accounts payable and accrued expenses.
Net cash used by investing activities in the nine-month period ended
September 30, 1999 was $450,356 as compared to net cash used of $2,100,685 in
the same period ended September 30, 1998. Cash used by investing activities
in 1999 was attributable to the purchase of furniture, fixtures and equipment
of $839,505, which was offset by $30,000 received from the sale of certain
assets from discontinued operations and the maturity of certificates of
deposits in the amounts of $359,149. In the first nine months of 1998, cash
used by investing activities was primarily due to purchase of furniture,
fixtures and equipment of $3,299,900 which was offset by $310,000 received
from sale of certain assets from discontinued operations and $889,215 from
matured restricted certificates of deposit.
Financing activities provided net cash of $13,959,940 in the first nine
months of 1999 as compared to cash provided of $16,215,227 in the same period
of 1998. Cash provided in 1999 included proceeds of $8,200,000 from
short-term debt and $5,000 in net proceeds from exercises of common stock
warrants and options. Also, in July 1999, the Company completed an offering
of Series N preferred stock resulting in net proceeds to the company of
$7,116,408. As part of the Series N offering the Company converted
$12,718,914 of short-term debt and related accrued interest into Series N
preferred stock
13
thus reducing the liabilities of the Company. Repayments of $1,361,468 on
long-term debt, notes payable and capital lease obligations from continuing
operations offset these proceeds. During the same nine months in 1998, cash
provided by financing activities included $7,768,000 in proceeds from
issuance of long-term debt and warrants, $9,470,000 in net proceeds from the
issuance of preferred stock and common stock warrants and $684,943 from the
exercise of common stock warrants and options. These sources were offset by
repayments of $1,537,251 on long-term debt and capital lease obligations from
continuing operations and $170,465 from discontinued operations.
The Company incurred a net loss from continuing operations of $18,949,857 for
the first nine-months of 1999, and as of September 30, 1999 had an
accumulated deficit of $104,466,738. While the Company believes that current
working capital will be sufficient to fund operations in 1999, the Company
anticipates that additional funds will be necessary from public or private
financing markets to successfully integrate and finance the planned expansion
of the business communications services, product development and
manufacturing (including NetLink IP), and to discharge the financial
obligations of the Company.
CURRENT POSITION/FUTURE REQUIREMENTS
During the remainder of 1999, the Company plans to use available cash and
funds raised from the sale of debt or equity securities to fund its on-going
operations and the development and marketing of I-Link products and services.
During the third quarter of 1999 revenue from continuing operations increased
$373,269 (4.4%) from the second quarter of 1999 as shown below:
Three Months Ended
---------------------------- Increase % Increase
6/30/99 9/30/99 (Decrease) Decrease
---------- ---------- ---------- ---------
Telecommunications services $6,225,552 $6,986,968 $761,416 12.2%
Marketing services 1,476,090 989,157 (486,933) (33.0%)
Technology licensing and development 754,557 853,343 98,786 13.1%
---------- ---------- ----------
Net operating revenue $8,456,199 $8,829,468 $373,269 4.4%
========== ========== ==========
Telecommunications services revenue in the third quarter was 761,416 (12.2%)
greater than the second quarter of 1999. The number of minutes billed in the
third quarter were approximately 23% greater than the second quarter. This
revenue from increased minutes billed was essentially offset by a decrease in
the average billed rate per minute which is a direct result of the reduced
rate plans offered by the Company. The Company anticipates that this rate of
growth in minutes and related revenue will increase in future periods as the
Company continues it IP Telephony network expansion into new geographic areas
allowing the Company to offer increasingly competitive rates for
long-distance and enhanced telecommunications services.
The decrease in marketing services revenue was primarily due to a decreased
revenues from two areas: (1) revenues from the sale of the Company's new
WebCentre product which was first offered in the second quarter of 1999
decreased $223,377 to a level more representative of anticipated recurring
quarterly revenues and (2) revenues from new independent representatives
(IRs) signed up decreased in the third quarter by $403,952 as compared to the
second quarter of 1999. These decreases were offset by $169,884 in conference
revenues as a national conference was held in the third quarter of 1999 where
there was no such conference in the third quarter of 1998. WebCentre revenues
in the third quarter were generated from a base of existing IRs and
accordingly future WebCentre revenues may be more directly related to the
future growth of the number of IRs.
The decrease in kits sales is in part attributable to the change in marketing
focus from providing 1+ long distance to enhanced calling services such as
V-Link 3.0. As a result of the change, the composition of the network
marketing sales force is shifting from IRs interested solely in providing
inexpensive 1+ long-distance calling to those focused on selling the enhanced
communication services. The Company anticipates that revenues from marketing
services will increase as the year continues primarily due to: (1) the
release of V-Link 3.0, (2) the expansion of the Company's IP Telephony
network resulting in reduced telecommunication rates to users of I-Link's
telecommunications services and (3) increased availability of enhanced
services.
Technology licensing and development revenue increased in the third quarter
of 1999. The Company has decided to direct a greater portion of the MiBridge
resources into research and development rather than technology licensing and
development.
14
Accordingly, revenues from technology licensing and development in the fourth
quarter of 1999 and continuing into 2000 are anticipated to decrease. Revenue
from this source will vary from quarter to quarter based on timing of
technology licensing and development projects and royalties from products
previous sold.
The Company anticipates improved cash flow from operations in the remainder
of 1999 primarily from the following sources:
- - During the first nine months of 1999 the Company continued deployment of
its Communication Engines in the United States and anticipates continued
deployments during the remainder of 1999 to continue the build out of the
Company's IP Telephony network. The anticipated effect of this expansion is
increased revenues and profit margins for telecommunications services in
the future.
- - Anticipated increase in revenues from marketing of its NetLink IP product
in early 2000.
- - Release of V-Link 3.0 in the third quarter of 1999 that has increased
functionality and ease of use thus increasing revenues from incremental
sales and usage of V-Link enhanced services.
- - Marketing of enhanced services through master agents to employee
associations.
- - Hosting thirds party vendor applications on the I-Link IP network.
- - New revenues will be generated from the Company's IR WebCentre product that
was released in late March 1999.
- - New product pricing and expanded marketing channels.
The Company anticipates that in preparation for continued market penetration
and deployment of I-Link products, cash requirements for operations and the
continued development and marketing of I-Link services will be at
increasingly higher levels than experienced in the first nine-months of 1999.
In January 1999, the Company entered into an agreement with a national
carrier to lease local access spans to continue the build out of the I-Link
Network infrastructure. The three-year agreement includes minimum usage
commitments of $1,512,000 during the first year and $2,160,000 in the second
and third years. If the Company were to terminate the agreement early, it
would be required to pay any remaining first year minimum monthly usage
requirements and pay 25% of any remaining second and third year minimum
monthly usage requirements.
In order to provide for capital expenditure and working capital needs, the
Company entered into two agreements with Winter Harbor. The first agreement,
finalized in January 1999, provided an additional $11,000,000 in financing
(the "Winter Harbor Financing Arrangement"), as well as the issuance of
warrants and a rights offering. The Winter Harbor Financing Arrangement
consists of an $8,000,000 bridge loan facility (the "Bridge Loan") and a
$3,000,000 standby letter of credit (the "Letter of Credit") to secure
additional capital leases of equipment and telephone lines relative to the
proposed expansion of the Company's telecommunications network. The Company
had received advances under the bridge loan and letter of credit of
$8,000,000 and $3,000,000 respectively, however in July 1999, the bridge loan
plus accrued interest was exchanged for Series N preferred stock as discussed
below.
In the second agreement, dated April 15, 1999, Winter Harbor agreed to loan
to the Company up to $4 million under a note due September 30, 1999. In July
1999 this loan plus accrued interest was exchanged for Series N referred
stock as discussed below.
In addition, the due date of the Company's prior obligation to Winter Harbor
in the amount of $7.768 million, which was due on demand, was extended to
April 15, 2000.
On July 23, 1999 the Company completed its offering of 20,000 shares of
Series N preferred stock. The offering was fully subscribed through cash
subscriptions and the Company exercising its rights to exchange the above
mentioned $8,000,000 and $4,000,000 loans plus accrued interest from Winter
Harbor. In total the Company received $7,281,086 in cash (before expenses of
$164,678) and exchanged $12,718,914 in debt and accrued interest.
While the Company believes that the aforementioned sources of funds will be
sufficient to fund operations in 1999, the Company anticipates that
additional funds will be necessary from public or private financing markets
to successfully integrate and finance the planned expansion of the business
communications services, product development and manufacturing, and to
discharge the financial obligations of the Company.
15
The availability of such capital sources will depend on prevailing market
conditions, interest rates, and the 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, 1999 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998
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, 1999 and 1998 have been reported as discontinued
operations.
REVENUES
Telecommunication services revenue increased $1,966,318 to $6,986,968 in the
third quarter of 1999 as compared to $5,020,650 in the third quarter of 1998.
The increase is due primarily to the new customers obtained through the
Network Marketing channel which began generating revenue in the third quarter
of 1997.
Marketing services revenue, which includes revenue recognized from
independent representatives for promotional and presentation materials,
WebCentre, and ongoing administrative support decreased $339,792 to $989,157
in the third quarter of 1999 as compared to $1,328,949 in the same quarter of
1998. The decrease was primarily due to revenues from new independent
representatives (IRs) signed up which decreased in the third quarter by
$781,465 as compared to the third quarter of 1998. This decrease was
primarily offset by new revenues of $392,479 related to the Company's new
WebCentre product which was first offered in the second quarter of 1999 and
$49,194 increase in convention revenues in the third quarter of 1999 as
compared to same quarter of 1998. The decrease in kits sales is in part
attributable to the change in marketing focus from providing 1+ long distance
to enhanced calling services such as V-Link 3.0. As a result of this change,
the composition of the network marketing sales force is shifting from IRs
interested solely in providing inexpensive 1+ long-distance calling to those
focused on selling the enhanced communication services. The Company
anticipates that revenues from marketing services will increase as the year
continues primarily due to: (1) the release of V-Link 3.0, (2) the expansion
of the Company's IP Telephony network resulting in reduced telecommunication
rates to users of I-Link's telecommunications services and (3) increased
availability of enhanced services. As revenues in this marketing channel are
intended to cover the marketing service costs, it is anticipated that as the
base of independent representatives grows, marketing service revenues will
approximate the related costs.
Technology licensing and development revenue increased $446,564 to $853,343
in the third quarter of 1999 as compared to $406,779 in the same quarter of
1998. These revenues are from the licensing and development of technology
through MiBridge, Inc. and are due to increased acceptance of its products in
the market place. This rate of increase is not expected to continue in the
future as the Company has decided to direct a greater portion of the MiBridge
resources into research and development rather than technology licensing and
development. Accordingly, revenues from technology licensing and development
in the fourth quarter of 1999 and continuing into 2000 are anticipated to
decrease. Additionally, revenue from this source will vary from quarter to
quarter based on timing of technology licensing and development projects and
royalties from products previously sold.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $129,588 in the third quarter of
1999 to $5,224,851 as compared to $5,095,263 for the same quarter of 1998.
These expenses include the costs related to the continuing development and
deployment of the Company's communication network and expenses related to the
telecommunication services revenue. The increase in expense was primarily due
to the increase in telecommunication services revenue. However the rate of
increase is significantly below the rate of increase in telecommunications
revenues primarily due to (1) continued deployment of the Company's enhanced
IP (Internet protocol) telephony network and related economies of scale and
increased traffic on the network, (2) efforts of the Company to negotiate
reduced rates from its underlying carriers, and (3) better utilization of the
Company's telecommunication infrastructure. The Company expects that
telecommunications network expense will increase as telecommunication
services revenue increases, but at a lesser rate of growth.
16
Marketing service costs increased $220,246 to $1,584,356 in the third quarter
of 1999 as compared to $1,364,110 for the same quarter of 1998. Marketing
service costs are directly related to marketing service revenues. Although
marketing service revenues decreased during the third quarter of 1999 as
compared to the same quarter of 1998, marketing service expenses increased.
This increase was primarily due to an increase in expenses relating to
general overhead, such as salaries and wages, and national and regional
conventions. Lower commissions and costs of promotional and presentational
materials offset these increased expenses. Marketing services expense
includes commissions and the costs of providing promotional and presentation
materials, national and regional conventions, the Company's new WebCentre
product and ongoing administrative support to independent representatives.
Selling, general and administrative expense increased $494,688 to $3,085,766
in the third quarter of 1999 as compared to $2,591,078 in the third quarter
of 1998. The increase was primarily due to increased overhead and personnel
costs associated with growing the Company's telecommunication business.
The provision for doubtful accounts increased $122,137 to $997,788 in the
third quarter of 1999 as compared to $875,651 in the same quarter of 1998.
This increase is primarily due to growth in the Company's telecommunication
services revenue.
Depreciation and amortization increased $505,368 to $1,564,774 in the third
quarter of 1999 as compared to $1,059,406 in the third quarter of 1998. The
increase is primarily due to increased depreciation related to continuing
acquisitions of equipment under capital lease agreements. Depreciation
expense also increased due to continued acquisition of telecommunication
equipment.
Research and development increased $170,735 to $778,638 in the third quarter
of 1999 as compared to $607,903 in the same period of 1998. The Company
anticipates that research and development expense for 1999 will be slightly
greater than 1998.
Interest expense increased $1,575,143 to $1,878,978 in the third quarter of
1999 as compared to $303,835 in the same quarter of 1998. Interest in the
third quarter of 1999 included $1,506,242 (non-cash) in amortization of debt
discount related to certain warrants granted in connection with $8,000,000 in
loans and a $3,000,000 letter of credit to the Company from Winter Harbor
L.L.C. and interest on outstanding debt of the Company of $372,736. Interest
in the third quarter of 1998 was primarily related to $303,835 in interest on
outstanding debt.
Interest and other income decreased $26,986 to $69,182 in the third quarter
of 1999 as compared to $96,168 in the same quarter of 1998. The decrease was
primarily due to a decrease in the average balance of cash on hand in the
third quarter of 1999 as compared to the same quarter of 1998.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
In December 1997, 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, 1999 and 1998 have been reported as discontinued operations.
REVENUES
Telecommunications service revenue increased $5,458,624 to $19,395,218 in the
first nine months of 1999 as compared to $13,936,594 in the first nine months
of 1998. The increase is due primarily to the new customers obtained through
the Network Marketing channel which began generating revenues in the third
quarter of 1997.
Marketing services revenue, which includes revenue recognized from
independent representatives for promotional and presentation materials,
WebCentre, and ongoing administrative support decreased $409,039 to
$3,225,119 in the first nine-months of 1999 as compared to $3,634,158 in the
same period of 1998. The net decrease was primarily due to increased revenues
of $1,057,955 related to the Company's new WebCentre product which was first
offered in the second quarter of 1999 which new revenues were offset by: (1)
a decrease of $1,191,917 in revenues from independent representatives for
promotional and presentation materials and (2) discontinuance of certain
products sold totaling $275,077 in the first nine-months of 1998 which
accordingly did not have revenues in 1999. The decrease in kits sales is in
part attributable to the
17
change in marketing focus from providing 1+ long distance to enhanced calling
services such as V-Link 3.0. As a result of this change, the composition of
the network marketing sales force is shifting from IRs interested solely in
providing inexpensive 1+ long-distance calling to those focused on selling
the enhanced communication services. The Company anticipates that revenues
from marketing services will increase as the year continues primarily due to:
(1) the release of V-Link 3.0, (2) the expansion of the Company's IP
Telephony network resulting in reduced telecommunication rates to users of
I-Link's telecommunications services and (3) increased availability of
enhanced services. As revenues in this marketing channel are intended to
cover the marketing service costs, it is anticipated that as the base of
independent representatives grows, marketing service revenues will
approximate the related costs.
Technology licensing and development revenue increased $914,927 to $1,902,316
in the first nine months of 1999 as compared to $987,389 in the first nine
months of 1999. These revenues are from the licensing and development of
technology through MiBridge, Inc. and are due to increased acceptance of its
products in the market place. This rate of increase is not expected to
continue in the future as the Company has decided to direct a greater portion
of the MiBridge resources into research and development rather than
technology licensing and development. Additionally, revenue from this source
will vary from quarter to quarter based on timing of technology licensing and
development projects and royalties from products previous sold.
OPERATING COSTS AND EXPENSES
Telecommunication network expenses decreased $316,908 in the first nine
months of 1999 to $14,288,905 as compared to $14,605,813 for the same period
in 1998. These expenses include the costs related to the continuing
development and deployment of the Company's communication network and
expenses related to the telecommunication services revenue. The decrease in
expense was primarily due to the deployment of the Company's IP network and
the Company's efforts to negotiate reduced rate contracts with other
carriers. The Company expects that telecommunications network expense will
increase as telecommunication services revenue increases but at a lesser rate
of growth as the Company benefits from economies of scale and increased
traffic on the Company's enhanced IP telephony network.
Marketing service costs decreased $10,955 to $4,564,112 in the first nine
months of 1999 as compared to $4,575,067 for the same period in 1998.
Marketing service costs are directly related to marketing service revenues.
Although marketing service revenues decreased during the first nine months of
1999 as compared to the same nine months of 1998, the decrease in related
market services expense did not decrease proportionately as many expenses do
not vary directly with revenues generated. Marketing service expenses include
commissions and the costs of providing promotional and presentation
materials, the Company's new WebCentre product, and ongoing administrative
support to independent representatives.
Selling, general and administrative expense increased $1,487,415 to
$9,010,585 in the first nine months of 1999 as compared to $7,523,170 in the
first nine months in 1998. The increase was primarily due to increased
overhead and personnel costs associated with growing the Company's
telecommunication business.
The provision for doubtful accounts increased $617,490 to $2,941,803 in the
first nine months of 1999 as compared to $2,324,313 in the same period in
1998. This increase is primarily due to growth in the Company's
telecommunication services revenue
Depreciation and amortization increased $1,236,365 to $4,345,597 in the first
nine months of 1999 as compared to $3,109,232 in the first nine months of
1998. The increase is primarily due to increased depreciation related to
continuing acquisitions of equipment under capital lease agreements.
Depreciation expense also increased due to continued acquisition of
telecommunication equipment.
In the first quarter of 1999, the Company recorded a write-down of
capitalized software costs of $1,847,288. In early 1998 the Company
contracted with an outside consulting company to develop a billing and
operations information system. The Company continually evaluated the
functionality and progress of the in-process system development. The
Company's management and its Board of Directors concluded that the new system
would not significantly enhance the Company's existing billing and
information systems or meet its ultimate needs and accordingly did not
justify paying additional contracted expenses of approximately $1,000,000.
Accordingly the Company recorded a write-down on the in-process system
development of $1,847,288.
18
Research and development increased $100,685 to $1,852,743 in the first nine
months of 1999 as compared to $1,752,058 in the same period in 1998. The
Company anticipates that research and development expense for 1999 will be
slightly greater than 1998.
Interest expense decreased $3,197,002 to $4,747,410 in the first nine months
of 1999 as compared to $7,944,412 in the same period in 1998. Interest
expense in the first nine months of 1999 was primarily due to $3,295,042
(non-cash) in amortization of debt discount related to certain warrants
granted in connection with $8,000,000 in loans and a $3,000,000 letter of
credit to the Company from Winter Harbor L.L.C. and interest on outstanding
debt of the Company of $1,452,368. The interest expense in the first nine
months of 1998 was 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 and
interest expense of $670,412 on outstanding debt of the Company.
Interest and other income decreased $33,699 to $125,933 in the first nine
months of 1999 as compared to $159,632 in the same period of 1998. The
decrease was primarily due to a decrease in the average balance of cash on
hand in the first nine months of 1999.
The Company recorded an additional loss from discontinued operations in the
first nine months of 1999 in the amount of $350,000. The Company has
experienced unexpected delays in disposing of the remaining non-operating
assets, including certain assets located in China. Additionally, the
Company's best estimate of proceeds from the remaining assets is expected to
be less than originally estimated by management. As the remaining asset
disposals have not occurred as expected, during the first nine months of 1999
the Company revised its best estimate of the ultimate loss on disposal and
related on-going administrative costs and accordingly recorded the additional
estimated loss of $350,000.
IMPACT OF YEAR 2000
I-Link's Year 2000 ("Y2K") program is designed to minimize the possibility of
serious Y2K interruptions. Possible worst case scenarios include the
interruption of significant parts of I-Link's business as a result of
critical telecommunication networks and/or information systems failure. Any
such interruption may have a material adverse impact on future results. Since
their possibility cannot be eliminated, I-Link formed a "Year 2000 Team"
during 1998 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).
The Company does not believe its non-IT systems will be significantly
affected by Y2K. Nevertheless, the Y2K project team is continuing to evaluate
the readiness of all of the facilities the Company occupies to be certain
that the non-IT systems will be compliant. The Company anticipates its IT and
non-IT systems will be Y2K compliant by November 30, 1999.
STATE OF READINESS. The Company's approach to the Y2K issue includes six
major phases: Inventory, Assessment, Remediation, Testing, Implementation,
and Contingency Planning. Several phases of this methodology are well
underway. The Inventory and Assessment phases are nearly complete, and
efforts have begun in Remediation and Testing. Based upon the results of the
assessment, a significant portion of the Company's software and hardware
already appears to be Y2K compliant, though the Company intends to confirm
that opinion in the Testing phase. As the Company began operations in 1996,
much of the hardware and software currently in use at the Company was Y2K
compliant when acquired and implemented.
While the Company continues to assess various aspects of its Y2K
vulnerability, the project team has begun the process of remediating or
replacing systems and devices that do not appear to be fully compliant. Much
of this remediation effort involves readily available, simple upgrades to
hardware and software components, or relatively minor changes to the
Company's in-house developed systems. While the Company has completed much of
the Remediation phase, except for the billing system discussed below, the
Company anticipates that this phase will not be completed until November 15,
1999. Total costs, past and future, of all remediations, including the
billings system discussed below, are not expected to exceed $250,000. The
Company does not believe that its use of internal resources will
significantly delay any other systems development efforts. The Company has
initiated testing of some systems to confirm that they can process calendar
dates after December 31, 1999.
19
The Company believes that reliance on other telecommunications providers
represents the Company's greatest Y2K exposure and is the primary third-party
relationship that is critical to the Company's on-going operations. While the
Company has its own communications network to carry much of its traffic, the
Company's network is dependent upon significant third-party carriers (such as
Sprint) and local exchange carriers (LECs), such as U.S. West and PacBell.
These entities originate and terminate local and long-distance caller traffic
which accesses the Company's communications network or services areas not
covered by I-Link's network. This is substantially the same risk faced by
other telecommunications providers. The Company is in the process of
evaluating the Y2K preparedness of its carriers and the many LEC's. I-Link's
carriers have indicated they intend to be Y2K compliant in public filings and
other notifications. In the event that these carriers do not become Y2K
compliant prior to December 31, 1999, the Company would need to switch to
carriers who were Y2K compliant or face a significant impact on its ability
to deliver telecommunications services. In the event the Company's current
carriers do not become Y2K compliant and the Company is unable to switch to a
carrier(s) that is Y2K compliant, the Company would not be able to deliver
its services which would have a substantial negative impact on the Company
and its results of operations, liquidity, and financial position. In the
event that certain LEC's are not Y2K compliant, customers of the Company
would not be able to originate or terminate a call in geographic areas
serviced by the LEC, which would negatively impact the financial condition of
the Company.
In order to assess the preparedness of third party vendors including I-Link's
carriers and LEC's, the Company is surveying the vendors and their public
statements and Web sites. At the conclusion of its internal and third party
assessments, the Company intends to complete contingency plans to address
various scenarios in which key vendors and suppliers may not be Y2K compliant.
The internal system the Company believes most vulnerable to Y2K problems is
the existing billing system which: (1) gathers call detail records ("CDRs");
(2) processes the CDRs into billable CDRs; (3) rates the CDRs; (4) prepares
invoices to customers; (5) and records payments received. The inability of
the Company's billing system to operate in the Year 2000 would adversely
impact the recognition and collection of revenue, and therefore, could
negatively impact the results of operations and financial position. The
current billing system contains some programs that are not Y2K compliant. The
rating and taxing components of the billing system are compliant and the
accounts receivable component will be compliant by November 30, 1999. The
cost of these modifications to the existing billing system are not
anticipated to exceed $50,000, and would involve internal resources only such
as salaries and benefits.
COSTS. The Company is primarily using internal resources to identify,
assess, correct, test, and implement solutions for minimizing Y2K
consequences, but expects to incur some additional consulting, upgrade, and
other expenses. The Company has already expended approximately $45,000 to
date for upgrades, and approximately $55,000 on internal resources for Y2K
preparation. The Company estimates the remaining expenditures for outside
services and upgrades should not exceed $85,000 and internal resources should
not exceed $65,000. However, the ultimate final cost of modifications and
conversions could change and is not definitively known at this time. The
Company expects to fund such expenditures from existing working capital.
RISKS. The failure to correct a material Y2K problem could result in an
interruption of normal business activities. Such a disruption could
materially and adversely affect the Company's results of operations,
liquidity, and financial condition. The Company's assessment of Y2K risk does
not cover all possible catastrophic events, such as the failure of electrical
power grids or the general telecommunications infrastructure. The following
reasonably likely worst case scenario is based upon conceivable, though not
probable, worst-case disruptions to the Company's revenue cycle.
The Company's revenue cycle is dependent on the ability to complete customer
calls and integrate the related CDRs into the billing system described above.
The Company's ability to complete calls is contingent upon the Y2K compliance
of its underlying carriers and LECs, which have represented that they will be
ready. Barring a long-term, catastrophic failure of electrical services or
the telecommunications industry in general, the most likely worst-case
scenario would be a general failure of the Company's own communications
network, which carries its call traffic. In that case, the Company would not
be able to provide enhanced services (such as V-Link) but customers could
still complete long-distance calls as those calls would be routed over the
Company's carriers networks. However unlikely, such an event would seriously
and adversely affect operating margins, but operations could continue until
repairs were made. Continuing on with the worst-case scenario, a failure of
the Company's ability to collect CDRs might prevent the timely billing of
services. Such a failure would result in a cash-flow exposure to the Company
for as long as it may require to correct CDR collection programs. Since the
billing
20
process occurs two to three weeks after the close of any period, minor
problems would probably have minimal financial impact. Nevertheless, if
corrections required a significantly longer time period, customer billing,
revenue collection and cash flows could be delayed and bad debts increased to
the extent that material damages to the Company could result. The Company
intends to test various components of this scenario to reduce exposure to
this reasonably likely worst case scenario.
Milestones and implementation dates and the costs of the Company's Y2K
readiness program are subject to change based on new circumstances that may
arise or new information becoming available, that may alter underlying
assumptions or requirement.
21
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on July 19, 1999, at
which three proposals were considered and passed by the stockholders:
Proposal 1 reelected Mr. Thomas A. Keenan as a Class I director of the
Company.
Proposal 2 ratified the continued engagement of PricewaterhouseCoopers LLP as
independent public accountants for the Company.
Proposal 3 approved a modification to the terms of the Series N Preferred
Stock to establish a conversion price floor of $1.25 and to link the Series N
conversion price to the price at which common stock is issued upon the
exercise or conversion of any new options, warrants, preferred stock or other
convertible security, including the conversion rate of the Series F Preferred
Stock.
ITEM 6(a) - EXHIBITS
Exhibit
Number Item
- ------ ----
4.14* Stock option agreement by and between the Company and John Edwards,
filed herewith
10.10* Employment agreement with John Edwards dated September 9, 1999, filed
herewith
27 Financial data schedule.
- --------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed.
ITEM 6(b) - REPORTS ON FORM 8-K
A report on Form 8-K was filed on July 22, 1999 which reported on the
approval of the proposal to amend the conversion terms of the Series N
Preferred Stock at the annual meeting of the shareholders on July 19, 1999.
22
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 5, 1999 By: /S/ JOHN W. EDWARDS
--------------------------------
John W. Edwards
President, Chief Executive Officer
By: /S/ JOHN M. AMES
--------------------------------
John M. Ames
Chief Financial Officer, and Chief
Operating Officer
23