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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-26013
MULTI-LINK TELECOMMUNICATIONS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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COLORADO 84-1334687
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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4704 HARLAN STREET, SUITE 420,
DENVER, COLORADO 80212
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(720) 855-0440
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK
(TITLE OF CLASSES)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for its most recent fiscal year were $2,217,468.
The aggregate market value of the voting common equity held by
non-affiliates of the Registrant on December 23, 1999, was approximately
$15,363,320, based upon the reported closing sale price of such shares on the
Nasdaq SmallCap Market for that date. As of December 23, 1999, there were
3,272,302 shares outstanding of which 2,083,162 shares were held by
non-affiliates.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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MULTI-LINK TELECOMMUNICATIONS, INC.
1999 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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ITEM DESCRIPTION PAGE
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Item 1. Description of Business..................................... 1
Item 2. Description of Property..................................... 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 7
Item 5. Market for Common Equity and Related Stockholder Matters.... 7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 7. Financial Statements........................................ 16
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 16
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 17
Item 10. Executive Compensation...................................... 18
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 12. Certain Relationships and Related Transactions.............. 21
Item 13. Exhibits and Reports on Form 8-K............................ 22
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated,
including but not limited to, the availability of future acquisitions, the
effects of general or regional economic and market conditions, increases in
marketing and sales costs, intensity of competition, cost of technology, the
availability of financing, contingencies associated with Year 2000 compliance
and our ability to manage our growth. Cautionary statements regarding the risks,
uncertainties and other factors associated with these forward-looking statements
are discussed under "Risk Factors" in this Form 10-KSB. You are urged to
carefully consider these factors, as well as other information contained in this
Form 10-KSB and in our other periodic reports and documents filed with the SEC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We were incorporated in 1996 and are headquartered in Denver Colorado. We
currently have two principal operating subsidiaries that provide a broad range
of voice messaging related telecommunications services to individuals,
residences and small businesses.
MULTI-LINK COMMUNICATIONS, INC. has been our principal operating entity
since its acquisition in February 1996 and provides advanced integrated voice
and fax messaging services for small and medium sized businesses in the Denver
metropolitan area. These services enable businesses to improve the handling of
incoming calls and facilitate more efficient communication between employees,
customers, suppliers and other key relationships of the subscriber company. In
the first quarter of fiscal 2000, Multi-Link Communications, Inc. has expanded
the range of products it offers to include long distance service, telephone
systems, pagers and mobile telephones.
HELLYER COMMUNICATIONS SERVICES, INC. was formed in November 1999 for the
purpose of completing the acquisition of the business and substantially all of
the assets of Hellyer Communications, Inc. Hellyer provides messaging services
in Indianapolis, Chicago and Detroit. In Chicago and Detroit, Hellyer offers
basic numeric paging and residential messaging service through remotely operated
Glenayre voice messaging systems. In Indianapolis, where Hellyer is
headquartered, Hellyer offers a much broader range of services to homes and
businesses including:
- voice messaging services;
- paging services;
- live operator answering services; and
- sales and service of Nextel mobile telephones.
The acquisition of Hellyer took place after our fiscal year end on
September 30, 1999, and consequently the financial statements included in this
report do not include any information relating to Hellyer.
We completed our initial public offering in May 1999 and plan to continue
to grow through the acquisition of regional voice messaging companies and other
telecommunications service providers such as interconnect vendors, Internet
service providers, paging service providers and other companies providing
services to the same customer group.
THE VOICE MESSAGING INDUSTRY
We estimate that revenues realized in 1997 by North American voice
messaging service providers were approximately $2.67 billion, with $570 million
of the total revenues realized by approximately 4,200 independent voice
messaging providers scattered throughout North America. We also estimate that
local telephone companies, wireless companies and other providers realized the
remaining $2.1 billion in revenues.
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We believe that the voice messaging market is experiencing structural
changes brought about by new technologies and changes in consumer preferences
and that these changes will increase the rate of growth of the overall messaging
services market, and create an opportunity for independent specialist voice
messaging providers such as us to capture increased market share from the
telephone companies that dominate the market today.
OVERVIEW OF OUR CURRENT AND FUTURE SERVICES
We offer some types of messaging services that are new and have yet to
receive broad market acceptance as well as basic voice messaging services that
compete directly with the traditional automated answering services offered by
the local telephone companies. We believe that broad market adoption of some of
the new services and communications practices described below will only be
achieved over time. As a result, we will continue to offer traditional voice
messaging services while awaiting market acceptance of the advanced services of
which our systems are capable.
Single Box Voice Mail for Business and Home. We provide single voice
mailboxes to residences and small businesses for telephone answering. Using
automated call forwarding features programmed on the phone lines, incoming calls
are transferred to a single mailbox when the line is busy or when nobody
answers. The standard mailbox provided by us has many useful features that
currently are not available from the local phone companies or are provided by
them as additional cost options. These features include: multiple greetings
which play according to a time schedule, the option for a caller to press the
zero key to be transferred to another number and the option to have new messages
notified to a pager or a mobile telephone.
Multiple Box Business Voice Messaging Networks. We provide comprehensive
voice messaging networks for businesses that employ up to 50 people. Every
network is designed individually to meet each specific customer's needs. There
are several ways callers can access the voice messaging system:
- using automated call-forwarding features programmed on the phone lines,
incoming calls are transferred to a general company mailbox when the line
is busy or when nobody answers. Callers then have the option to leave a
message or to reach the mailbox of a specific individual through a
directory;
- incoming calls during normal business hours can be answered by a person
and then transferred to an individual voice mailbox if the person sought
is not available; and
- callers who wish to leave a personal message can dial the voicemail box
directly without speaking with the receptionist.
Each mailbox within the overall network can be individually programmed to
send notification of new messages to a wide variety of pagers and mobile
telephones, to forward callers to different numbers when the zero key is pressed
and to take advantage of the consolidated messaging and one number services
described below.
Automated Attendant Call Routing Service. We offer automated call routing
services. Our system answers all incoming calls for a business and acts as a
virtual receptionist for the business. By pressing keys in response to a series
of progressive menus, callers reach the person or department they require. The
service provides fully automated call handling and often allows businesses to
reduce or eliminate the cost of receptionist personnel. We believe that the
service is particularly valuable to businesses with multiple locations in the
same local calling area since all those businesses can now be linked through one
central access telephone number.
Consolidated Messaging Service. We offer a consolidated messaging service.
A subscriber buys a voice mailbox from us. Call forwarding is then established
from all of the subscriber's phone lines -- home, business and mobile -- to the
same voice mailbox. In this way, all voice messages are channeled automatically
into one voice mailbox. This saves time, is more efficient and often saves
money -- one mailbox instead of three.
One Number Service. We offer one number service called "Constant Touch
Service." Callers who reach a subscriber mailbox are given two options in the
greeting. If immediate contact with the subscriber is not required, they are
requested to leave a voice message for later attention by the subscriber.
However, if they need to speak to the subscriber, they are instructed to press
keys to activate the subscriber's Constant Touch Service. Upon
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activation, the service requires the caller to state the caller's name which is
recorded in the voice mailbox. The messaging system immediately dials several
numbers simultaneously to try to reach the subscriber. Typically the system will
dial a mobile phone number, a pager number, a home telephone number and an
office direct line. If the subscriber is reached, the messaging system plays the
name of the caller on hold and awaits instructions. The subscriber may elect to
connect immediately with the caller, to request that the caller leave a message,
or to terminate the call without offering the opportunity to leave a message. By
using Constant Touch Service, subscribers make it very simple for callers to
reach them, yet maintain complete control over incoming calls. If the subscriber
is not reached, the messaging system will wait up to two minutes and then so
advise the caller and request the caller to leave a message.
Over the next few years, we expect this "one number" technology will
revolutionize the way people communicate. It will no longer be necessary to
guess where the person called may be at any given time. The work of finding the
subscriber will be undertaken by the messaging system. In time, as
communications practices change, we believe subscribers will give out their
voice mail number as the primary contact number and all callers will leave
messages or use the one number technology. The use of the messaging system as a
primary contact point will eliminate the interruption of non-urgent calls and
should increase productivity.
Calling Card Functionality/Call Origination Capability. The voice messaging
system can act as a communications hub for subscribers who travel extensively.
Subscribers access their messaging system from anywhere in the United States by
using a dedicated "800" number. After listening to their messages, they may
elect to obtain a dial tone and make a call from within the voice mailbox. When
they terminate each call, they are returned to the mailbox and may continue
listening to other messages or make further calls. We believe that this service
is less expensive and more convenient than most calling cards. Our messaging
systems offer this service capability now, although we have not yet begun
marketing this product on a commercial basis. We expect to begin marketing this
service in fiscal 2000.
Unified Messaging Service for Voice, Fax and Internet Based e-mail. We
believe that unified messaging will change the industry over the next few years.
Unified messaging is the term used to describe a service that can store voice
messages, fax messages and Internet e-mail messages in one mailbox. The service
should also allow retrieval of any type of message over a telephone, fax machine
or personal computer, no matter what the original form of the message might have
been.
The unified messaging market is still in the early stages of development
and, although some equipment has been deployed commercially, we believe that
revenues from unified messaging services are still very small. We expect that
unified messaging services will be particularly popular among traveling
executives. We currently provide unified voice and fax messaging service. We
plan to offer a unified messaging service which will include integration with
Internet based e-mail service in calendar year 2000.
Voice Activated Commands. At the present time, almost all voice-messaging
systems respond to tones created by key presses on the Dial Tone Modulated
Frequency or DTMF keypad. The exclusive use of the DTMF keypad has significant
disadvantages to the mobile user who may often wish to use the messaging system
when driving or performing other complex tasks. The use of speech recognition
technology will allow subscribers to simply speak commands to the messaging
system rather than using key presses. In addition to the benefits to mobile
users, the use of speech recognition will facilitate faster navigation through
complex menus and offer more intuitive access to less frequently used functions
of the messaging system. We believe that speech recognition technology is one of
the most exciting developments in the messaging industry. We expect to market
speech recognition technology in the mid part of 2000.
"Adtracker" Advertising Analysis Tool. With each Adtracker service package,
a business customer is provided with a block of five local telephone numbers.
Each direct response advertising medium is directed to a different number and
not to the advertiser's main office telephone number. When callers dial each
number in response to the advertising, the call passes momentarily through our
system and is transferred to the advertiser's main office telephone number and
handled by the advertiser in the normal way. The transit of the call through our
switch generates a call detail record that is printed through our billing system
in the form of a monthly call log. The log gives time and date information for
every call received through the system. By comparing the call logs to
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the advertising, the advertiser can identify patterns in the responses and
determine how best to deploy advertising dollars in the future.
Live Operator Telephone Answering Services. We offer a 24/7 "live operator"
answering service at our Hellyer subsidiary in Indianapolis. There are many
situations in which live answering is considered superior to automated message
taking. Live answering is often used in situations where a qualitative decision
is required -- for example, an after hours doctor's answering service. We may
consider expanding the live answering service to our other markets calendar
2000.
Mobile Telephone Services. We are an authorized agent for the sale of
mobile telephone service and handsets for several national airtime providers
including Airtouch, Nextel and Voicestream Wireless. We seek to sell these
products to our business customers in connection with our voice messaging
service, which integrates extensively with mobile telephone service.
Telephone Systems. We are an authorized sales agent for Vodavi telephone
systems and seek to provide sales and service to our base of business customers
as a method of decreasing customer attrition and generating incremental
revenues.
Numeric Paging Services. We are an authorized reseller of alpha numeric and
numeric paging services of several national carriers including Pagenet,
Mobilcomm, Arch and Contact Paging.
Long Distance Service. We are an authorized agent for Frontier
Communications' long distance services.
DISTRIBUTION METHODS
We distribute our business products and services through independent sales
agents, a direct business to business sales force, and through our Internet Web
site. Residential messaging and paging services are sold through our outbound
telesales operation based in Indianapolis, Indiana.
We believe that the introduction of unified messaging in calendar 2000 will
open up new distribution channels allowing us to forge distribution alliances
with Internet service providers and other companies involved in the provision of
Internet based e-mail services. We plan to provide Internet based e-mail
services and other Internet related services in calendar 2000.
CUSTOMER BASE
Our business customer base consists predominantly of small and medium sized
businesses that have between one and 50 employees. This customer base includes
approximately 20,000 diverse businesses. Our residential customer base exceeds
40,000 households. No single customer accounts for more than 0.1% of total
monthly revenues.
KEY SUPPLIERS AND TECHNOLOGY
Equipment. Our voice messaging systems are manufactured by Glenayre
Electronics of Atlanta. Currently, we have six Glenayre systems, which are
reliable, easy to maintain and have historically experienced minimal downtime.
We employ technicians who provide support for the Glenayre systems. In addition,
Glenayre provides technical support via a direct modem link when necessary and
provides periodic software upgrades to insure that we continue to offer updated
services. We have no written agreements with Glenayre. There are several other
manufacturers of voice messaging equipment that could supply our equipment needs
if Glenayre was unable or unwilling to do so for any reason. We make no
expenditures on research and development of any kind.
Interconnection with Public Switched Networks. Our voice messaging systems
are linked to the public switched telephone network using digital two-way direct
inward dial trunks. These interconnection services are provided by several
telecommunications carriers including: US West Communications, Ameritech,
Frontier Communications, McLeod Communications and AT&T Local Services.
Following the deregulation of the telecommunications industry in 1996, we
believe that we will experience an increasing number of potential alternative
suppliers for our interconnection needs, and that our interconnection costs will
decrease over the coming year.
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COMPETITION
The regional local telephone companies have the largest share of the voice
messaging services market and therefore constitute our primary competitors. We
obtain most of our business customers by offering voice messaging services that
compare favorably with those provided by the local telephone companies in the
following ways:
- We have consolidated messaging service, one number service and other
applications and features which are not currently offered by the local
telephone companies;
- Our sales agents conduct a comprehensive analysis of every prospective
customer's needs and custom design a voice messaging service to meet
those specific needs. Generally, the local telephone companies do not
offer this type of individual analysis in the voice messaging market;
- Our voice messaging service includes more standard features than the
local telephone companies;
- We send out customer trainers to teach new subscribers how to best use
our messaging services. The local telephone companies offer only
telephone-based support;
- We maintain a well-trained customer service staff that specializes in
providing messaging services. By comparison, the phone company's customer
service staff generally deal with a wide range of telephone line issues
and, therefore, are not as knowledgeable as our specialist
representatives;
- We provide no cost help in reorganizing service configurations, adding
staff members to, or deleting staff members from, a network or simply
understanding the best way to use the voice messaging services; and
- In some market areas we charge less than our competitors for what we
believe is overall a superior service.
We believe that the technological changes taking place in the voice
messaging industry will enable messaging service providers like us to capture a
larger market share of the voice messaging industry. The new services described
above require the provider of the messaging services to maintain complex
messaging networks which interact with a broad range of other telecommunications
services supplied by a wide range of service providers. We believe that the
provision and maintenance of the new services involves a level of complexity
that is unattractive to the local phone companies and that they may be unable to
compete successfully in this service category.
BILLING OF SERVICES
All services provided to our business customers are invoiced directly by us
to each customer on a monthly basis. All accounts receivable and collections
activity is undertaken internally by us. As we continue with our industry
consolidation plan, we believe that significant efficiencies and economies of
scale can be obtained in the area of billing and collections.
The monthly charges for Hellyer's residential voice mail customers are
added to their Ameritech local telephone service bill through an arrangement
with Integretel Inc., a "consolidator" of third party telephone charges. Through
this arrangement Hellyer is able to cost effectively bill and receive payment
for small charges that average approximately $6.00 per household.
INDUSTRY CONSOLIDATION AND GEOGRAPHIC EXPANSION STRATEGY
We plan to expand our market share of the North American voice messaging
services market through an aggressive plan to consolidate some of the 4,200
independent voice mail providers that exist around the country. We believe that
we can present an attractive opportunity to business owners to merge their
businesses with ours.
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We have completed four acquisitions to date:
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- - Voice Services Inc. (Denver) February 1996
- - Bolder Voice Inc. (Denver) June 1999
- - Hellyer Communications, Inc. (Indianapolis) November 1999
- - Cashtel Inc. (Chicago) November 1999
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In addition, we have signed a definitive agreement for the acquisition of
One Touch Communications Inc. in Raleigh-Durham, North Carolina, which is
expected to close in early January 2000.
In addition to the benefits derived from our technological, capital and
marketing expertise, we believe that savings can be achieved as a result of the
centralization of purchasing, accounting, administration, marketing,
telemarketing and other core functions of acquired voice mail providers.
We anticipate that we will continue to use a mixture of cash, assumed debt,
vendor financing, and the issuance of common stock to complete future
acquisitions.
INTELLECTUAL PROPERTY
We hold no patents or patent applications. We have received a trademark
registration from the U.S. Patent and Trademark Office for our Multi-Link logo.
GOVERNMENTAL APPROVALS AND COSTS OF ENVIRONMENTAL COMPLIANCE
We are not regulated by any governmental authority in the provision of our
services, which are classified as "deregulated services" under the terms of the
Telecommunications Act of 1996. We believe that the government is decreasing its
level of regulation over the telecommunications industry and that additional
legislation or regulation affecting our business is unlikely.
We have incurred no costs of any kind in complying with environmental laws
and regulations imposed by any local, state or federal governmental body.
EMPLOYEES
As of December 23, 1999, we had 108 full time and 1 part time employees.
There are no union or collective bargaining agreements between us and our
employees and employee relations are considered by us to be excellent.
ITEM 2. DESCRIPTION OF PROPERTIES
Our corporate office and Denver operating facility is located at 4704
Harlan Street, Suite 420, Denver, Colorado, 80212. The lease for this facility
provides that we will occupy 6,059 square feet and has a term of 78 months,
beginning August 1999. After an initial six-month rent-free period, we began
paying $8,457 per month for the next 24 months, $8,710 per month for the next 12
months, and $8,962 per month for the remaining 36 months of the lease.
Hellyer's operating facility is located at 8330 Allison Pointe Trail,
Indianapolis, Indiana 46250. The lease for this facility provides that we will
occupy 30,000 square feet and has a term of five months beginning November 15,
1999 at an all-inclusive rental rate of $20,000 per month. We are currently
negotiating terms for a new lease at another facility in Indianapolis and expect
to agree terms in early January 2000. We expect to be able to move out of our
facility at Allison Pointe and into a new facility without any material
interruption to our business, although we will incur substantial one-time move
costs in our second fiscal quarter ending March 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings of any kind.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by us to a vote of our security holders during
the fourth quarter of our fiscal year ended September 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock and warrants have been quoted on the Nasdaq SmallCap
Market under the symbols "MLNK" and "MLNKW," respectively, since completion of
our public offering on May 14, 1999. Prior to that date, there was no public
market in our common stock or warrants. The following table sets forth for the
periods indicated the high and low bid prices of the common stock and warrants
as reported by the Nasdaq SmallCap Market.
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COMMON STOCK WARRANTS
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FISCAL 2000 HIGH LOW HIGH LOW
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Third Fiscal Quarter (from May 14, 1999).................... $9.750 $6.250 $1.125 $0.563
Fourth Fiscal Quarter....................................... 7.375 6.063 0.875 0.500
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Last Reported Price. On December 23, 1999, the last reported bid price of
the common stock and warrants reported on the Nasdaq SmallCap Market was $7.375
per share and $0.75 per warrant, respectively.
Holders. As of December 23, 1999, there were 40 holders of record of the
common stock and 7 holders of record of the warrants. We believe that we have in
excess of 300 beneficial owners of our common stock and 300 beneficial owners of
our warrants.
Dividends. We have not paid or declared cash distributions or dividends on
our common stock and do not intend to pay cash dividends in the foreseeable
future. Future cash dividends will be determined by our board of directors based
upon our earnings, financial condition, capital requirements and other relevant
factors.
Recent Sales of Unregistered Securities. In November 1998, we completed a
private placement of 75,000 units consisting of an aggregate of 150,000 shares
of common stock and warrants to purchase 75,000 shares of common stock. The
warrants currently have an exercise price of $4.17 per share and expire in May
2001 unless earlier exercised or redeemed. The private placement was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act and/or Rule 506 under the Securities Act. The purchasers of the units
consisted of ten "accredited investors" (as the term is defined in Rule 501
under the Securities Act) and two financially sophisticated non-accredited
investors. We received gross proceeds of $625,000 from the sale of the units.
Spencer Edwards, Inc. acted as placement agent for the private placement for
which it received a 10% commission, a 3% non-accountable expense allowance and
warrants to purchase 22,500 shares of our common stock. 11,340 of these warrants
were subsequently cancelled. Of the 11,160 warrants currently outstanding, 7,440
have an exercise price of $5.00 per share and 3,720 have an exercise price of
$4.17 per share.
Use of Proceeds from Registered Securities. On May 14, 1999, the
registration statement filed by us relating to our initial public offering was
declared effective by the SEC (File No. 333-1334687). Pursuant to the
registration statement, we registered the sale of 1,380,000 units, each
comprised of one share of common stock and one warrant. After selling all of the
units for $6.00 each, the offering was terminated. The managing underwriter for
the offering was Schneider Securities, Inc. We received total gross proceeds of
$8,280,000. We paid underwriting discounts and commissions and expenses to the
underwriters of $1,076,400. In addition, we paid other expenses of the offering
of approximately $344,200. The total net proceeds minus expenses paid to date
were $6,859,400. Since completion of the offering, we have paid:
- $2,140,000 to Westburg Media Capital L.P. to pay down the outstanding
balance of a revolving loan;
- $1,070,000 as partial consideration in connection with the acquisition of
Hellyer;
- $620,000 to repay a portion of Hellyer's liabilities that we assumed;
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- $189,000 as partial consideration in connection with the acquisition of
Cashtel; and
- approximately $250,000 for capital expenditures and general corporate
purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto and the other financial
information included elsewhere in this report. This discussion contains forward-
looking statements that involve risks and uncertainties. Multi-Link's actual
results could differ materially from those anticipated in these forward looking
statements as a result of any number of factors, including but not limited to,
the availability of future acquisitions, the effects of regional economic and
market conditions, increases in marketing and sales costs, intensity of
competition, cost of technology, the availability of financing, contingencies
associated with Year 2000 compliance, our ability to manage our growth and those
risks described under "Risk Factors."
OVERVIEW
The acquisitions of Hellyer Communications, Inc. and Cashtel Inc. took
place after our fiscal year end on September 30, 1999, and consequently neither
the financial statements nor this discussion and analysis includes any
information relating to these companies.
We provide advanced integrated voice and fax messaging services for small
and medium sized businesses in the Denver metropolitan area. These services
enable businesses to improve the handling of incoming calls and facilitate more
efficient communication between employees, customers, suppliers and other key
relationships of the subscriber company. In the first quarter of fiscal 2000, we
have has expanded the range of products we offer to include long distance
service, telephone systems, pagers and mobile telephones.
Our revenues are primarily derived from receiving fixed monthly service
fees, installation and set-up charges and sales of ancillary telecommunications
services such as paging. We recognize revenues as we deliver services. Annual
prepayments by subscribers are recognized over the period covered by the
prepayment on a straight-line basis.
Our primary costs of delivering our voice messaging services to our
subscribers are our voice messaging platforms, maintenance costs and the
interconnection costs to the US West network. Most of our general and
administrative expenses are incurred in the processing and servicing of new
subscriber accounts.
From inception through December 31, 1997, we sold voice-messaging services
to businesses through an in-house sales force. All salaries and commissions
associated with our in-house sales force were expensed as incurred. On December
31, 1997, the in-house sales operations were closed and we began selling through
independent sales agents. All commissions paid to independent agents for
procuring subscribers are capitalized and amortized. Our policy is to amortize
subscriber account acquisition costs over the estimated economic life of
subscriber accounts or 36 months, whichever is less. To determine the economic
life of subscriber accounts, we analyze the net reduction in the total amount
billed to our existing subscribers each month. The calculation includes service
reductions and service increases to existing subscribers but excludes new
subscriber contracts or subscriber lists purchased during the period and revenue
increases resulting from changes in service prices. This enables us to project
the average subscriber life across the total existing subscriber base. During
fiscal 1999, we experienced an average attrition rate of 1.76% per month,
indicating a projected life of the subscriber portfolio of 57 months. We
currently amortize subscriber account acquisition costs over 36 months.
From inception through September 1998, we financed our operations and net
losses through factoring of customer contracts and working capital loans
provided by CS Capital Corp at implied interest rates of up to 52% per annum. In
September 1998, we refinanced most of our indebtedness with a five-year term
loan from Westburg Media Capital LP. The Westburg loan has an interest rate of
3% per annum over the prime rate. In May 1999, we repaid all but $10,000 of the
Westburg loan from the proceeds of our initial public offering and, as a result,
experienced significantly lower net interest expense in fiscal 1999 than in
prior years.
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<PAGE> 11
We plan to continue to increase revenues by increasing the number of
independent sales agents that offer our voice messaging services, by increasing
the range of telecommunications services we offer to our subscribers, and by
acquiring companies involved in the voice messaging industry. After completing
any such acquisition, we plan to convert the operations of the acquired company
to conform to our current business model, where economically feasible. We
completed two acquisitions after our September 30, 1999 fiscal year end. See
"Subsequent Events".
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in our consolidated statements of
operations and comprehensive income (loss).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998 1999
------ ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of services and products............................... 30.2 20.0 18.5
------ ----- -----
Gross margin................................................ 69.8 80.0 81.5
------ ----- -----
Sales and advertising expense............................... 60.0 8.4 2.1
General and administrative expense.......................... 73.4 39.9 39.6
Depreciation expense........................................ 5.4 4.3 4.2
Amortization expense........................................ 0.4 2.2 8.9
------ ----- -----
Total operating expenses.......................... 139.2 54.8 54.8
------ ----- -----
Income (loss) from operations............................... (69.4) 25.2 26.7
Interest income (expense)................................... (37.9) (34.2) (9.0)
------ ----- -----
Net income (loss)........................................... (107.3) (9.0) 17.6
------ ----- -----
EBITDA (loss)............................................... (63.6)% 31.7% 39.8%
------ ----- -----
</TABLE>
The row entitled "EBITDA (loss)" reflects net income or loss plus
depreciation, amortization and interest expense, income taxes and other non-cash
charges. EBITDA is a measure used by analysts and investors as an indicator of
operating cash flow because it excludes the impact of movements in working
capital items, non-cash charges and financing costs. However, EBITDA is not a
measure of financial performance under generally accepted accounting principles
and should not be considered a substitute for other financial measures of
performance.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30,
1998.
Net Revenues. Revenues for the year ended September 30, 1999 were
$2,217,000, compared to $1,859,000 for the fiscal year ended September 30, 1998,
an increase of 19%. Most of this increase reflects the steady net growth in our
base of customers, although we did increase prices for certain messaging
services on July 1, 1999 affecting revenues in the fourth fiscal quarter of
1999. The price increase contributed approximately $75,000 or 4% of the revenue
increase for the fiscal year.
Cost of Services and Products. Cost of services and products for the fiscal
year ended September 30, 1999 was $411,000, compared to $371,000 for the fiscal
year ended September 30, 1998, an increase of 11%. The increase in cost of
services and products was attributable to the growth in customers.
Gross Profit Margin. Gross margin for the fiscal year ended September 30,
1999 was $1,807,000 compared to $1,488,000 for the fiscal year ended September
30, 1998, an increase of 21%. The gross profit margin as a percentage of net
revenues increased from 80% to 81%. The increase in gross profit resulted from
achieving higher revenues at consistent gross profit margins.
Sales and Advertising Expense. Sales and advertising expenses for the
fiscal year ended September 30, 1999 were $47,000 compared to $155,000 for the
fiscal year ended September 30, 1998, a decrease of 70%. This resulted from the
closure of our in-house sales and telemarketing operations on December 31, 1997,
when we
9
<PAGE> 12
began procuring subscriber accounts from independent sales agencies and
capitalizing the cost of acquiring such subscriber accounts.
General and Administrative Expenses. General and administrative expenses
for the fiscal year ended September 30, 1999 were $878,000 compared to $743,000
for the fiscal year ended September 30, 1998. This increase of 18% was due to
increased staff numbers, increased costs of billing the increased revenues, and
the costs associated with our becoming a public company under Securities
Exchange Act, including transfer agent fees, legal fees, accounting fees and
other professional expenses.
EBITDA -- Earnings Before Interest, Tax, Depreciation, and
Amortization. EBITDA for the fiscal year ended September 30, 1999 was $882,000
compared to $590,000 for the fiscal year ended September 30, 1998, an increase
of 49%. This was partly attributable to the increased revenues and gross
profits, and partly due to the closure of our in-house sales and telemarketing
operations. "EBITDA" reflects net income or loss plus depreciation, amortization
and interest expense, income taxes and other non-cash charges. EBITDA is a
measure used by analysts and investors as an indicator of operating cash flow
because it excludes the impact of movements in working capital items, non-cash
charges and financing costs. However, EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered a substitute for other financial measures of performance.
Depreciation of Equipment. Depreciation expense in the fiscal year ended
September 30, 1999 was $92,000 compared to $81,000 for the fiscal year ended
September 30, 1998. This increase of 15% was due to increased fixed assets.
Amortization. Amortization of subscriber accounts and goodwill was $198,000
for the fiscal year ended September 30, 1999 compared to $42,000 for the fiscal
year ended September 30, 1998. This increase of 371% was due to the continuation
of customer account purchases from our base of independent sales agents.
Income (Loss) from Operations. Income from operations was $591,000 for the
fiscal year ended September 30, 1999 compared to $468,000 for the fiscal year
ended September 30, 1998, an increase of 26%, due to the factors discussed
above.
Net Interest Income (Expense). Net interest income (expense) for the fiscal
year ended September 30, 1999 was $(200,000), compared to $(636,000) for the
fiscal year ended September 30, 1998, a decrease of 69%. The decrease was
attributable to the significantly lower interest costs of the Westburg loan from
the beginning of the fiscal year through May 14, 1999, and the net interest
income in the fourth fiscal quarter from the cash on deposit following our
initial public offering.
Net Income (Loss) and Comprehensive Income (Loss). We achieved a net income
of $391,000 for the fiscal year ended September 30, 1999, compared to a net loss
of $(168,000) for the fiscal year ended December 31, 1998 due to the factors
outlined above. The comprehensive profit for 1999 was $380,000, $11,000 less
than the net profit of $391,000. The difference of $11,000 relates to unrealized
losses on our portfolio of marketable securities, which are held as available
for sale investments. The net loss and comprehensive loss were the same in
fiscal 1998.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30,
1997.
Net Revenues. Revenues for the fiscal year ended September 30, 1998 were
$1,859,000, compared to $1,154,000 for the fiscal year ended September 30, 1997,
an increase of 61%. This increase reflects the steady net growth in our base of
customers.
Cost of Services and Products. Cost of services and products for the fiscal
year ended September 30, 1998 was $371,000, compared to $348,000 for the fiscal
year ended September 30, 1997, an increase of 7%. The relative stability of cost
of services and products in relation to the 61% growth in revenues resulted from
operating a network with excess capacity in fiscal 1997, which required only
minimal additional expenditures to provide service for a greater number of
customers in fiscal 1998.
Gross Profit Margin. Gross profit margin for the fiscal year ended
September 30, 1998 was $1,488,000 compared to $806,000 for the fiscal year ended
September 30, 1997, an increase of 85%. The gross profit margin
10
<PAGE> 13
as a percentage of net revenues increased from 70% to 80%. The increase in gross
profit margin resulted from achieving higher revenues from the same network
capacity resulting in more efficient utilization of fixed asset infrastructure.
Sales and Advertising Expense. Sales and advertising expenses for the
fiscal year ended September 30, 1998 were $155,000 compared to $692,000 for the
fiscal year ended September 30, 1997, a decrease of 78%. This resulted from the
closure of our in-house sales and telemarketing operations on December 31, 1997
when we began procuring subscriber accounts from independent sales agencies and
capitalizing the cost of acquiring such subscriber accounts.
General and Administrative Expenses. General and administrative expenses
for fiscal year ended September 30, 1998 were $743,000 compared to $848,000 for
the fiscal year ended September 30, 1997. This decrease of 12% was due to a
reduction in personnel expenses during fiscal 1998.
EBITDA -- Earnings before Interest Tax Depreciation and
Amortization. EBITDA for the fiscal year ended September 30, 1998 was $590,000
compared to an EBITDA (loss) of $(734,000) for the fiscal year ended September
30, 1997. This was partly attributable to the increased revenues and gross
profits, and partly due to the closure of our in-house sales and telemarketing
operations as described above.
Depreciation of Equipment. Depreciation expense in the fiscal year ended
September 30, 1998 was $81,000 compared to $62,000 for the fiscal year ended
September 30, 1997. This increase of 31% was due to increased fixed assets.
Amortization. Amortization of subscriber accounts and goodwill was $42,000
for the fiscal year ended September 30, 1998 compared to $5,000 for the fiscal
year ended September 30, 1997. Amortization expense associated with subscriber
accounts was first incurred in 1998 after Multi-Link commenced procuring
subscriber accounts through the base of independent sales agents as previously
described.
Income (Loss) from Operations. The income from operations was $468,000 for
the fiscal year ended September 30, 1998 compared to an operating loss of
$(801,000) for the fiscal year ended September 30, 1997, due to the factors
discussed above.
Interest Income (Expense). Interest income (expense) for the fiscal year
ended September 30, 1998 was $(636,000), compared to $(437,000) for the fiscal
year ended September 30, 1997, an increase of 46%. The increase is attributable
to an increase in outstanding borrowings.
Net Income (Loss) and Comprehensive Income (Loss). We incurred a net loss
of $(168,000) for the fiscal year ended September 30, 1998, compared to a net
loss of $(1,238,000) for the fiscal year ended December 31, 1997, a decrease of
86% due to the factors outlined above. The net loss and comprehensive loss were
the same for fiscal 1998 and 1997.
CASH FLOW INFORMATION
For the year ended September 30, 1998 and 1999, net cash (used in)/provided
by operations was approximately $(109,000) and $367,000, respectively. Net cash
used in investing activities in the year ended September 30, 1999 for the
purchase of marketable securities, fixed assets and intangibles was $(5,103,000)
compared to $(266,000) in the prior year. During the years ended September 30,
1998 and 1999, cash from financing activities included net proceeds from the
issuance of common stock and exercise of stock options of $0 and $7,235,000
respectively, and from borrowing of $2,871,000 and $430,000 before note payable
payments of $(1,795,000) and $(2,965,000) for the same respective periods.
For the year ended September 30, 1997 and 1998, net cash used in operations
was approximately $(967,000) and $(109,000), respectively. Net cash used in
investing activities in the year ended September 30, 1998 for the purchase of
fixed assets and intangibles was $(266,000) compared to $(38,000) in the prior
year. During the year ended September 30, 1997 and 1998, cash from financing
activities included borrowings of $1,379,000 and $2,871,000, respectively,
before note payable payments of $380,000 and $1,795,000 for the same respective
periods.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 1998, we financed our operations through
equity contributions, loans from several shareholders, deferred executive
compensation and consulting fees, a factoring facility from CS Capital, and
several working capital loans.
In September 1998, we obtained a $2.1 million, five-year senior term loan
facility from Westburg. We used the proceeds of this facility to repay working
capital loans, deferred executive compensation and part of our indebtedness to
CS Capital. The loan from Westburg bears interest at the rate of prime rate plus
3% per annum. The loan is secured by substantially all of our assets. The loan
requires monthly payments of interest only until October 2001, when regular
repayments of principal and interest commence on the basis of a ten-year
amortization schedule. The outstanding balance is due on October 31, 2003. Under
the terms of the loan, our ratio of debt to annualized cash flow may not exceed
3 to 1 and our ratio of annualized cash flow to interest, principal repayments
and taxes may not be less than 1.25 to 1. Additionally, the loan has certain
other restrictions including limits on total indebtedness and lease obligations,
limits on capital expenditures and restrictions on the payment of dividends. All
but $10,000 of the loan was repaid from the proceeds of our initial public
offering in May 1999. The facility remains available for additional advances.
On May 14, 1999, we completed our initial public offering of common stock
and warrants. A total of 1,380,000 shares of common stock and 1,380,000 warrants
to purchase shares of common stock were sold in the offering. The gross proceeds
from the offering were $8,280,000 and we received net proceeds of $6,859,000.
As of September 30, 1999, we were current on our obligations to all lenders
and in compliance with all debt covenants. As of September 30, 1999, we had
available cash and marketable investments of $4,296,000 and $501,000 of
long-term equipment financing debt.
We have used approximately $1.9 million of available cash in connection
with the acquisitions of Hellyer Communications, Inc. and Cashtel, Inc. in
November 1999, and plan to use an additional $1.1 million to complete the
acquisition of One Touch Communications, Inc. in early calendar 2000. See
"Subsequent Events."
As of December 23, 1999 we had committed to the purchase of approximately
$350,000 of additional voice messaging equipment from Glenayre. We have received
$200,000 of four year financing for this equipment from Colorado Business
Leasing, a Denver based equipment-leasing company.
We anticipate that our existing cash balances and marketable securities
together with internally generated funds from operations and the $2.1 million
Westburg revolving term loan, will be sufficient to meet our presently projected
cash and working capital requirements for the next 12 months.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for our financial statement for the fiscal year
ended September 30, 2001 and the adoption of this standard is not expected to
have a material effect on our financial statements.
EFFECTS OF INFLATION
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the future
to have, a material effect on our operating results or financial condition.
YEAR 2000 ISSUE
Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field, which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with
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<PAGE> 15
"20" and the familiar "19." If these systems and products are not modified or
replaced, many will fail, create erroneous results and/or may cause interfacing
systems to fail.
Our operations rely heavily upon computer systems, software applications
and other electronics containing date-sensitive embedded technology. Some of
these technologies were internally developed and others are standard, purchased
systems that may or may not have been customized for our particular application.
We also rely heavily upon various vendors and suppliers that are themselves very
reliant on computer systems, software applications and other electronics
containing date sensitive embedded technology.
We have completed internal assessment and testing of our date sensitive
computer systems and have determined that our voice messaging, internal billing,
customer service and support systems are compatible with the year 2000.
We rely on certain external suppliers to provide our voice messaging
service. A regional or national failure in the telephone network or power grid
would prevent us from servicing our customers and generating revenues. Such
failure would materially adversely affect our business, financial condition and
operating results. We have no contingency plan for occurrence of these events.
We have not incurred any material costs for Year 2000 modifications to date
and do not anticipate incurring any such material costs in the future.
SUBSEQUENT EVENTS
On November 17, 1999, we completed the acquisition of the business and
substantially all the assets of Hellyer Communications, Inc., which provides a
broad range of messaging related services in Indianapolis, Chicago and Detroit
using the same Glenayre technology as we use. We paid $1,070,000 in cash,
assumed $1,105,000 of long-term lease financing liabilities and assumed a
further $1,000,000 of other liabilities. In addition, we issued 150,000 shares
of common stock, valued at $965,625, to Jerry L. Hellyer Sr. in connection with
consulting and non-competition agreements.
On November 30, 1999, Hellyer completed the acquisition of the customer
base of Chicago based, Cashtel, Inc., a provider of residential voice messaging
services in the Chicago and Detroit areas. Total consideration is expected to be
$290,000. Hellyer plans to transfer the Cashtel customers to its advanced
Glenayre voice messaging systems in Chicago and Detroit, which have adequate
capacity to service these customers without additional expenditures. Cashtel
will cease providing service on January 30, 2000.
On December 22, 1999, we signed a definitive purchase agreement for the
acquisition of the business and substantially all the assets of One Touch
Communications, Inc., which provides advanced business messaging services in
Raleigh-Durham, North Carolina. As consideration for the acquisition, Multi-Link
has agreed to pay $1,100,000 in cash and to issue $2,020,000 worth of common
stock to the shareholders of One Touch. The shares will be subject to transfer
restrictions which release on December 31, 2000 with respect to 50% of the
shares, on June 30, 2001 with respect to 25% of the shares and on December 31,
2001 with respect to 25% of the shares.
RISK FACTORS
You should be aware that there are various risks associated with us and our
business, including the ones discussed below. You should carefully consider
these risk factors, as well as the other information contained in this Form
10-KSB, in evaluating us and our business.
WE HAVE BEEN OPERATING OUR BUSINESS ONLY SINCE FEBRUARY 1996.
We began voice messaging operations by completing an acquisition of a voice
messaging business in February 1996. Accordingly, we have a limited operating
history upon which you may evaluate us. This limited operating history makes
predicting our future operating results difficult.
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<PAGE> 16
WE HAVE ONLY RECENTLY ACHIEVED PROFITABILITY SO OUR LONG-TERM SUCCESS IS NOT
ASSURED.
We generated net income of $391,000 in the fiscal year ended September 30,
1999. We incurred significant net losses in fiscal 1997 and fiscal 1998.
Although our revenues have grown in recent periods, they may not continue to
grow or even continue at their current level. Our expenses may increase in
future periods due to:
- goodwill and other amortized charges resulting from future acquisitions,
including acquisitions of subscriber accounts and subscriber lists;
- planned equipment purchases; and
- increases in sales and marketing activities.
If any of these expenses are not accompanied by increased revenues, our
business, financial condition and operating results will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BECAUSE WE FACE INTENSE COMPETITION FROM LARGER VOICE MESSAGING AND RELATED
SERVICE PROVIDERS, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, WHICH WOULD REDUCE
OUR REVENUES.
We compete primarily with large telephone companies, and expect to compete
with other national, regional and local telecommunications companies as we
expand. Most of our competitors have greater name recognition and greater
financial, marketing and other resources than we have. This may place us at a
disadvantage in responding to our competitors' pricing strategies, technological
advances, advertising campaigns and other initiatives. If we are unable to
compete successfully against our competitors, our business, financial condition
and operating results will be adversely affected.
WE MAY LOSE CUSTOMERS AND REVENUES IF OUR VOICE MESSAGING EQUIPMENT FAILS.
We depend on the efficient and uninterrupted operation of our voice
messaging equipment, referred to as voice messaging platforms, to deliver
service to its customers. Any sustained service interruption would cause
customers to cancel service. This could materially adversely affect our
business, financial condition and operating results. Our insurance may not
provide sufficient coverage for these events and our operating results could
suffer if losses exceed our coverage.
LOSS OF THE CONNECTION TO THE PUBLIC TELEPHONE NETWORKS COULD DISRUPT OUR
SERVICE CAUSING US TO LOSE CUSTOMERS AND, AS A RESULT, ADVERSELY AFFECT OUR
BUSINESS.
We rely on several telecommunications companies for connection to the
public telephone network. The protracted failure of such connection would
interrupt service, causing customers to cancel service. This could materially
adversely affect our business, financial condition and operating results. In
this event, we would have to establish a new connection to the public telephone
network, which would take several weeks. We would lose subscribers if such a
disruption occurred.
WE MAY BE UNABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY
WHICH MAY CAUSE US TO FAIL.
Our success depends on its ability to remain competitive in cost and
services provided. There can be no assurance that we can acquire superior
technologies as needed. If we are unable to successfully respond to
technological developments or acquire technologies in a cost effective way, our
business, financial condition and operating results will be materially adversely
affected. To be successful, we must:
- continually improve our services on a cost-effective basis;
- develop and offer new features and services to meet customer needs; and
- adopt Internet based messaging and other advanced technologies that
achieve widespread acceptance.
14
<PAGE> 17
Our success will depend in part on our ability to purchase or license
leading technologies necessary to remain competitive. Licensing these
technologies may require us to pay royalties, maintenance and other fees that
reduce operating margins.
WE CANNOT INCUR ADDITIONAL DEBT, MAKE CAPITAL EXPENDITURES EXCEEDING CERTAIN
LIMITS, OR PAY DIVIDENDS WITHOUT THE CONSENT OF OUR PRIMARY LENDER.
The agreement between us and our primary lender contains certain debt
covenants, which require us to maintain a debt to annualized cash flow ratio of
not more than 3 to 1 and also require us to maintain a ratio of annualized cash
flow to interest, principal and taxes of not less than 1.25 to 1. A violation of
these restrictions could accelerate our repayment obligation.
IF NIGEL V. ALEXANDER OR SHAWN B. STICKLE DO NOT CONTINUE IN THEIR PRESENT
POSITIONS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on Nigel V. Alexander and Shawn B. Stickle,
both directors and officers, continuing to render their services to us. If Mr.
Alexander or Mr. Stickle become unable or unwilling to continue in their present
positions, our growth, business and financial results could be materially
adversely affected. We have a three year employment agreement with Mr. Stickle
and a three year consulting agreement with Mr. Alexander's company, Octagon
Strategies, Inc. We have key man life insurance policies in the face amounts of
$1,000,000 each on both Mr. Alexander and Mr. Stickle.
OUR ACQUISITIONS MAY BE UNSUCCESSFUL DUE TO AN INABILITY TO RETAIN CUSTOMERS, A
FAILURE TO INTEGRATE THE ACQUISITION OR A FAILURE TO MEET FINANCIAL OBJECTIVES.
Our acquisition strategy is subject to the following risks:
- We may be unsuccessful in retaining the customer base of specific
acquisitions;
- We may be unable to successfully integrate services and personnel of any
acquisition into our operations; and
- Acquisitions could result in charges to our earnings for goodwill, or
other expenses that adversely affect our operating results.
YOU WILL BE UNABLE TO REVIEW INFORMATION ABOUT MOST PROPOSED ACQUISITIONS OR TO
VOTE ON ACQUISITIONS.
We have determined certain criteria that we will most likely use in
considering potential acquisitions. Except in the case of a very large
transaction, you will not have the opportunity to review the financial
statements or any other information of any business we may propose to acquire,
and you will not be able to vote on any such acquisition.
THE FINANCE CHARGES ASSOCIATED WITH ANTICIPATED ADDITIONAL EQUIPMENT PURCHASES
MAY ADVERSELY AFFECT OUR PROFITABILITY.
We expect to purchase additional voice messaging platforms and accompanying
software licenses. If financing for these purchases is not available at an
acceptable cost, our financial condition may be materially adversely affected.
This may reduce our future profitability.
IF WE WERE TO LOSE OUR ABILITY TO BILL OUR RESIDENTIAL MESSAGING AND PAGING
SUBSCRIBERS ON THE AMERITECH PHONE BILL, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED.
In the Midwest region we add our charges for residential voice mail and
paging services to our customer's Ameritech telephone bill. This makes it easy
for them to pay us, and easy for us to collect money from them. If we were to
lose this billing arrangement, we believe it would be expensive and inefficient
for us to bill our customers directly, and that this segment of our business may
not be commercially viable.
15
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are included herein commencing on page 24.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 19
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information concerning our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nigel V. Alexander..................... 38 Chief Executive Officer, Treasurer,
Secretary and Director
Shawn B. Stickle....................... 34 President and Chief Operating Officer
and Director
David J. Cutler........................ 44 Chief Financial Officer
Christina M. Neher..................... 34 President, Hellyer Communications
Services, Inc.
Keith R. Holder........................ 55 Director
R. Brad Stillahn....................... 47 Director
</TABLE>
Messrs. Holder and Stillahn are members of the Audit and Compensation
Committee
The directors are elected for a three-year term, with approximately
one-third of the board of directors standing for election each year. Each
director holds office until the expiration of the director's term, until the
director's successor has been duly elected and qualified or until the earlier of
their resignation, removal or death. All of our officers devote full-time to our
business and affairs.
Nigel V. Alexander -- Chief Executive Officer, Secretary, Treasurer and
Director. Mr. Alexander co-founded Multi-Link in 1996. Mr. Alexander has served
since that time as a Managing Director and now as Chief Executive Officer with
responsibility for financing and strategic planning. Since January of 1996, Mr.
Alexander has been the sole owner of Octagon Strategies, Inc., a consultant to
us. From September 1994 until founding Multi-Link, Mr. Alexander conducted
research into the telecommunications industry to identify the business
opportunity now being pursued by us. From April 1991 to September 1994, Mr.
Alexander was an executive officer of SnowRunner, Inc. a company involved in the
distribution of winter sports products. Mr. Alexander is an Associate of the
British Chartered Institute of Bankers. He has over 15 years experience in
merchant banking, mergers and acquisitions and corporate finance, including ten
years as a merchant banker in London, England and Geneva, Switzerland with Henry
Ansbacher & Co. and the Paribas Group.
Shawn B. Stickle -- President, Chief Operating and Director. Mr. Stickle
co-founded Multi-Link in 1996. Mr. Stickle has served since that time as a
Managing Director and now as our President and Chief Operating Officer with
direct responsibility for all of Multi-Link's operations. From February 1995
until January 1996, Mr. Stickle was employed as Executive Vice President of
Voice Services, Inc. From 1987 to December 1994, Mr. Stickle was Sales and
Marketing Manager for T.A. Pelsue Company, a manufacturer of telecommunications
products. Mr. Stickle holds a bachelor's degree from the University of Colorado
in marketing and is a certified ISO 9000 Quality Assurance Advisor.
David J. Cutler -- Chief Financial Officer. Mr. Cutler joined us in March
1998 and has served as our Chief Financial Officer since that time. From March
1993 until joining us, Mr. Cutler was a self employed consultant providing
accounting and financial advice to small and medium sized companies in the
United Kingdom and the United States. Mr. Cutler has more than 20 years
experience in international finance, accounting and business administration. He
held senior positions with multi-national companies such as Reuters Group Plc
and the Schlumberger Ltd. and has served as a director for two British
previously publicly quoted companies -- Charterhall Plc and Reliant Group Plc.
Mr. Cutler has a masters degree from St. Catherine College in Cambridge, England
and qualified as a British Chartered Accountant and as an Associate of the
Institute of Taxation with Arthur Andersen & Co. in London. He was subsequently
admitted as a Fellow of the UK Institute of Chartered Accountants. In early
1998, he passed the CPA examination in the United States and is now a member of
the American Institute of Certified Public Accountants.
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<PAGE> 20
Christina M. Neher -- President, Hellyer Communications Services, Inc. Ms.
Neher joined Hellyer Communications, Inc. in 1989 and has served as Hellyer's
Vice President of Operations since 1995. Ms. Neher was appointed President of
Hellyer with responsibility for all of Hellyer's operations following its
acquisition by us on November 17, 1999. From 1984 to 1988, Ms. Neher was
employed by St. Mary's College and held the position of telecommunications
coordinator. Ms. Neher holds an associates degree in business from Indiana
Wesleyan University. Ms. Neher has 15 years experience in the telecommunications
industry.
Keith R. Holder -- Director. Mr. Holder became one of our directors in
February 1999. Since January 1998, Mr. Holder has been the Chief Executive
Officer of Recovery Specialists Inc., a regional environmental company. From
March 1990 to January 1998, Mr. Holder was the founder, Chief Executive Officer
and Director of Triumph Fuels Corporation, a gasoline refining, distribution and
retailing company. Mr. Holder received his Bachelor of Science degree in Geology
from the University of London in 1969.
R. Brad Stillahn -- Director. Mr. Stillahn became one of our directors in
February 1999. Since January 1991, Mr. Stillahn has been the owner, Chairman and
Chief Executive Officer of West Tape & Label, Inc., a national custom label
printer. From 1987 to 1991, Mr. Stillahn was the Director of Corporate Marketing
for Menasha Corporation, a diversified holding company. Mr. Stillahn received
his Masters of Business Administration from Washington University in 1976 and in
1974 received a Bachelor of Arts degree in Economics from the University of
Missouri.
DIRECTOR COMPENSATION
Our employee directors do not receive any compensation for their services
as directors. Non-employee directors presently receive compensation of $250.00
per meeting and are entitled to reimbursement of travel and other expenses.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors maintains a compensation committee and an audit
committee. The compensation committee is composed of Keith R. Holder and R. Brad
Stillahn, both non-employee directors. The audit committee is composed of Keith
R. Holder and R. Brad Stillahn. The primary function of the compensation
committee is to review and make recommendations to the board of directors with
respect to the compensation, including bonuses, of our officers and to
administer the grants under our stock option plan. The functions of the audit
committee are to review the scope of the audit procedures employed by our
independent auditors, to review with the independent auditors our accounting
practices and policies and recommend to whom reports should be submitted within
Multi-Link, to review with the independent auditors their final audit reports,
to review with our internal and independent auditors Multi-Link's overall
accounting and financial controls, to be available to the independent auditors
during the year for consultation, to approve the audit fee charged by the
independent auditors, to report to the board of directors with respect to such
matters and to recommend the selection of the independent auditors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act requires our Officers and
Directors, and persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file. Based
solely on our review of copies of such reports received, and representations
from certain reporting persons, we believe that, during the last fiscal year,
all Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were filed in compliance with all applicable
filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us for services
rendered during the fiscal years ended September 30, 1998, 1997 and 1996 to
Nigel V. Alexander and Shawn B. Stickle. No executive officer of Multi-Link
earned or was paid compensation of more than $100,000 for the year ended
September 30, 1999.
18
<PAGE> 21
Multi-Link pays consulting fees to Octagon Strategies, Inc. for consulting
services rendered by Nigel V. Alexander to Multi-Link. "Octagon" is a company
wholly-owned by Nigel V. Alexander. All amounts reflected in the salary column
in the following table paid to Mr. Alexander are consulting fees paid to Octagon
for Mr. Alexander's benefit.
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEAR COMPENSATION
ENDED ---------------
NAME AND PRINCIPAL POSITION SEPTEMBER 30, SALARY BONUS
- --------------------------- ------------- ------- -----
<S> <C> <C> <C>
Nigel V. Alexander....................................... 1999 $45,551 --
Chief Executive Officer; Secretary and Treasurer 1998 $40,000 --
1997 $39,960 --
Shawn B. Stickle......................................... 1999 $41,000 --
President and Chief Operating Officer 1998 $36,000 --
1997 $36,000 --
</TABLE>
The foregoing compensation tables do not include certain fringe benefits
made available on a nondiscriminatory basis to all of our employees such as
group health insurance, long-term disability insurance, vacation and sick leave.
EMPLOYMENT AGREEMENTS
Effective January 1, 1999, we entered into three-year agreements with
Octagon and Shawn B. Stickle. The agreements require that Messrs. Alexander and
Stickle devote their full business time to Multi-Link, may only be terminated by
us for "cause" (as defined in the agreements) and may be terminated with or
without cause by Octagon or Mr. Stickle. If the agreements are terminated by us
without cause, Octagon and Mr. Stickle are entitled to receive lump sum payments
equal to the greater of the compensation payable pursuant to the agreements for
the remaining terms thereof or one year's annual payments. The agreements also
contain confidentiality and non-compete provisions. The contracts provide for
annual salary and consulting payments that are subject to periodic increases
from time to time at the sole discretion of the compensation committee of the
Board of Directors. Effective November 1, 1999 the Compensation Committee set
Mr. Stickle's fiscal 2000 compensation at $81,000 and Octagon's fiscal 2000
consulting payments at $90,000. In addition, both are eligible to receive
bonuses based upon our profitability and other factors determined and adjusted
periodically by the Compensation Committee.
STOCK OPTION PLAN
We adopted our stock option plan in 1997 pursuant to which an aggregate of
300,000 shares of common stock are reserved for issuance.
The stock option plan provides for the granting of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code and non-qualified
stock options, reload options and stock appreciation rights. The stock option
plan is currently administered by the compensation committee of the board of
directors, which determines the terms and conditions of the options granted
under the stock option plan, including the exercise price, the number of shares
subject to a particular option and the exercisability thereof.
The exercise price of all incentive stock options granted under the stock
option plan must be at least equal to the fair market value of our common stock
on the date of grant and must be 110% of fair market value when granted to a 10%
or more stockholder. Under the stock option plan, the exercise price of all
non-qualified stock options granted under the stock option plan may be less than
the fair market value of the common stock on the date of grant. The term of all
options granted under the stock option plan may not exceed ten years, except the
term of incentive stock options granted to a 10% or more stockholder may not
exceed five years. We have agreed that for a period of at least one year
following the date of this prospectus, non-qualified options will not be granted
at an exercise price of less than 100% of the fair market value of our common
stock on the date of grant and the terms will not exceed five years. The stock
option plan may be amended or terminated by the board of directors, but no such
action may impair the rights of a participant under a previously granted option.
19
<PAGE> 22
The stock option plan provides the board of directors or the compensation
committee with the discretion to determine when options granted under the stock
option plan shall become exercisable and the vesting period of such options.
As of September 30, 1999, we had issued options to purchase 277,830 shares
of common stock under our stock option plan. The options have exercise prices
ranging from $0.02 per share to $6.50 per share. The options expire on various
dates between January 14, 2007 and June 29, 2009. Of such issued options, 50,760
had been exercised and 16,440 has been cancelled as of September 30, 1999.
Therefore, as of September 30, 1999, we had 210,630 options issued and
outstanding.
No options to purchase shares of common stock have been granted by
Multi-Link to Nigel V. Alexander, Shawn B. Stickle or Octagon, and none of such
persons owned any options to purchase common stock on September 30, 1999.
No reload options or stock appreciation rights have been granted pursuant
to the stock option plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Multi-Link's common stock, as of December 23, 1999, by:
- each person who is known by Multi-Link to own beneficially more than 5%
of Multi-Link's outstanding common stock,
- each of Multi-Link's named executive officers and directors, and
- all executive officers and directors as a group.
Shares of common stock not outstanding but deemed beneficially owned by
virtue of the right of an individual to acquire the shares of common stock
within 60 days are treated as outstanding only when determining the amount and
percentage of common stock owned by such individual. Except as noted below the
table, each person has sole voting and investment power with respect to the
shares of common stock shown. Unless otherwise shown, the address of each person
is 4704 Harlan Street, Suite 420, Denver, Colorado 80212.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OUTSTANDING
------------------------------------ --------- -----------
<S> <C> <C>
Executive Officers and Directors
Nigel V. Alexander.......................................... 581,250 17.8%
Shawn B. Stickle............................................ 581,250 17.8%
Keith R. Holder............................................. 26,640 0.8%
107 Country Club Park Drive, Grand Junction, CO 81503
R. Brad Stillahn............................................ 0 0%
3845 Forest, Denver, CO 80207
All executive officers and directors as a group (5
persons).................................................. 1,211,640 36.8%
Other Beneficial Owners
Kennedy Capital Management.................................. 278,128 8.5%
10829 Olive Blvd, St. Louis, MO 63141-7739
</TABLE>
In the foregoing table the common stock beneficially owned by:
- Nigel V. Alexander and Shawn B. Stickle includes an aggregate of
200,000 shares of common stock held in escrow. As a condition to the
initial public offering, Nigel V. Alexander and Shawn B. Stickle were each
required to deposit 100,000 shares of common stock in an escrow account
pursuant to an agreement with American Securities Transfer & Trust, Inc.
and Schneider Securities, Inc. The common stock deposited in the escrow
account will be subject to release on the earlier to occur of (a)
Multi-Link achieving basic net income of at least $0.75 per share and the
common stock having a bid price of at least $15.00 per share for the year
ended and as of September 31, 2000, or (b) Multi-Link achieving basic net
income of at least $1.25 per share and a bid price of at least $25.00 per
share for the year ended and as of September 30, 2001, or
20
<PAGE> 23
(c) a property exchange, or sale of all or substantially all of the assets
or stock of Multi-Link if any such transaction is approved by the holders
of a majority of the outstanding shares of common stock (excluding the
shares in escrow), and (d) May 14, 2006. For purposes of determining the
release from escrow, net income will include the effects of any
extraordinary items and will be based on basic net income per share and on
the audited financial statements of Multi-Link for the respective periods.
The shares of common stock held in escrow are not transferable or
assignable, although the stockholders may vote them. The earnings levels
and per share prices set forth above were determined by negotiation between
Multi-Link and Schneider Securities, Inc. and should not be construed to
imply or predict any future earnings by Multi-Link or the market price of
the common stock.
- Keith R. Holder includes 26,640 shares beneficially owned by Harbour
Settlement, a Jersey Channel Islands Trust established for the benefit of
Mr. Holder's children, and does not include 10,000 shares underlying
options that were granted to Mr. Holder personally, and which are not
exercisable for the next 60 days.
- R. Brad Stillahn does not include 10,000 shares underlying options
that are not exercisable for the next 60 days.
- All of the executive officers and directors as a group, includes
22,500 shares of common stock underlying presently exercisable options but
does not include 67,500 shares underlying options that are not exercisable
for the next 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the following related party transactions were made on terms no less
favorable to us than those available from unaffiliated parties. In addition, all
future related party transactions will be made on terms no less favorable than
those available from unaffiliated parties and such related party transactions
will be approved by a majority of the independent, disinterested members of the
board of directors who had access, at our expense, to our counsel or independent
legal counsel.
From April 1996 through January 1998, CS Capital made available a factoring
facility and several working capital loans to us at high rates of interest. In
addition, CS Capital received 157,928 shares of common stock in connection with
such loans. In May 1998, all of the outstanding balances on the factoring
facility and the loans were consolidated into a $1,698,000 term loan that was
secured by our assets, was guaranteed by Nigel V. Alexander and Shawn B.
Stickle, had an interest rate of 25% per annum and was payable in fixed payments
of principal and interest through June 30, 2001.
In September 1998, Westburg loaned us $2,100,000 to repay debt and deferred
executive compensation, and to fund expenses of our initial public offering. The
loan bears interest at a rate of 3% over prime rate. The loan is payable
interest only until September 25, 2001, and thereafter the outstanding principal
balance and interest will be payable monthly and amortized over ten years with
final payment in full on October 31, 2003. The loan is secured by all of our
assets. In connection with the loan, Multi-Link issued Westburg a warrant to
purchase 150,000 shares of common stock at an exercise price of $4.17 per share.
The detailed terms of the loan were amended in April 1999 and again in November
1999. We repaid all but $10,000 of the loan after the public offering and
Westburg converted the term loan into a revolving loan. We are permitted to make
further draws on this loan.
In September 1998, using the proceeds of the Westburg loan, we repaid CS
Capital $900,000 on the term loan and CS Capital converted $300,000 of the term
loan into 72,000 shares of our common stock and warrants to purchase 36,000
shares of our common stock at an exercise price of $8.33 per share. The warrants
are exercisable from November 17, 1999 through May 17, 2001. The conversion
price paid by CS Capital for the shares of common stock and warrants was the
same price paid by nonaffiliated persons in a private offering that was being
21
<PAGE> 24
conducted by us at that time. We repaid CS Capital an additional $376,000 of
interest and principal on the loan in November 1998, and repaid all remaining
amounts due under the loan in March 1999.
In September 1998, Octagon Strategies, Inc. agreed to loan us $100,000 to
fund working capital. The loan was unsecured, had an interest rate of 10% and
was due on demand. This loan has been repaid in full.
In September 1998, Shawn B. Stickle loaned $77,244 to us to fund working
capital. The loan was unsecured, had an interest rate of 10% and was due on
demand. This loan has been repaid in full.
On February 1, 1999, we reduced the exercise price of the warrants issued
to CS Capital from $8.33 to $4.17 per share at the same time we reduced the
exercise price of all the warrants held by other persons unaffiliated with us
who had acquired warrants from us in the November 1998 private placement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
------- --------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.(1)
1.2 -- Form of Selected Dealers Agreement.(1)
3.1 -- Restated Articles of Incorporation filed on May 18, 1998.(1)
3.2 -- Amendments to Restated Articles of Incorporation filed on
February 2, 1999.(1)
3.3 -- Bylaws as amended through January 1, 1999.(1)
4.1 -- Borrowing Agreement dated September 25, 1998, between
Westburg Media Capital LP, the Registrant, Multi-Link
Telecommunications, Inc., Nigel V. Alexander, Shawn B.
Stickle and The Blackhawk Trust.(1)
4.2 -- Form of Commercial Installment Contract between the
Registrant and Associates Commercial Corporation.(1)
4.3 -- Form of Security Agreement between the Registrant and
Associates Commercial Corporation.(1)
4.4 -- Form of Warrant Agreement between the Registrant and
American Securities Transfer & Trust, Inc.(1)
4.5 -- Form of Escrow Agreement.(1)
4.6 -- Forms of Lock-Up Agreements.(1)
4.7 -- Form of Representative's Option for the Purchase of
Units.(1)
4.8 -- Form of Warrant Exercise Fee Agreement between Schneider
Securities, Inc., American Securities Transfer & Trust, Inc.
and the Registrant.(1)
4.9 -- Amendment to Borrowing Agreement dated April 15, 1999
between Westburg Media Capital L.P., the Registrant and
Multi-Link Communications, Inc.(1)
4.10 -- Registration Rights Agreement dated April 15, 1999 between
Westburg Media Capital L.P. and the Registrant.(1)
9.1 -- Form of Representative's Option for the Purchase of
Units.(2)
10.1 -- Stock Option Plan.(1)
10.2 -- First Amendment to Stock Option Plan.(1)
10.3 -- Agreement dated January 1, 1999, between the Registrant and
Telecom Sales Associates, Inc. as amended on February 3,
1999.(1)
10.5 -- US West Communications Digital Switched Service Rate
Stability Plan Agreements.(1)
10.6 -- Consulting Agreement between the Registrant and Octagon
Strategies, Inc.(1)
10.7 -- Employment Agreement between the Registrant and Shawn B.
Stickle.(1)
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
------- --------------------------------
<S> <C> <C>
10.8 -- Lease Agreement dated March 29, 1999 between the Registrant
and Lakeside Holdings, L.L.C., as amended.(1)
10.9 -- Promissory Note dated September 30, 1998 from Registrant to
Octagon Strategies, Inc.(1)
10.10 -- Promissory Note dated September 30, 1998 from Registrant to
Shawn B. Stickle.(1)
10.11 -- Promissory Note dated April 14, 1999 from Registrant to
Westburg Media Capital, L.P.(1)
10.12 -- Agreement for Sale and Purchase of Assets and Exhibits A and
B dated September 17, 1999 by and among Hellyer
Communications, Inc., Jerry L. Hellyer, Sr., Multi-Link
Telecommunications, Inc., and HC Acquisition Corp.(3)
10.13 -- Consulting Agreement dated September 17, 1999 by and among
Hellyer Communications, Inc. and HC Acquisition Corp.(3)
10.14 -- Amended and Restated Asset Purchase Agreement dated November
17, 1999 by and among Hellyer Communications, Inc., Jerry L.
Hellyer, Sr., Multi-Link Telecommunications, Inc. and
Hellyer Communications Services, Inc. (without exhibits).(4)
10.15 -- Loan Agreement dated November 17, 1999 by and between
Multi-Link Telecommunications, Inc. and Jerry L. Hellyer,
Sr.(4)
10.16 -- Promissory Note dated November 17, 1999 by and between
Multi-Link Telecommunications, Inc. and Jerry L. Hellyer,
Sr.(4)
10.17 -- Pledge and Security Agreement by and between Multi-Link
Telecommunications, Inc. and Jerry L. Hellyer, Sr.(4)
10.18 -- Purchase Agreement dated November 22, 1999 by and between
B.F.G of Illinois, Inc., Multi-Link Telecommunications, Inc.
and Hellyer Communications Services, Inc.(5)
10.19 -- Asset Purchase Agreement dated December 22, 1999 by and
among One Touch Communications, Inc., David G. Webster, Eric
C. Beguelin, Multi-Link Telecommunications, Inc. and One
Touch Communications, Inc.(5)
16 -- Letter from James E. Scheifley & Associates, PC confirming
the circumstances pursuant to which James E. Scheifley &
Associates, PC resigned as Registrant's principal
independent accountants.(1)
21 -- Subsidiaries of the Registrant.(5)
23.1 -- Consent of HEIN + ASSOCIATES LLP.(6)
27 -- Financial Data Schedule.(6)
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits contained in the Registrant's
Registration Statement on Form SB-2 (No. 333-72889).
(2) Incorporated by reference to the exhibits contained in the Registrant's
Quarterly Report on Form 10-QSB filed on June 25, 1999.
(3) Incorporated by reference to the exhibits contained in the Registrant's
Current Report on Form 8-K filed on September 24, 1999.
(4) Incorporated by reference to the exhibits contained in the Registrant's
Current Report on Form 8-K filed on December 3, 1999.
(5) Filed with original Form 10-KSB on December 28, 1999.
(6) Filed herewith.
(b) Reports on Form 8-K
None.
23
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ 25
CONSOLIDATED BALANCE SHEET -- September 30, 1999............ 26
CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Years Ended
September 30, 1998 and 1999............................... 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY -- For the Years Ended September 30, 1998 and
1999...................................................... 28
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Years Ended
September 30, 1998 and 1999............................... 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 30
</TABLE>
24
<PAGE> 27
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Multi-Link Telecommunications, Inc. and Subsidiary
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Multi-Link
Telecommunications, Inc. and subsidiary as of September 30, 1999 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years ended September 30, 1998 and 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Multi-Link Telecommunications, Inc. and subsidiary as of September 30, 1999 and
of the results of their operations and their cash flows for the years ended
September 30, 1998 and 1999, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 9, 1999
25
<PAGE> 28
MULTI-LINK TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 512,617
Marketable securities, current.............................. 3,397,002
Accounts receivable -- trade, net of allowance for doubtful
accounts of $33,215....................................... 265,419
Prepaid expenses............................................ 51,234
-----------
Total current assets................................... 4,226,272
MARKETABLE SECURITIES....................................... 386,357
PROPERTY AND EQUIPMENT, net................................. 1,184,653
OTHER ASSETS:
Deferred financing and offering costs....................... 159,430
Intangible assets, less amortization of $547,215............ 715,882
-----------
TOTAL ASSETS...................................... $ 6,672,594
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 117,373
Accrued expenses............................................ 50,647
Deferred revenue............................................ 164,091
Notes payable -- related parties, current portion........... 17,569
Notes payable and current portion of long-term debt......... 160,424
-----------
Total current liabilities.............................. 510,104
LONG-TERM DEBT, less current portion........................ 341,011
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued................................... --
Common stock, no par value; 20,000,000 shares authorized,
3,122,302 shares issued and outstanding................... 7,722,778
Accumulated deficit......................................... (1,889,987)
Unrealized loss on marketable securities.................... (11,312)
-----------
Total stockholders' equity............................. 5,821,479
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 6,672,594
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
MULTI-LINK TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
NET REVENUES................................................ $1,859,276 $2,217,468
COST OF SERVICES AND PRODUCTS............................... 371,391 410,623
---------- ----------
GROSS MARGIN................................................ 1,487,885 1,806,845
OPERATING EXPENSES:
Sales and advertising....................................... 155,270 46,762
General and administrative.................................. 742,527 878,102
Depreciation................................................ 80,513 92,337
Amortization................................................ 41,674 198,055
---------- ----------
Total operating expenses............................... 1,019,984 1,215,256
---------- ----------
INCOME FROM OPERATIONS...................................... 467,901 591,589
Interest income (expense), net.............................. (635,518) (200,330)
---------- ----------
NET INCOME (LOSS)................................. $ (167,617) $ 391,259
========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic..................................................... $ (.11) $ .18
========== ==========
Diluted................................................... $ (.11) $ .16
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic..................................................... 1,496,905 2,203,992
========== ==========
Diluted................................................... 1,496,905 2,400,075
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 30
MULTI-LINK TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER COMPREHENSIVE
---------------------- ACCUMULATED COMPREHENSIVE INCOME
SHARES AMOUNT DEFICIT INCOME (LOSS) (LOSS) TOTAL
--------- ---------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, OCTOBER 1,
1997.................. 1,490,698 $ 49,151 $(2,113,629) $ -- $(2,064,478)
Net loss and
comprehensive loss...... -- -- (167,617) $167,617 (167,617)
========
Warrants issued for
loans................. -- 73,440 -- -- 73,440
Common stock issued in
exchange for debt..... 79,454 320,000 -- -- 320,000
--------- ---------- ----------- -------- -----------
BALANCES, SEPTEMBER 30,
1998.................. 1,570,152 442,591 (2,281,246) -- (1,838,655)
Comprehensive income:
Net income.............. -- -- 391,259 -- $391,259 391,259
Unrealized loss on
marketable
securities............ -- -- -- (11,312) (11,312) (11,312)
--------
Comprehensive income.... $379,947
========
Common stock issued for
private placement..... 141,600 350,901 -- -- 350,901
Common stock issued in
exchange for debt..... 8,400 35,000 -- -- 35,000
Shares repurchased...... (28,610) (5,721) -- -- (5,721)
Common stock issued in
initial public
offering.............. 1,380,000 6,859,392 -- -- 6,859,392
Options issued for
services.............. -- 15,675 -- -- 15,675
Exercise of options..... 50,760 24,940 -- -- 24,940
--------- ---------- ----------- -------- -----------
BALANCES, SEPTEMBER 30,
1999.................. 3,122,302 $7,722,778 $(1,889,987) $(11,312) $ 5,821,479
========= ========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 31
MULTI-LINK TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (167,617) $ 391,259
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 122,187 290,392
Amortization of debt discount and issuance costs.......... -- 29,862
Common stock and options issued for services and loans.... -- 15,675
Bad debt expense.......................................... 95,299 35,064
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................. (49,190) (161,135)
Deferred factoring costs and other prepayments....... 107,492 (51,234)
Increase (decrease) in:
Accounts payable..................................... (63,449) (36,059)
Accrued expenses..................................... (214,471) (148,993)
Deferred revenue..................................... 60,318 2,660
----------- -----------
Net cash provided by (used in) operating
activities.......................................... (109,431) 367,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subscriber accounts............................. (265,834) (664,693)
Purchase of fixed assets.................................... -- (593,024)
Purchase of marketable securities........................... -- (3,794,671)
Deferred acquisition costs.................................. -- (42,744)
Purchase of minority interest in subsidiary................. (8,000)
----------- -----------
Net cash used in investing activities....................... (265,834) (5,103,132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issue costs............................................ (70,154) (2,000)
Payment of related party notes payable...................... (1,546,938) (731,471)
Advances under related party notes payable.................. 1,673,641 80,066
Advances under notes payable................................ 1,197,215 350,000
Payment of notes payable.................................... (248,412) (2,233,701)
Repurchase of outstanding shares............................ -- (5,721)
Proceeds from issuance of common stock...................... -- 8,870,000
Offering costs.............................................. (91,215) (1,659,707)
Proceeds from the exercise of stock options................. -- 24,940
----------- -----------
Net cash provided by financing activities................... 914,137 4,692,406
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 538,872 (43,235)
CASH AND CASH EQUIVALENTS, at beginning of period........... 16,980 555,852
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period................. $ 555,852 $ 512,617
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 652,199 $ 265,877
=========== ===========
Cash paid for taxes......................................... $ -- $ --
=========== ===========
Unrealized loss on available-for-sale securities............ $ -- $ (11,312)
=========== ===========
Equipment acquired through debt............................. $ 23,016 $ --
=========== ===========
Conversion of notes payable to equity....................... $ 320,000 $ 35,000
=========== ===========
Fair value of warrants granted for loans.................... $ 73,440 $ --
=========== ===========
Options issued for subscriber accounts...................... $ -- $ 15,675
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 32
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations -- Multi-Link Telecommunications, Inc.
(Telecommunications) was incorporated in the state of Colorado in January 1996
under the name Multi-Link Holdings, Inc. Multi-Link Holdings, Inc. was renamed
Multi-Link Telecommunications, Inc. in May 1998. On February 15, 1996,
Telecommunications acquired 97.5% of the issued common stock of Voice Services,
Inc., a Colorado corporation. Voice Services Inc. was renamed Multi-Link
Communications, Inc. (Communications) in April 1996. In May 1996, Communications
purchased a Glenayre Modular Voice Processor and launched a new range of custom
designed voice and fax messaging products targeted at business users in the
Denver and Boulder local calling areas. Telecommunications acquired the
remaining 2.5% of Communications in August 1999.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Telecommunications and its 100% (97.5% until August
1999) owned subsidiary, Communications (collectively the "Company"). All
significant intercompany transactions and accounts have been eliminated.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash and
highly liquid debt instruments with original maturities of less than three
months.
Marketable Securities -- The Company's investments comprise FIDC guaranteed
Certificates of Deposit and investment grade corporate bonds. Investments with
original maturities at date of purchase beyond 3 months and less than 12 months
are classified as short-term investments. Investments with original maturities
beyond one year are classified as long-term investments. The investments are
held in the Company's name and held at a major financial institution. All the
Company's investments were classified as available-for-sale and are carried at
fair value. Unrealized gains and losses on these investments are included as a
separate component of stockholders' equity, net of any related tax effect.
Property and Equipment -- Property and equipment acquired on the purchase
of Communications have been stated at fair value. Otherwise, property and
equipment are stated at cost. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 3 years
Motor vehicles.............................................. 3 years
Plant and equipment......................................... 3 years
Voice messaging equipment................................... 15 years
</TABLE>
Intangible Assets -- Direct and incremental external costs associated with
the acquisition of subscriber accounts are capitalized. The Company's personnel
and related support costs incurred in support of acquiring and transitioning
subscriber accounts are expensed as incurred. Costs related to the sales and
marketing for subscriber accounts internally generated are expensed as incurred.
Through December 1997, all subscriber accounts were internally generated and,
accordingly, sales and marketing costs were expensed as incurred. Beginning
January 1998, the Company acquired its subscriber accounts primarily through
independent, third-party sales organizations and, accordingly, these direct and
incremental costs have been capitalized.
The costs of capitalized subscriber accounts acquired are amortized on a
straight-line basis over the lesser of 3 years or the estimated economic life of
the subscriber account.
Goodwill represents the excess of the purchase price over the value of net
assets/liabilities acquired in business acquisitions accounted for as a
purchase. Goodwill is amortized over 5 years on a straight-line basis.
Deferred Acquisition, Deferred Financing, and Offering Costs - Costs
incurred with respect to the Company's debt financing have been capitalized and
are amortized over the respective lives of associated debt using the
straight-line method, which approximates the interest rate method.
30
<PAGE> 33
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
External costs incurred with respect to the Company's acquisitions are
initially deferred and ultimately capitalized as a cost of the acquisition if
successful or expensed if the acquisition is unsuccessful.
Offering costs have been offset against the proceeds of a private and
public offering completed during fiscal 1999.
Impairment of Long-Lived and Intangible Assets -- In the event that facts
and circumstances indicate that the cost of long-lived and intangible assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.
Concentration of Credit Risk and Significant Vendors -- Concentration of
credit risk is limited to trade accounts receivable. The nature of the Company's
business is such that no single customer represents more than 2% of net accounts
receivable. The Company does not require collateral or other security to support
customer's receivables but conducts periodic reviews of customer payment
practices to minimize collection risk on trade accounts receivable. Allowances
are maintained for potential credit losses and such losses have been within
management's expectations.
The Company currently uses services provided by US West for interconnection
to the public telephone network. There are other local telephone companies which
could provide the Company with a similar interconnection. However, in the event
that US West was to experience difficulties in providing the Company with
interconnection in its present configuration, it could materially adversely
affect the Company's business in the short-term. A period of time would be
required to enable the Company to establish a new interconnection to the public
telephone network.
During the year ended September 30, 1998, the Company began using
independent agents to obtain new subscriber accounts. One agent accounted for
approximately 45% and 46% of the Company's new revenue growth during the fiscal
year 1998 and 1999, respectively.
Financial Instruments -- The estimated fair values for financial
instruments are determined at discrete points in time based on relevant market
information. These estimates involve uncertainties and cannot be determined with
precision. The carrying amounts of note receivable, accounts receivable,
accounts payable, and accrued liabilities approximate fair value because of the
short-term maturities of these instruments. The fair value of notes payable
approximates their carrying value as generally their interest rates reflect the
Company's current effective annual borrowing rate.
Income Taxes -- The Company currently accounts for income taxes under the
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred Revenue and Revenue Recognition -- Revenues are recognized at the
time services are performed or products are delivered, net of refunds. Deferred
revenues primarily represent customer prepayments which are recognized as income
when earned.
Comprehensive Income (Loss) -- Comprehensive income is defined as all
changes in stockholders' equity (deficit), exclusive of transactions with
owners, such as capital investments. Comprehensive income includes net income or
loss, changes in certain assets and liabilities that are reported directly in
equity such as translation adjustments on investments in foreign subsidiaries
and unrealized gains (losses) on available-for-sale securities. The Company's
comprehensive income (loss) was equal to its net income (loss) for the year
ended September 30, 1998. During 1999, the Company purchased available-for-sale
securities, and the unrealized loss on these
31
<PAGE> 34
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
securities has been recognized as a component of comprehensive income in the
consolidated statements of stockholders' equity.
Income (Loss) Per Share -- The income (loss) per share is presented in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 replaced the presentation of
primary and fully diluted earnings (loss) per share (EPS) with a presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing the income or
loss available to common stockholders by the weighted average number of common
stock outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Basic and diluted EPS were the same
for fiscal 1998 as the Company had losses from operations and, therefore, the
effect of all additional potential common stock was antidilutive. During the
year ended September 30, 1999, included in diluted EPS are common equivalent
shares outstanding totaling 196,083 determined using the treasury stock method
consisting of stock options and warrants. In connection with the Company's
public offering (see Note 6), the representative of the underwriters required
certain of the Company's significant stockholders to place 200,000 shares of
common stock in escrow pursuant to an escrow agreement. These shares will be
released from escrow based on achieving certain net income and share price
levels in the future or the sale of all or substantially all the assets or stock
of the Company. However, the shares will be released from escrow seven years
from the date of the public offering, if not previously released and, therefore,
are included in the basic and diluted earnings (loss) per share calculations.
The escrowed shares retain voting rights.
Stock-Based Compensation -- In fiscal 1997, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on fair value.
Companies that do not adopt the fair value accounting rules must disclose the
impact of adopting the new method in the notes to the financial statements.
Transactions in equity instruments with non-employees for goods or services must
be accounted for on the fair value method. The Company has elected not to adopt
the fair value accounting prescribed by SFAS No. 123 for employees, and is
subject only to the disclosure requirements prescribed by SFAS No. 123.
Use of Estimates -- The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
Recently Issued Accounting Pronouncements -- SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for the Company's financial statements for the year ended September
30, 2001 and the adoption of this standard is not expected to have a material
effect on the Company's financial statements.
32
<PAGE> 35
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment comprise the following as of September 30, 1999:
<TABLE>
<S> <C>
Computer equipment.......................................... $ 111,985
Motor vehicles.............................................. 55,560
Plant and equipment......................................... 45,709
Voice messaging equipment................................... 1,234,170
----------
1,447,424
Accumulated depreciation.................................... (262,771)
----------
$1,184,653
==========
</TABLE>
3. INTANGIBLE ASSETS:
Intangible assets comprise the following as of September 30, 1999:
<TABLE>
<S> <C>
Goodwill.................................................... $ 332,570
Subscriber accounts......................................... 930,527
----------
1,263,097
Amortization................................................ (547,215)
----------
$ 715,882
==========
</TABLE>
4. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt consist of the following as of September
30, 1999:
Related Parties:
<TABLE>
<S> <C>
Notes payable to a stockholder/director of the Company, with
10% interest, payable on demand. This note is unsecured..... $17,569
=======
</TABLE>
Total interest expense to related parties for the years ended September 30,
1998 and 1999 was $23,381 and $376,344, respectively.
Other:
<TABLE>
<S> <C>
Communications has entered into various loan agreements to
purchase motor vehicles, computer and voice messaging
equipment. The loans require varying monthly payments and
mature through June 2003. Interest is charged at rates
between 12.5% and 13.9%. The loans are collateralized by the
underlying assets and are personally guaranteed by certain
officers/directors/stockholders of the Company.............. $ 491,435
Line-of-credit to a commercial lender (the Westburg Loan)
for $2,150,000. Interest charged at 3% above prime (11.25%
as of September 30, 1999) with monthly payments of interest
only through October 2001 after which date monthly principal
and interest payments are to be made on the basis of a
10-year amortization with all unpaid principal and accrued
interest due October 2003. This note is collateralized by
all the assets of the Company. Under the terms of the
Westburg Loan, the Company is required to maintain certain
financial ratios and has certain other restrictions
including limits on total indebtedness, payment of
dividends, and capital expenditures As of September 30,
1999, the Company was in compliance with these covenants.... 10,000
---------
501,435
Less current portion........................................ (160,424)
---------
$ 341,011
=========
</TABLE>
33
<PAGE> 36
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principal payments on the above obligations at September 30, 1999 are due
as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
------- --------
<S> <C> <C>
2000...................................................... $17,569 $160,424
2001...................................................... -- 176,193
2002...................................................... -- 125,198
2003...................................................... -- 29,620
2004...................................................... -- 10,000
Thereafter................................................ -- --
------- --------
$17,569 $501,435
======= ========
</TABLE>
5. COMMITMENTS:
The Company leases certain equipment under lease agreements classified as
operating leases. Minimum future equipment and office rental payments are as
follows:
<TABLE>
<S> <C>
2000........................................................ $ 67,785
2001........................................................ 106,190
2002........................................................ 103,255
2003........................................................ 106,285
2004........................................................ 107,547
Thereafter.................................................. 161,321
--------
$652,383
========
</TABLE>
Rent expense for the period for the years ended September 30, 1999 and 1998
was $33,839 and $20,712, respectively.
6. STOCKHOLDERS' EQUITY:
Preferred Stock -- The Company has the authority to issue 5,000,000 shares
of preferred stock. The Board of Directors has the authority to issue such
preferred stock in series and determine the rights and preferences of the
shares.
Common Stock -- During 1997, the Company declared a 200 for 1 stock split.
The Company also declared a 3 for 5 reverse stock split effective in February
1999. Accordingly, all amounts for common stock reflected in the financial
statements and accompanying notes reflect the effect of these splits.
In November 1998, the Company completed a private placement of 150,000
shares and 75,000 warrants for gross proceeds of $590,000 cash and $35,000 debt
conversion. Net proceeds of the private placement and debt conversion were
$385,901.
In May 1999, the Company completed an initial public offering of 1,380,000
shares and 1,380,000 warrants for gross proceeds of $8,280,000. Net proceeds of
the initial public offering were $6,859,392.
Warrants -- During fiscal 1998, the Company issued warrants for the
purchase of 36,000 shares of common stock to an entity in consideration for
converting part of its debt with the Company into 72,000 shares of common stock.
These warrants expire May 2000 and as of December 31, 1998, were exercisable at
$8.33 per share. Effective February 1999, these warrants were repriced at $4.17
per share.
During the year ended September 30, 1998, the Company issued a warrant for
the purchase of 150,000 shares of common stock to the lender in consideration
for advancing the Westburg Loan (see Note 4). The expiration date of the warrant
will be earlier of (i) the date all amounts are repaid under the Westburg loan,
34
<PAGE> 37
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ii) the date of the sale of the Company or substantially all of its assets, or
(iii) the effective date of a registration statement filed under the Securities
Act in connection with a $5,000,000 or greater firm commitment underwriting for
common stock of the Company at a price greater than $8.17 per share. The warrant
is exercisable at $4.17 per share.
In connection with the private placement and debt conversion in November
1998, the Company issued warrants to purchase 75,000 shares of common stock.
These warrants are currently exercisable at $4.17 per share. The warrants expire
in May 2001 and are redeemable under certain circumstances by the Company.
In November 1998, the placement agent of the private placement and its
nominees were issued warrants to purchase 15,000 and 7,500 shares of common
stock at $5.00 and $4.17 per share, respectively. The warrants are exercisable
under the same terms as the warrants issued in the private placement. The
placement agent options are exercisable after November 1999 and expire in
November 2003. In May 1999, two of the placement agent's nominees agreed to
cancel warrants to purchase a total of 11,340 shares of common stock.
In connection with the initial public offering in May 1999, the Company
issued 1,380,000 warrants. Two warrants are exercisable to purchase one share of
common stock for an exercise price of $9.00 per share during the three years
ended May 14, 2002, subject to the Company's redemption rights.
In May 1999, the underwriter to the initial public offering was issued
warrants to subscribe for 120,000 units at $7.68 per unit. Each unit comprises
one common share and one warrant. Two of the warrants within the units are
exercisable to purchase one share of common stock for an exercise price of
$11.52. The warrants within the units are not in issue at present. Warrants
within the units only become issued when the warrants over the units are
exercised.
Stock Options -- In 1997, the Company adopted a stock option plan (the
"Plan") that authorizes the issuance of up to 300,000 shares of common stock.
Pursuant to the Plan, the Company may grant "incentive stock options" (intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended)
or "nonqualified stock options."
Incentive and nonqualified stock options shall be granted at fair market
value, to be determined by the Board of Directors, at the date of grant (except
for holders of more than 10% of common stock, in which case the exercise price
must be at least 110% of the fair market value at the date of grant for
incentive stock options). The term of the options shall not exceed ten years and
the vesting date is determined by the Board of Directors. As of September 30,
1999, the Company had granted options under the Plan to purchase 277,830 shares,
of which 50,760 options have been exercised and 16,440 have been forfeited or
canceled.
35
<PAGE> 38
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a table of activity under the Plan:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year.................... 101,355 $ .105 154,665 $1.384
Granted:
Employees and others............................ 25,200 2.450 30,335 6.00
Employees and others............................ 35,490 4.167 83,200 6.50
Employees....................................... -- -- -- --
Employees....................................... -- -- -- --
Employees....................................... -- -- -- --
Exercised......................................... -- -- (50,760) .492
Forfeited/Canceled................................ (7,380) .943 (6,810) 3.703
------- ------ ------- ------
Outstanding, end of year.......................... 154,665 $1.384 210,630 $4.207
======= ====== ======= ======
</TABLE>
For all options granted during fiscal 1998 and 1999, the weighted average
market price of the Company's common stock on the grant date was approximately
equal to the weighted average exercise price. Because the shares were not
registered and publicly traded during 1998 and part of 1999, for the purpose of
pricing the grants, the fair market value of the Company's common stock was
determined by the Company's management and the Board of Directors. In May 1999,
the Company's shares were registered and became publicly traded. The market
prices of the companies shares underlying the options granted subsequent to that
time ranged from $6.50 to $7.25.
The weighted average contractual life for all options as of September 30,
1999 was approximately 8 years, with the exercise prices ranging from $.017 to
$6.50. At September 30, 1999, options for 17,670 shares were exercisable and
options for the remaining shares become exercisable pro rata through fiscal
2002. If not previously exercised, options outstanding at September 30, 1999,
will expire as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
FISCAL YEAR OF SHARES PRICE
- ----------- --------- --------
<S> <C> <C>
2004....................................................... 20,000 $6.000
2007....................................................... 49,425 .040
2008....................................................... 47,670 3.384
2009....................................................... 93,535 6.445
------- ------
210,630 4.207
======= ======
</TABLE>
Pro Forma Stock-Based Compensation Disclosures -- The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options which
are granted to employees. Accordingly, no compensation cost has been recognized
for grants of options to employees since the exercise prices were not less than
the fair value of the Company's common stock on the grant dates. Had
compensation cost been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS No. 123, the
36
<PAGE> 39
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amount indicated below.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- --------
<S> <C> <C>
Net income (loss) applicable to common shareholders:
As reported................................................. $(167,617) $391,259
Pro forma................................................... (184,033) 318,000
Net income (loss) per common share As reported.............. $ (.11) $ .18
Pro forma................................................... (.12) .15
</TABLE>
For purposes of this disclosure, the weighted average fair value of the
options granted was $1.12 and $1.64 in fiscal 1998 and 1999, respectively. The
fair value of each employee option granted in fiscal year 1998 and 1999, was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
--------------
1998 1999
---- ----
<S> <C> <C>
Expected volatility......................................... 0% 34.8%
Risk-Free interest rate..................................... 5.6% 5.0%
Expected dividends.......................................... -- --
Expected terms (in years)................................... 4 2
</TABLE>
7. INCOME TAXES:
The Company's actual effective tax rate differs from U.S. Federal corporate
income tax rate of 34% as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------
1998 1999
----- -----
<S> <C> <C>
Statutory rate.............................................. (34.0)% 34.0%
State income taxes, net of Federal income tax benefit....... (3.3)% 3.3%
Increase (reduction) in valuation allowance related to net
operating loss carryforwards and change in temporary
differences............................................... 37.3% (37.3)%
----- -----
-0-% -0-%
===== =====
</TABLE>
The components of the net deferred tax asset recognized as of September 30
are as follows:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Long-term deferred tax assets (liabilities):
Net operating loss carryforwards............................ $ 756,000 $ 862,000
Goodwill.................................................... 96,000 115,000
Capitalized subscriber accounts............................. (86,000) (261,000)
Other....................................................... (45,000) (36,000)
Valuation allowance......................................... (721,000) (680,000)
--------- ---------
Net long-term deferred tax asset............................ $ -- $ --
========= =========
</TABLE>
37
<PAGE> 40
MULTI-LINK TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company currently has a net operating loss carryforward for Federal tax
purposes of approximately $2,310,000, which, unless utilized, expires from 2011
through 2018. Certain of the loss carryforwards will be subject to restrictions
after completion of the public offering (see Note 6).
8. SUBSEQUENT EVENTS:
On November 17, 1999, the Company, through its newly formed subsidiary,
Hellyer Communications Services, Inc., acquired the business and substantially
all the assets of Hellyer Communications, Inc. (Hellyer) for a combination of
cash, assumption of certain liabilities and common stock valued at $4.2 million.
The purchase price was $1.1 million cash and the assumption of $2.1 million in
liabilities. $1.0 million in restricted common stock was issued with a two-year
vesting schedule with respect to a non-compete and consulting agreement. Hellyer
has been a provider of business messaging services since 1969, and has over
40,000 subscribers in Indianapolis, Chicago, and Detroit.
On November 23, 1999, the Company, through its newly formed subsidiary,
Hellyer Communications Services, Inc., acquired the customer base of Chicago
based, Cashtel, Inc. (Cashtel). The purchase price is expected to be
approximately $290,000 depending on the final number of customers transferred.
Cashtel will be paid $20, in cash plus $2 in Telecommunications restricted
common stock for each active customer transferred. In addition, Cashtel will be
paid $70,000 to meet the costs of providing the messaging services to the
customer base through January 31, 2000 when the transfer of customers onto the
Company's systems is expected to be completed.
On December 17, 1999, the Company entered into a $700,000, 48-month
equipment leasing facility at an interest rate of 9.25%. These funds are to be
used to refinance existing equipment leases at higher rates of interest and to
purchase new equipment.
On December 22, 1999, the Company, through its newly formed subsidiary,
entered into an agreement to acquire the business and substantially all the
assets of One Touch Communications, Inc., a provider of advanced voice messaging
services to businesses in Raleigh, North Carolina. The purchase is expected to
be completed in January 2000. The purchase price will be $3.12 million, $1.1
million in cash and $2.02 million in restricted common stock. The sellers have
agreed to hold the common stock for up to two years from the closing date.
38
<PAGE> 41
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MULTI-LINK TELECOMMUNICATIONS, INC.
Date: January 10, 2000 By: /s/ NIGEL V. ALEXANDER
------------------------------------
Nigel V. Alexander
Chief Executive Officer,
Treasurer and Secretary
In accordance with the Securities Exchange Act of 1924, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ NIGEL V. ALEXANDER Chief Executive Officer January 10, 2000
- ----------------------------------------------------- Treasurer and Secretary
Nigel V. Alexander (Principal Executive Officer)
/s/ SHAWN B. STICKLE President, Chief Operating January 10, 2000
- ----------------------------------------------------- Officer and Director
Shawn B. Stickle
/s/ DAVID J. CUTLER Chief Financial Officer January 10, 2000
- ----------------------------------------------------- (Principal Financial and
David J. Cutler Accounting Officer)
/s/ KEITH R. HOLDER Director January 10, 2000
- -----------------------------------------------------
Keith R. Holder
/s/ R. BRAD STILLAHN Director January 10, 2000
- -----------------------------------------------------
R. Brad Stillahn
</TABLE>
39
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
------- --------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.(1)
1.2 -- Form of Selected Dealers Agreement.(1)
3.1 -- Restated Articles of Incorporation filed on May 18, 1998.(1)
3.2 -- Amendments to Restated Articles of Incorporation filed on
February 2, 1999.(1)
3.3 -- Bylaws as amended through January 1, 1999.(1)
4.1 -- Borrowing Agreement dated September 25, 1998, between
Westburg Media Capital LP, the Registrant, Multi-Link
Telecommunications, Inc., Nigel V. Alexander, Shawn B.
Stickle and The Blackhawk Trust.(1)
4.2 -- Form of Commercial Installment Contract between the
Registrant and Associates Commercial Corporation.(1)
4.3 -- Form of Security Agreement between the Registrant and
Associates Commercial Corporation.(1)
4.4 -- Form of Warrant Agreement between the Registrant and
American Securities Transfer & Trust, Inc.(1)
4.5 -- Form of Escrow Agreement.(1)
4.6 -- Forms of Lock-Up Agreements.(1)
4.7 -- Form of Representative's Option for the Purchase of
Units.(1)
4.8 -- Form of Warrant Exercise Fee Agreement between Schneider
Securities, Inc., American Securities Transfer & Trust, Inc.
and the Registrant.(1)
4.9 -- Amendment to Borrowing Agreement dated April 15, 1999
between Westburg Media Capital L.P., the Registrant and
Multi-Link Communications, Inc.(1)
4.10 -- Registration Rights Agreement dated April 15, 1999 between
Westburg Media Capital L.P. and the Registrant.(1)
9.1 -- Form of Representative's Option for the Purchase of
Units.(2)
10.1 -- Stock Option Plan.(1)
10.2 -- First Amendment to Stock Option Plan.(1)
10.3 -- Agreement dated January 1, 1999, between the Registrant and
Telecom Sales Associates, Inc. as amended on February 3,
1999.(1)
10.5 -- US West Communications Digital Switched Service Rate
Stability Plan Agreements.(1)
10.6 -- Consulting Agreement between the Registrant and Octagon
Strategies, Inc.(1)
10.7 -- Employment Agreement between the Registrant and Shawn B.
Stickle.(1)
10.8 -- Lease Agreement dated March 29, 1999 between the Registrant
and Lakeside Holdings, L.L.C., as amended.(1)
10.9 -- Promissory Note dated September 30, 1998 from Registrant to
Octagon Strategies, Inc.(1)
10.10 -- Promissory Note dated September 30, 1998 from Registrant to
Shawn B. Stickle.(1)
10.11 -- Promissory Note dated April 14, 1999 from Registrant to
Westburg Media Capital, L.P.(1)
10.12 -- Agreement for Sale and Purchase of Assets and Exhibits A and
B dated September 17, 1999 by and among Hellyer
Communications, Inc., Jerry L. Hellyer, Sr., Multi-Link
Telecommunications, Inc., and HC Acquisition Corp.(3)
10.13 -- Consulting Agreement dated September 17, 1999 by and among
Hellyer Communications, Inc. and HC Acquisition Corp.(3)
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND METHOD OF FILING
------- --------------------------------
<S> <C> <C>
10.14 -- Amended and Restated Asset Purchase Agreement dated November
17, 1999 by and among Hellyer Communications, Inc., Jerry L.
Hellyer, Sr., Multi-Link Telecommunications, Inc. and
Hellyer Communications Services, Inc. (without exhibits).(4)
10.15 -- Loan Agreement dated November 17, 1999 by and between
Multi-Link Telecommunications, Inc. and Jerry L. Hellyer,
Sr.(4)
10.16 -- Promissory Note dated November 17, 1999 by and between
Multi-Link Telecommunications, Inc. and Jerry L. Hellyer,
Sr.(4)
10.17 -- Pledge and Security Agreement by and between Multi-Link
Telecommunications, Inc. and Jerry L. Hellyer, Sr.(4)
10.18 -- Purchase Agreement dated November 22, 1999 by and between
B.F.G of Illinois, Inc., Multi-Link Telecommunications, Inc.
and Hellyer Communications Services, Inc.(5)
10.19 -- Asset Purchase Agreement dated December 22, 1999 by and
among One Touch Communications, Inc., David G. Webster, Eric
C. Beguelin, Multi-Link Telecommunications, Inc. and One
Touch Communications, Inc.(5)
16 -- Letter from James E. Scheifley & Associates, PC confirming
the circumstances pursuant to which James E. Scheifley &
Associates, PC resigned as Registrant's principal
independent accountants.(1)
21 -- Subsidiaries of the Registrant.(5)
23.1 -- Consent of HEIN + ASSOCIATES LLP.(6)
27 -- Financial Data Schedule.(6)
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits contained in the Registrant's
Registration Statement on Form SB-2 (No. 333-72889).
(2) Incorporated by reference to the exhibits contained in the Registrant's
Quarterly Report on Form 10-QSB filed on June 25, 1999.
(3) Incorporated by reference to the exhibits contained in the Registrant's
Current Report on Form 8-K filed on September 24, 1999.
(4) Incorporated by reference to the exhibits contained in the Registrant's
Current Report on Form 8-K filed on December 3, 1999.
(5) Filed with original Form 10-KSB on December 28, 1999.
(6) Filed herewith.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference of our report dated December 9,
1999 accompanying the financial statements of Multi-Link Telecommunications,
Inc. also incorporated by reference in the Form S-8 Registration Statement of
Multi-Link Telecommunications, Inc. and to the use of our name and the
statements with respect to us, as appearing under the heading "Experts" in the
Registration Statement.
/s/ HEIN & ASSOCIATES
HEIN & ASSOCIATES LLP
Denver, Colorado
January 6, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 512,617
<SECURITIES> 3,783,359
<RECEIVABLES> 298,634
<ALLOWANCES> (33,125)
<INVENTORY> 0
<CURRENT-ASSETS> 4,226,272
<PP&E> 1,447,424
<DEPRECIATION> (262,771)
<TOTAL-ASSETS> 6,672,594
<CURRENT-LIABILITIES> 510,164
<BONDS> 519,004
0
0
<COMMON> 7,722,778
<OTHER-SE> (1,901,299)
<TOTAL-LIABILITY-AND-EQUITY> 6,672,594
<SALES> 0
<TOTAL-REVENUES> 2,217,468
<CGS> 0
<TOTAL-COSTS> 410,623
<OTHER-EXPENSES> 1,215,256
<LOSS-PROVISION> 35,064
<INTEREST-EXPENSE> 266,779
<INCOME-PRETAX> 391,259
<INCOME-TAX> 0
<INCOME-CONTINUING> 391,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391,259
<EPS-BASIC> .18
<EPS-DILUTED> .16
</TABLE>
