<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ....................... to
................................
Commission File Number 000-26147
ZIPLINK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3457219
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 CHELMSFORD STREET,TOWER 1, FIFTH FLOOR
LOWELL, MASSACHUSETTS 01851
(Address of principal executive offices)
(Zip Code)
(978) 551-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes[ ] No [X].*
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 6, 1999
----- -----------------------------
Common Stock, par value $.001 per share 12,716,964 shares
* The registrant's registration statement on Form S-1 for its initial public
offering became effective on May 25, 1999 and the registrant has been
subject to the filing requirements of the Securities Exchange Act of 1934
since that date.
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ZIPLINK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheets at June 30, 1999 (Unaudited) and
December 31, 1998 3
Condensed Statements of Operations for the Three Months
ended June 30, 1999 and 1998 and the Six Months ended
June 30, 1999 and 1998 (Unaudited) 4
Condensed Statements of Cash Flows for the Six Months ended
June 30, 1999 and 1998 (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities and Use of Proceeds 14
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
EXHIBIT INDEX 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIPLINK, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $23,361 $ 512
Accounts receivable, net................................. 1,647 679
Prepaid expenses and other current assets................ 999 71
------------- -------------
Total current assets................................ 26,007 1,262
------------- -------------
Property and Equipment, net................................. 8,577 9,803
Other Assets................................................ 1,991 109
------------- -------------
Total assets........................................ $36,575 $11,174
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS'/MEMBERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of convertible debentures................ $ - $ 500
Current portion of capital lease obligations............. 490 465
Accounts payable......................................... 1,338 1,077
Accrued expenses......................................... 949 1,686
Deferred revenue......................................... 351 120
Amounts due to affiliates, net........................... - 476
------------- -------------
Total current liabilities........................... 3,128 4,324
Note Payable To a Bank...................................... - 17,600
Convertible Debentures, less current portion................ - 7,000
Capital Lease Obligations, less current portion............. 87 339
------------- -------------
Total liabilities................................... 3,215 29,263
------------- -------------
Stockholders'/Members' Equity (Deficit):
Common stock, $.001 par value, 50,000 shares authorized,
12,717 shares issued and outstanding at June 30, 1999.... 13 -
Additional paid in capital.................................. 60,558 -
Accumulated deficit/members' deficit........................ (27,128) (18,089)
Deferred compensation (83) -
------------- -------------
Total stockholders'/members' equity (deficit)............... 33,360 (18,089)
------------- -------------
Total liabilities and stockholders'/members' equity
(deficit)........................................ $36,575 $11,174
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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ZIPLINK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ $3,048 $1,604 $5,793 $3,282
----------- ------------ -------------- ---------------
Costs and Expenses:
Cost of revenues..................... 1,950 1,619 3,708 2,904
Selling, general and administrative.. 1,530 1,322 2,915 2,569
Depreciation and amortization........ 828 545 1,778 1,033
----------- ------------ -------------- ---------------
Total costs and expenses........ 4,308 3,486 8,401 6,506
----------- ------------ -------------- ---------------
Loss from operations............ (1,260) (1,882) (2,608) (3,224)
----------- ------------ -------------- ---------------
Other Expenses:
Interest expense..................... (248) (296) (604) (573)
Interest income...................... 100 14 105 24
Other income (expense) .............. - - (38) -
----------- ------------ -------------- ---------------
(148) (282) (537) (549)
----------- ------------ -------------- ---------------
Net loss........................ $(1,408) $(2,164) $(3,145) $(3,773)
----------- ------------ -------------- ---------------
----------- ------------ -------------- ---------------
Net Loss per Unit (Note 5):
Net Loss per unit -
Basic and diluted.............. $ - $ (0.22) $ - $ (0.38)
----------- ------------ -------------- ---------------
----------- ------------ -------------- ---------------
Weighted average units -
Basic and diluted .............. - 9,899 - 9,899
----------- ------------ -------------- ---------------
----------- ------------ -------------- ---------------
Net Loss per Share (Note 5):
Net Loss per share -
Basic and diluted............... $ (0.14) $ - $ (0.35) $ -
----------- ------------ -------------- ---------------
----------- ------------ -------------- ---------------
Weighted average shares -
Basic and diluted.............. 9,933 - 9,068 -
----------- ------------ -------------- ---------------
----------- ------------ -------------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
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ZIPLINK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................. $(3,145) $(3,773)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization..................... 1,778 1,033
Loss on disposal of property and equipment........ 38 -
Compensation expense associated with the granting
of options and warrants......................... 46 97
Changes in operating assets and liabilities-
Accounts receivable, net........................ (968) (3)
Prepaid expenses and other current assets....... (128) (18)
Accounts payable................................ 261 (3,756)
Accrued expenses................................ (557) 550
Deferred revenue................................ 231 (68)
Due to affiliates............................... (476) (11)
------------- -----------
Net cash used in operating activities........ (2,920) (5,949)
------------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment.................. (590) (1,070)
Decrease (Increase) in other assets.................. 18 (15)
------------- -----------
Net cash used in investing activities........ (572) (1,085)
------------- -----------
Cash Flows from Financing Activities:
Net proceeds from sale of common stock............... 44,168 -
Proceeds from convertible debentures................. - 7,500
Proceeds from borrowings under notes payable......... 2,400 -
Payments made on notes payable....................... (20,000) -
Payments of principal made on capital lease
obligations....................................... (227) (196)
------------- -----------
Net cash provided by financing activities.... 26,341 7,304
------------- -----------
Net Increase in Cash and Cash Equivalents............... 22,849 270
Cash and Cash Equivalents, beginning of period....... 512 1,081
------------- -----------
Cash and Cash Equivalents, end of period............. $ 23,361 $ 1,351
------------- -----------
------------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................... $ 754 $ 471
------------- -----------
------------- -----------
Supplemental Disclosure of Non-Cash Financing and
Investing Activities:
Forgiveness of accrued compensation by Capital
Member............................................. $ 180 $ -
------------- -----------
------------- -----------
Conversion of debentures to common stock............. $ 7,500 $ -
------------- -----------
------------- -----------
Issuance of common stock for telecommunications
services.......................................... $ 2,700 $ -
------------- -----------
------------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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ZIPLINK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY - ZipLink, Inc., a Delaware corporation (the "Company" or
"ZipLink"), was formed as a wholly-owned subsidiary of ZipLink, LLC on March 9,
1999. ZipLink, LLC was organized as a Connecticut limited liability company on
November 21, 1995 and reorganized as a Delaware LLC on March 9, 1999. On May 25,
1999, ZipLink, LLC was reorganized from a limited liability company to a
corporation. In connection with this reorganization all of the membership units
in ZipLink, LLC were transferred to and merged with and into the Company, as a
result of which, all of the assets and liabilities of ZipLink, LLC were
transferred to the Company. As these entities are under common control, the
merger transaction was accounted for as a reorganization of entities under
common control similar to a pooling of interest.
BASIS OF PRESENTATION - The Company has prepared the accompanying unaudited
condensed financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete annual financial
statements and should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1998, in the
Company's Prospectus dated May 26, 1999 (the "Prospectus"), filed as part of a
Registration Statement on Form S-1, as amended (Reg. No. 333-74273). In the
opinion of the Company's management, the accompanying unaudited condensed
financial statements contain all adjustments which are necessary to present
fairly its financial position as of June 30, 1999 and the results of its
operations and cash flows for the three and six month periods ended June 30,
1999 and 1998, and are of a normal and recurring nature. The results of
operations for interim periods are not necessarily indicative of the operating
results to be expected for the full year.
Certain prior year account balances have been reclassified to be consistent with
the current year's presentation.
2. INITIAL PUBLIC OFFERING
On June 1, 1999, the Company completed its initial public offering ("IPO") of
3,500,000 shares of common stock at $14.00 per share. Total proceeds to the
Company were approximately $44.2 million, net of offering costs of approximately
$4.8 million. Concurrent with the closing of the IPO, $7.5 million of
convertible debentures were converted into 807,143 shares of common stock. The
Company utilized $20.0 million of the net proceeds from the offering to repay
outstanding indebtedness under its line of credit with Fleet Bank. This facility
was terminated after the closing of the offering.
3. WILLIAMS COMMUNICATIONS, INC.
In May 1999, the Company entered into an agreement with Williams Communications,
Inc. ("Williams") to provide telecommunications services to the Company. As part
of this
6
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agreement, the Company has contractually committed to purchase $5.4 million of
telecommunications services from Williams over 42 months of which 50% or $2.7
million was paid through the issuance of 216,964 shares of common stock and the
remaining 50% will be paid in cash as services are provided. The Company has
recorded the value of the services based on the fair market value of the common
stock issued, and has recorded these services as a prepaid expense and other
asset, which will be amortized over the life of the contract as the services are
used. The Company expects to begin using Williams telecommunications services in
the third quarter of 1999.
In connection with the issuance of 216,964 shares of common stock to Williams
concurrent with the closing of the Company's IPO, Williams has agreed that the
maximum number of shares which it may sell during each one-year period following
the IPO shall be the greater of (a) the number of shares having a value equal to
one half of the charges for telecommunications services used by the Company as
of the date of any proposed sale, or (b) one third of the total number of shares
issued to Williams. This contractual restriction terminates on the third
anniversary of the delivery of the shares to Williams.
4. SIGNIFICANT CUSTOMER
WebTV Networks, Inc., a wholly-owned subsidiary of Microsoft Corporation,
represented approximately 76%, 63%, 78% and 64% of the Company's revenues during
the three and six month periods ended June 30, 1999 and 1998, respectively; and
91% and 85% of the Company's accounts receivable at June 30, 1999 and December
31, 1998, respectively.
5. NET LOSS PER SHARE AND NET LOSS PER UNIT
The Company has adopted SFAS No. 128, Earnings Per Share. Basic net loss per
common share/unit is computed using the weighted average number of shares of
common stock/units outstanding during the period. Diluted net loss per common
share/unit is the same as basic net loss per common share/unit since the effects
of the Company's potential common stock/unit equivalents are antidilutive.
Antidilutive securities, which consist of options, warrants and convertible
debentures that are not included in diluted net loss per share/unit were 825,291
shares for the three and six month periods ended June 30, 1999 and 404,989 units
for the three and six month periods ended June 30, 1998.
The following tables present information necessary to calculate net loss per
share/unit:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- -- --------------
<S> <C> <C> <C>
Basic net loss per share:
Loss available to common stockholders $(1,408) 9,933 $ (0.14)
--------------
--------------
Effect of dilutive securities:
Stock options/warrants - -
--------------- -----------------
Diluted net loss per share $(1,408) 9,933 $ (0.14)
--------------- ----------------- --------------
--------------- ----------------- --------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- ---------------
<S> <C> <C> <C>
Basic net loss per share:
Loss available to common stockholders $(3,145) 9,068 $ (0.35)
---------------
---------------
Effect of dilutive securities:
Stock options/warrants - -
--------------- -----------------
Diluted net loss per share $(3,145) 9,068 $ (0.35)
--------------- ----------------- ---------------
--------------- ----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
------------------------------------------------------
Earnings Unit Per Unit
(Numerator) (Denominator) Amount
--------------- ----------------- ---------------
<S> <C> <C> <C>
Basic net loss per unit:
Loss available to unit members $(2,164) 9,899 $ (0.22)
---------------
---------------
Effect of dilutive securities:
Unit options/warrants - -
Convertible debentures - -
--------------- -----------------
Diluted net loss per unit $(2,164) 9,899 $ (0.22)
--------------- ----------------- ---------------
--------------- ----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
------------------------------------------------------
Earnings Unit Per Unit
(Numerator) (Denominator) Amount
--------------- ----------------- ---------------
<S> <C> <C> <C>
Basic net loss per unit:
Loss available to unit members $(3,773) 9,899 $ (0.38)
---------------
---------------
Effect of dilutive securities:
Unit options/warrants - -
Convertible debentures
--------------- -----------------
Diluted net loss per unit $(3,773) 9,899 $ (0.38)
--------------- ----------------- ---------------
--------------- ----------------- ---------------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Any statements in this quarterly report concerning the Company's business
outlook or future economic performance, anticipated profitability, revenues,
expenses or other financial items, and network or service offering growth,
together with other statements that are not historical facts, are
"forward-looking statements" as that term is defined under the Federal
Securities Laws. Any forward-looking statements are estimates, reflecting the
best judgement of the party making such statements based upon currently
available information and involve a number of risks, uncertainties and other
factors which could cause actual results to differ materially from those stated
in such statements. Risks, uncertainties and factors which could affect the
accuracy of such forward-looking statements are identified in the public filings
made by the Company with the Securities and Exchange Commission, and
forward-looking statements contained in this Form 10-Q or in other public
statements of the Company should be considered in light of those factors.
OVERVIEW
ZipLink is a national provider of wholesale Internet access services to
developers and vendors of Internet appliances and local, regional and national
Internet service providers.
The Company derives a significant portion of its revenues from the provision of
wholesale Internet access services for Internet appliances, including Internet
connectivity, subscriber authentication, e-mail filtering and forwarding and
other specially developed services. One customer, WebTV, accounts for
substantially all of the Company's revenues from Internet appliance services.
Revenues from the provision of wholesale Internet access to WebTV are recognized
monthly as services are performed. The Company receives a fixed price per WebTV
subscriber per month if WebTV uses ZipLink as its first choice provider of
connectivity to WebTV. If WebTV does not designate ZipLink as the first choice
provider, the Company receives an hourly rate to the extent that a WebTV
subscriber actually obtains connectivity through ZipLink's network.
The Company also provides wholesale national dial-up Internet access and
enhanced services, including digital subscriber line service where available,
under the name ZipDial, to Internet service providers. The Company's services
enable Internet service providers to quickly and inexpensively expand their
existing geographic coverage and offer national dial-up Internet access, without
investing in costly infrastructure. Revenues from the Company's ZipDial program
are recognized monthly as services are provided.
The Company also derives revenues from the provision of direct Internet access
under the ZipLink name to a limited number of retail users, although the Company
intends to devote minimal resources to marketing in this area. Revenues from
these users are derived from service subscriptions and are recognized monthly.
Since inception, ZipLink has incurred net losses and experienced negative cash
flow from operations. The Company's cumulative net loss from operations as of
June 30, 1999 was $27.1 million. The Company expects to continue to operate at a
net loss and experience negative cash flow for the foreseeable future given the
level of planned operating and
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capital expenditures. The Company's ability to achieve profitability and
positive cash flow from operations is dependent upon its ability to
substantially grow its revenue base through expansion of its ZipDial program and
an increase in sales of access services for Internet appliances and to achieve
operating efficiencies. The Company plans to make significant capital
expenditures to expand its network and to increase its operating expenses based
in large part on its estimate of potential future revenues. If the Company's
future revenues fall short of its estimates or if its operating expenses exceed
its expectations, then the Company may never obtain or sustain profitability.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the three months and six months ending June 30, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 64.0 100.9 64.0 88.5
Selling, general and administrative 50.2 82.4 50.3 78.3
Depreciation and amortization 27.2 34.0 30.7 31.4
----------- ----------- ----------- -----------
Loss from operations (41.4) (117.3) (45.0) (98.2)
Interest and other expenses, net (4.8) (17.6) (9.3) (16.7)
----------- ----------- ----------- -----------
Net loss (46.2)% (134.9)% (54.3)% (114.9)%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
- -------------------------------------------------------------------
JUNE 30, 1998
- -------------
REVENUES. Revenues increased 87.5% to $3.0 million for the three months ended
June 30, 1999 from $1.6 million for the three months ended June 30, 1998. This
increase was due to WebTV revenues, which increased to $2.3 million for the
three months ended June 30, 1999 from $1.0 million for the three months ended
June 30, 1998. During this period, revenues from other sources, including
ZipDial services and direct retail users, increased to $649,000 for the three
months ended June 30, 1999 from $488,000 for the three months ended June 30,
1998.
COST OF REVENUES. Cost of revenues consist primarily of telecommunications costs
and collocation costs for super points of presence. Cost of revenues increased
18.8% to $1.9 million for the three months ended June 30, 1999 from $1.6 million
for the three months ended June 30, 1998. Substantially all of this increase was
due to an increase in telecommunications costs reflecting the expansion of our
network infrastructure.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries, professional services, marketing and
promotional materials to expand our revenue base and other costs related to our
sales, finance and administrative functions. Selling, general and administrative
expenses increased 15.4% to $1.5 million for the three months ended June 30,
1999 from $1.3 million for the three months ended June 30, 1998. This increase
was primarily due to salaries and
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administrative expenses associated with the growth in our ZipDial program,
partially offset by a reduction in professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased 51.9% to $828,000
for the three months ended June 30, 1999 from $545,000 for the three months
ended June 30, 1998. Substantially all of this increase resulted from the effect
of additional capital assets purchased and placed in service during 1998.
Depreciation expense of $828,000 for the three months ended June 30, 1999
includes $951,000 of depreciation on capital assets, partially offset by a
$123,000 reduction due to the elimination of certain equipment installation
costs.
INTEREST EXPENSE. Interest expense decreased to $248,000 for the three months
ended June 30, 1999 from $296,000 for the three months ended June 30, 1998.
Substantially all of this decrease was due to the repayment of $20.0 million of
indebtedness outstanding under the Company's line of credit in June 1999 and, to
a lesser extent, a reduction in interest on our capital lease obligations.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------
REVENUES. Revenues increased 75.8% to $5.8 million for the six months ended June
30, 1999 from $3.3 million for the six months ended June 30, 1998. This increase
was due to WebTV revenues, which increased to $4.5 million for the six months
ended June 30, 1999 from $2.1 million for the six months ended June 30, 1998.
During this period, revenues from other sources, including ZipDial services and
direct retail users, increased to $1.1 million for the six months ended June 30,
1999 from $964,000 for the six months ended June 30, 1998.
COST OF REVENUES. Cost of revenues increased 27.6% to $3.7 million for the six
months ended June 30, 1999 from $2.9 million for the six months ended June 30,
1998. This increase was primarily due to an increase in telecommunications costs
and, to a lesser extent, an increase in collocation costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 11.5% to $2.9 million for the six months ended June 30, 1999
from $2.6 million for the six months ended June 30, 1998. This increase was
primarily due to salaries, marketing and administrative expenses associated with
the growth in our ZipDial program, partially offset by a reduction in
professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased 80.0% to $1.8
million for the six months ended June 30, 1999 from $1.0 million for the six
months ended June 30, 1998. Substantially all of this increase resulted from the
effect of additional capital assets purchased and placed in service during 1998
and, to a lesser extent, additional capital assets purchased and placed in
service during 1999. Depreciation expense of $1.8 million for the six months
ended June 30, 1999 includes $1.9 million of depreciation on capital assets,
partially offset by a $123,000 reduction due to the elimination of certain
equipment installation costs.
INTEREST EXPENSE. Interest expense increased to $604,000 for the six months
ended June 30, 1999 from $573,000 for the six months ended June 30, 1998.
Substantially all of this increase was due to the $7.5 million of convertible
debentures
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which was outstanding for approximately five months in 1999 as compared to
approximately three months in 1998, partially offset by a reduction in
interest on our line of credit and capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) was $22.9 million and $(3.0) million at June 30, 1999
and December 31, 1998, respectively. The Company had cash and cash equivalents
totaling $23.4 million and $512,000 at June 30, 1999 and December 31, 1998,
respectively. The Company currently invests in U.S. Treasury bills and
repurchase agreements that are highly liquid, of high-quality investment grade,
and have maturities of less than three months with the intent to make such funds
readily available for operating purposes.
Net cash used in operating activities was $2.9 million and $5.9 million for the
six months ended June 30, 1999 and 1998, respectively. Net cash used in
operating activities for the six months ended June 30, 1999 is primarily
attributable to the Company's net loss, increase in accounts receivable,
decreases in accrued expenses and decreases in amounts due to affiliates,
partially offset by depreciation and amortization and increases in accounts
payable and deferred revenue. Net cash used in operating activities for the six
months ended June 30, 1998 is primarily attributable to the Company's net loss
and decrease in accounts payable, partially offset by depreciation and
amortization and an increase in accrued expenses.
Net cash used in investing activities was $572,000 and $1.1 million for the six
months ended June 30, 1999 and 1998, respectively. Principal investments were
for capital expenditures, which amounted to $590,000 and $1.1 million for the
six months ended June 30, 1999 and 1998, respectively. Significant capital
expenditures for the six months ended June 30, 1999 include the purchase of
$993,000 of network equipment to continue expansion of the Company's network,
partially offset by a $403,000 reduction in certain installation costs.
Significant capital expenditures for the six months ended June 30, 1998 include
$1.1 million of network and other equipment.
Net cash provided by financing activities was $26.3 million and $7.3 million for
the six months ended June 30, 1999 and 1998, respectively. Net cash provided by
financing activities for the six months ended June 30, 1999 include $44.2
million in proceeds received in June 1999 from the IPO of 3,500,000 shares of
common stock at $14.00 per share, net of underwriting discount and other
offering expenses. In addition, concurrent with the closing of the IPO, $7.5
million of convertible debentures were converted into 807,143 shares of common
stock. The Company utilized $20.0 million of the net proceeds from this offering
to repay outstanding indebtedness under its line of credit with Fleet Bank. This
facility was terminated after the closing of the offering. Net cash provided by
financing activities for the six months ended June 30, 1998 include $7.5 million
of proceeds received from convertible debentures issued to Nortel Networks for
working capital, to facilitate the Company's network buildout and upgrade its
network infrastructure.
The Company is currently seeking to obtain one or more debt financings
aggregating between $5.0 million and $15.0 million to be used for capital
expenditures, working capital and other general corporate purposes. The Company
further intends to make approximately $6.5 million in capital expenditures in
1999, primarily to expand its network infrastructure
12
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and increase the Company's area of service coverage. Subject to its capital
resources, the Company currently expects that its capital expenditures will be
substantially higher in future periods in connection with the expansion of its
network capacity and the increase in its area of service coverage.
The Company believes that funds provided by operations and its existing cash and
cash equivalent balances will be sufficient to meet its anticipated working
capital and capital expenditure requirements for at least the next 12 months.
The Company anticipates that it will need to raise significant additional
capital for the period after the next 12 months through public or private debt
or equity financings or other sources in order to execute its business plan.
There can be no assurance that ZipLink would be able to obtain such financing on
reasonable terms, if at all.
YEAR 2000 CONVERSION
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, the
Company's computer programs that have date-sensitive software and software of
companies into which its network is interconnected may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The Company relies on its computer systems for authentication of our wholesale
customers onto its network, e-mail and web services, billing and customer
support activities and network monitoring. The Company is currently in the
process of reviewing its products and services, as well as its internal
management information systems and non-information technology systems in order
to identify and modify those products, services and systems that are not Year
2000 compliant. In addition, the Company has contacted approximately 40% of its
suppliers to ascertain their Year 2000 status. During the next 90 days the
Company plans to contact the remainder of its suppliers, as well as its
significant customers, including WebTV, to ascertain their Year 2000 status.
The Company is currently engaged in Phase I of our Year 2000 Compliance Project
and has tested and replaced or corrected some non-compliant equipment and
software. A member of the senior management team has been identified to lead the
Year 2000 Compliance Project. The Company defines the term "Year 2000
Compliance" to mean the assurance that its customers will not be negatively
impacted, nor will there be any disruption in service, by dates prior to,
during, or after the year 2000. Phase I of this project involves doing a full
inventory of all equipment, computer hardware, and software. Based upon this
inventory, all equipment, computer hardware, and software components will then
be tested for Year 2000 Compliance. Phase II of this project involves evaluation
of the results of these tests. Any equipment, computer hardware, or software
component that is found to be non-compliant will then be upgraded, rewritten, or
replaced as required to achieve compliance.
As of June 30, 1999, the Company has spent approximately $60,000 correcting
incidents of noncompliance, exclusive of internal costs. The Company anticipates
that the additional direct costs associated with our Year 2000 Compliance
Project will not exceed $170,000, however, the Company cannot assure you that
its actual costs of achieving compliance will
13
<PAGE>
not exceed this amount. While the Company expects to be Year 2000 compliant by
the beginning of the fourth quarter of 1999, it cannot assure you that it will
be able to timely and successfully modify its services and systems to comply
with Year 2000 requirements. Nor can the Company assure that equipment received
from suppliers will comply or that any of its suppliers or peering or transit
partners, such as Nortel Networks, MCI WorldCom or Williams Communications, will
be Year 2000 compliant in a timely manner or that there will not be problems
with technology working together. Furthermore, despite testing performed by the
Company and its suppliers and partners, the Company's products, services and
systems may contain undetected errors or defects associated with Year 2000
related functions. In the event any material errors or defects are not detected
and fixed, or if third parties cannot timely provide the Company with products,
services or systems that meet Year 2000 requirements, the Company's business,
financial condition or results of operations could be adversely affected. Known
or unknown errors or defects that affect the operation of the Company's
products, services or systems could result in delay or loss of revenue,
interruption of network services, cancellation of customer contracts, diversion
of development or network expansion resources, damage to the Company's
reputation, and litigation costs.
The Company believes that the worst case scenario related to its services and
systems due to Year 2000 complications would be the failure of its entire
network. This would result in users being unable to connect to the Internet
using the Company's network until such failure was remedied. As a result of such
failure the Company's revenues would be materially adversely affected and its
customers may terminate agreements to use the Company's Internet access services
or otherwise not utilize such services.
The Company does not have a contingency plan in the event its systems fail due
to Year 2000 related problems. The Company cannot assure you that these or other
factors relating to Year 2000 compliance issues will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is the preservation of
principal and liquidity while at the same time maximizing the income we receive
from our investments without significantly increasing risk. The Company
currently invests in U.S. Treasury bills and repurchase agreements that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months with the intent to make such funds readily available for
operating purposes. As such, we consider our exposure to market risk to be
minimal.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Changes in Securities
14
<PAGE>
On May 25 1999, in connection with the Company's reorganization from a limited
liability company to a corporation, the Company issued an aggregate of 8,087,880
unregistered shares of its common stock to holders of membership units of
ZipLink, LLC in exchange for membership units of ZipLink, LLC. In connection
with the Company's conversion to corporate form, the Company also granted
options and warrants to purchase an aggregate of 364,470 shares and 58,521
shares of its common stock, respectively, in exchange for options and warrants
to purchase membership units of ZipLink, LLC. The Company also issued 104,977
unregistered shares of its common stock to certain members of ZipLink, LLC in
exchange for additional capital contributions made by such members to ZipLink,
LLC. The foregoing issuances and grants were made in reliance upon the exemption
from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as
amended (the "Securities Act").
On June 1, 1999, concurrent with the closing of the Company's IPO, the
Company issued 216,964 unregistered shares of its common stock to Williams
Communications, Inc. at an effective price of $12.44 per share pursuant to an
agreement. As part of this agreement, the Company has contractually committed
to purchase $5.4 million of telecommunications services from Williams over 42
months of which 50% or $2.7 million was paid for through the issuance of
these 216,964 unregistered shares of common stock and the remaining 50% will
be paid in cash as services are provided. The foregoing sale was made in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities Act for transactions not involving a public offering.
On June 1, 1999, concurrent with the closing of the Company's IPO, the Company
issued to Nortel Networks (i) 450,000 unregistered shares of common stock upon
the conversion of a $2.5 million convertible debenture at a conversion price of
$5.56 per share, and (ii) 357,143 unregistered shares of common stock upon
conversion of a $5.0 million convertible debenture at a conversion price of
$14.00 per share. The foregoing sale was made in reliance upon the exemption
from registration pursuant to Section 4(2) of the Securities Act for
transactions not involving a public offering.
On May 26, 1999 the Company granted options to purchase an aggregate of 406,300
shares of common stock under the Company's 1999 Stock Option Plan to certain of
its directors and employees at a weighted average exercise price of $13.79 per
share. The foregoing grants were made in reliance upon the exemption from
registration pursuant to Rule 701 of the Securities Act.
(d) Application of Proceeds from Initial Public Offering
The Company's registration statement on Form S-1 (Reg. No. 333-74273) under the
Securities Act for its IPO became effective on May 25, 1999. The offering
commenced on May 26, 1999 and terminated when all of the shares were sold on
June 1, 1999. The managing underwriters of this offering were Jefferies &
Company, Inc. and FAC/Equities. 3,500,000 shares of common stock were sold by
the Company in the offering at a price of $14.00 per share, for an
aggregate-offering price of $49,000,000. The Company had registered a maximum
aggregate-offering price of $56,350,000. The amount of offering expenses were
$4,832,000, including an underwriting discount of $3,430,000 and other offering
expenses of $1,402,000, resulting in net proceeds to the Company of $44,168,000.
As of June 30, 1999, the net proceeds to the Company have been applied as
follows: (i) $20.0 million for repayment of outstanding indebtedness under the
Company's line of
15
<PAGE>
credit, (ii) approximately $23.4 million in temporary
investments in the form of U.S. Treasury bills and repurchase agreements, and
(iii) approximately $0.8 million for working capital. None of the Company's net
proceeds of the offering were paid directly or indirectly to any director or
officer of the Company or their associates, persons owning 10% or more of any
class of securities of the Company, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial data schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
June 30, 1999.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
Date: August 13, 1999
ZIPLINK, INC.
By: /s/ GARY P. STRICKLAND
------------------------------------
Gary P. Strickland
Chief Financial Officer
(Principal Financial and Accounting Officer and
Authorized Signatory)
17
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