<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, 2000
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[X] No [ ].
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 7, 2000
Common Stock, par value $0.001 per share 12,982,433 shares
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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
Consolidated Balance Sheets at June 30, 2000 3
(Unaudited) and December 31, 1999
Consolidated Statements of Operations for the 4
Three Months ended June 30, 2000 and 1999 and the Six
Months Ended June 30, 2000 and 1999 (Unaudited)
Consolidated Statements of Cash Flows for the Six 5
Months ended June 30, 2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 13
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 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIPLINK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $6,559 $17,384
Accounts receivable, net.................................... 3,084 1,491
Prepaid expenses and other current assets................... 2,569 2,256
------- -------
Total current assets................................... 12,212 21,131
Property and Equipment, net.................................... 22,809 15,917
Other Long Term Assets, net.................................... 4,911 1,557
------- -------
Total assets........................................... $39,932 $38,605
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations................ $4,177 $2,197
Accounts payable............................................ 6,503 3,511
Accrued expenses............................................ 2,656 1,550
Deferred revenue............................................ 90 95
Other current liabilities................................... 146 -
------- -------
Total current liabilities.............................. 13,572 7,353
Capital Lease Obligations, less current portion................ 8,510 3,943
Long Term Liabilities, less current portion.................... 70 -
------- -------
Total liabilities...................................... 22,152 11,296
Stockholders' Equity :
Common stock, $.001 par value, 50,000 shares authorized,
12,982 and 12,770 shares issued and outstanding at June 30,
2000 and December 31,1999, respectively....................... 13 13
Additional paid-in capital..................................... 63,131 60,690
Accumulated deficit............................................ (45,292) (33,320)
Cumulative translation adjustment.............................. (72) -
Deferred stock-based compensation.............................. - (74)
------- -------
Total stockholders' equity..................................... 17,780 27,309
------- -------
Total liabilities and stockholders' equity............. $39,932 $38,605
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
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ZIPLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ $ 6,886 $ 3,048 $12,378 $5,793
-------- -------- -------- --------
Costs and Expenses:
Cost of revenues..................... 7,125 1,950 12,446 3,708
Selling, general and administrative.. 4,201 1,530 7,813 2,915
Depreciation and amortization........ 1,989 828 3,941 1,778
-------- -------- -------- --------
Total costs and expenses........ 13,315 4,308 24,200 8,401
-------- -------- -------- --------
Loss from operations............ (6,429) (1,260) (11,822) (2,608)
-------- -------- -------- --------
Other Income (Expenses):
Interest expense..................... (311) (248) (457) (604)
Interest income...................... 116 100 307 105
Other income (expense) .............. - - - (38)
-------- -------- -------- --------
(195) (148) (150) (537)
-------- -------- -------- --------
Net loss........................ $ (6,624) $ (1,408) $(11,972) $(3,145)
======== ======== ======== ========
Net Loss per Share (Note 5):
Basic and diluted............... $(0.51) $(0.14) $(0.93) $(0.35)
======== ======== ======== ========
Weighted Average Shares -
Basic and diluted............... 12,953 9,933 12,923 9,068
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
4
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ZIPLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................. $ (11,972) $ (3,145)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash telecommunications expense............ 655 -
Depreciation and amortization..................... 3,941 1,778
Loss on disposal of property and equipment........ - 38
Compensation expense associated with the granting
of options and warrants......................... (8) 46
Changes in assets and liabilities, net of acquired
amounts:
Accounts receivable, net........................ (1,448) (968)
Prepaid expenses and other current assets....... (311) (128)
Accounts payable................................ 2,575 261
Accrued expenses................................ 780 (557)
Deferred revenue................................ (5) 231
Due to affiliates............................... - (476)
Other assets.................................... (41) -
--------- ---------
Net cash used in operating activities....... (5,834) (2,920)
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment.................. (2,707) (590)
Decrease in other assets............................. - 18
Cash used in acquisition............................. (1,150) -
--------- ---------
Net cash used in investing activities........ (3,857) (572)
--------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common stock............... - 44,168
Proceeds from borrowings under notes payable......... - 2,400
Payments made on notes payable....................... - (20,000)
Proceeds from exercise of stock options.............. 134 -
Payments of principal made on capital lease
obligation......................................... (1,196) (227)
--------- ---------
Net cash (used in) provided by financing
activities................................ (1,062) 26,341
--------- ---------
Effect of exchange rates on cash and cash
equivalents........................................ (72) -
--------- ---------
Net (decrease) increase in Cash and Cash Equivalents.... (10,825) 22,849
Cash and Cash Equivalents, beginning of period....... 17,384 512
--------- ---------
Cash and Cash Equivalents, end of period............. $ 6,559 $ 23,361
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................... $ 368 $ 754
========= =========
Acquisition of Subsidiary:
Fair value of assets acquired........................ $ 480 $ -
Goodwill and other intangibles....................... 4,181 -
Liabilities assumed.................................. (1,124) -
Issuance of common stock............................. (2,387) -
--------- ---------
Net cash paid for acquisition........................ $ 1,150 $ -
========= =========
Supplemental Disclosure of Non-Cash Financing and
Investing Activities:
Issuance of common stock for telecommunications
services.......................................... - $ 2,700
========= =========
Conversion of debentures to common stock............ - $ 7,500
========= =========
Acquisition of equipment under capital leases....... $ 8,093 $ -
========= =========
Acquisition of Subsidiary........................... $ 2,387 $ -
========= =========
Forgiveness of accrued compensation by
Capital Member..................................... $ - $ 180
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
5
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ZIPLINK, INC.
NOTES TO CONSOLIDATED 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
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim consolidated financial
reporting. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete annual consolidated financial statements and should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1999, in the Company's Annual Report on Form 10-K. In the
opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments which are necessary to present
fairly its financial position as of June 30, 2000 and the results of its
consolidated operations and consolidated cash flows for the three and six months
periods ended June 30, 2000 and 1999, and are of a normal and recurring nature.
The results of operations for June 30, 2000 are not necessarily indicative of
the operating results to be expected for the full year.
2. ACQUISITION OF INTERHOP NETWORK SERVICES, INC.
On January 18, 2000 the Company acquired the assets of Interhop Network
Services, Inc. of Toronto, Ontario, an Internet service provider providing
Internet connectivity services throughout Canada. The consideration paid in
the acquisition consisted of $1,150,000 in cash, 153,997 shares of common
stock valued at $2,387,000 and the assumption of liabilities of $1,124,000.
Goodwill and other intangibles are amortized over 15 years. For financial
statement purposes, this acquisition was accounted for as a purchase, and
accordingly, the results of operations of Interhop Network Services, Inc.
subsequent to January 18, 2000 are included in the Company's consolidated
statements of operations.
6
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The Company has allocated the purchase price, including transaction costs of
approximately $152,000, to the fair value of the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Current assets.................................................... $ 146,000
Property and equipment............................................ 334,000
Goodwill and other intangible assets.............................. 4,181,000
Total liabilities assumed......................................... (1,124,000)
-----------
$ 3,537,000
===========
</TABLE>
3. COMPREHENSIVE LOSS
Comprehensive loss includes net loss as well as other changes in stockholders'
equity (deficit), except for stockholders' investments and distributions. The
components of comprehensive loss are as follows :
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
(in thousands)
<S> <C> <C>
Net loss............................. $ (6,624) $ (1,408)
Foreign currency
translation adjustment............ (12) --
---------- -----------
Comprehensive loss................... $ (6,636) $ (1,408)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net loss............................. $(11,972) $ (3,145)
Foreign currency
translation adjustment............ (72) --
---------- -----------
Comprehensive loss................... $(12,044) $ (3,145)
</TABLE>
4. SIGNIFICANT CUSTOMERS
WebTV Networks, Inc., a wholly-owned subsidiary of Microsoft Corporation,
represented approximately 36%, 40%, 76% and 78% of the Company's revenues during
the three and six months ended June 30, 2000 and 1999, respectively; and 26% and
52% of the Company's accounts receivable at June 30, 2000 and December 31, 1999,
respectively.
Spinway MediaNetwork Inc., a subsidized access provider of Internet services,
comprised 11% and 9% of the Company's revenues during the three and six
months ended June 30, 2000, respectively; and represented approximately 10%
and 0% of the Company's accounts receivable at June 30, 2000 and December
31, 1999, respectively.
1stUp.com (a wholly owned subsidiary of CMGI, Inc.), a subsidized access
provider of Internet services, comprised approximately 18% and 10% of the
Company's revenues during the three
7
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and six months ended June 30, 2000, respectively; and represented approximately
27% and 13% of the Company's accounts receivable at June 30, 2000 and December
31, 1999, respectively.
5. NET LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share". Basic net loss per
common share is computed using the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per common share is the
same as basic net loss per common share since the effects of the Company's
potential common stock equivalents are antidilutive. Antidilutive securities,
which consist of options and warrants that are not included in diluted net loss
per share were 1,342,521 shares for the three and six months ended June 30, 2000
and 825,291 shares for the three and six months periods ended June 30, 1999.
6. LINE OF CREDIT
On July 26, 2000, the Company entered into a secured Revolving Loan and
Security Agreement ("Agreement") with a commercial bank which provides for
maximum borrowings up to $10 million and is secured by substantially all of
the Company's assets. The Agreement is personally guaranteed by the
Co-Chairman and Chief Executive Officer of the Company who owns directly or
indirectly a majority of the outstanding shares of the Company's common
stock. The Agreement is further secured by non-affiliated stock held by the
Co-Chairman and Chief Executive Officer pursuant to a pledge agreement. The
total amount available to borrow is subject to, among other things,
conditions related to the fair market value of the pledged collateral and the
guarantor's approval of each Company drawdown under the Agreement. At the
Company's option, the Agreement bears interest at either the Lender's prime
rate minus 1% or a rate equal to the London Interbank Offer Rate (LIBOR) plus
30 basis points. Certain compensation, including interest payments of 4% on
borrowed amounts under the Agreement, is payable to the Co-Chairman and Chief
Executive Officer in consideration for his guaranty. The Agreement expires on
July 26, 2002.
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. THE
COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO
SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR UNCERTAINTIES AFTER THE
DATE HEREOF OR REFLECT THE ACCURACY OF UNANTICIPATED EVENTS.
8
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OVERVIEW
ZipLink is a provider of wholesale Internet connectivity services to Internet
service providers, or ISP's, and developers and vendors of Internet appliances
in the United States and Canada.
The Company provides wholesale Internet access services under the name
ZipDial to ISPs in the United States and Canada which, in turn, offer
Internet access to their subscribers using ZipLink's network infrastructure.
These ISPs consist of traditional local, regional, and national providers
that generally collect a monthly fee from their subscribers in addition to
emerging model providers, such as subsidized and free Internet access
providers and PC manufacturers and distributors. These services enable ISP's
to quickly and inexpensively expand their existing geographic coverage and
offer national dial-up Internet access, without investing in costly
infrastructure. Revenues from the ZipDial program are recognized monthly as
services are provided.
The Company also offers a range of connectivity services for Internet
appliances, including subscriber authentication and other specially developed
services. One customer, WebTV Network Inc., 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, also referred to as primary traffic, if WebTV uses the Company as its
first choice provider of connectivity to WebTV. If ZipLink is not designated as
the first choice provider by WebTV, it receives an hourly rate, also referred to
as secondary traffic, to the extent that a WebTV subscriber actually obtains
connectivity through the Company's network.
The Company also provides direct Internet access under the ZipLink name to a
limited number of retail users, although it devotes minimal resources to
marketing in this area. Revenues from these users are derived from service
subscriptions and are recognized monthly.
Since inception, the Company has incurred net losses and experienced negative
cash flow from operations. The Company had an accumulated deficit at June 30,
2000 of $45.3 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 activities and 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 its ability to expand the network and achieve operating
efficiencies. The Company plans to increase its operating expenses based in
large part on estimates 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.
9
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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, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 103.5 64.0 100.5 64.0
Selling, general and administrative... 61.0 50.2 63.1 50.3
Depreciation and amortization......... 28.9 27.2 31.8 30.7
----------- ----------- ----------- -----------
Loss from operations.................. (93.4) (41.3) (95.5) (45.0)
Interest and other expense, net....... (2.8) (4.8) (1.2) (9.3)
----------- ----------- ----------- -----------
Net loss.............................. (96.2)% (46.1)% (96.7)% (54.3)%
=========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,1999
REVENUES. Revenues consist primarily of monthly subscriber revenue and usage
based revenue. Monthly subscriber revenue includes WebTV primary traffic,
ZipDial and certain Internet appliance service revenues and the Company's
retail base. Usage based revenue includes revenue from subsidized and free
Internet access providers, WebTV secondary traffic and certain Internet
appliance service revenue. Revenues increased 126 % to $6.9 million for the
three months ended June 30, 2000 from $3.0 million for the three months ended
June 30, 1999. This increase was principally due to an increase in usage
based revenues, primarily attributable to revenues from subsidized and free
Internet access providers, to $2.4 million for the three months ended June
30, 2000 from $0.2 million for the three months ended June 30, 1999. The
increase was also due to an increase in revenues from monthly subscriber
revenue, primarily attributable to ZipDial program revenues and WebTV primary
traffic, to $4.5 million for the three months ended June 30, 2000 from $2.9
million for the three months ended June 30, 1999.
COST OF REVENUES. Cost of revenues consists primarily of telecommunication and
collocation costs for super points of presence. Cost of revenues increased to
$7.1 million for the three months ended June 30, 2000 from $1.9 million for the
three months ended June 30, 1999. Substantially all of this increase was due to
an increase in telecommunication and collocation costs reflecting the expansion
of the Company's network infrastructure from approximately 14,500 ports as of
June 30, 1999 to 64,000 ports as of June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries, legal and other professional services,
marketing and promotional materials to expand the Company's revenue base and
other costs related to sales, finance and administrative functions. Selling,
general and administrative expenses increased to $4.2 million for the three
months ended June 30, 2000 from $1.5 million for the three months ended June 30,
1999. This increase was primarily due to salaries and other related expenses
from an increase in headcount to 109 employees as of June 30, 2000 compared with
62 employees as of June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased to $2.0 million
for the three months ended June 30, 2000 from $0.8 million for the three months
ended June 30, 1999. Substantially all of this increase resulted from the effect
of additional capital assets purchased and placed in service in support of the
network expansion during 1999 and the six months ended June 30, 2000, and the
addition of goodwill amortization related to the Interhop acquisition in January
2000.
INTEREST EXPENSE. Interest expense increased slightly to $0.3 million for the
three months ended June 30, 2000 from $0.2 million for the three months ended
June 30, 1999. The net increase was due to an increase of interest expense
associated with the increase in capital leases during fiscal year 2000 offset
by a reduction of interest expense due to the repayment of $20.0 million of
indebtedness outstanding under the Company's line of credit in June 1999, and
the conversion
10
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of convertible debentures to common stock concurrent with the closing of the
Company's initial public offering ("IPO").
INTEREST INCOME. There was no significant net change in interest income for the
three months ended June 30, 2000 from the same period in the prior year.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,1999
REVENUES. Revenues increased 114 % to $12.4 million for the six months ended
June 30, 2000 from $5.8 million for the six months ended June 30, 1999. This
increase was principally due to an increase in usage based revenues, primarily
attributable to revenues from subsidized and free internet access providers,
to $3.9 million for the six months ended June 30, 2000 from $0.4 million for
the six months ended June 30, 1999. The increase was also due to an increase
in revenues from monthly subscriber revenues, primarily attributable to
ZipDial program revenues and WebTV primary traffic revenues to $8.5 million
for the six months ended June 30, 2000 from $5.4 million for the six months
ended June 30, 1999.
COST OF REVENUES. Cost of revenues increased to $12.4 million for the six
months ended June 30, 2000 from $3.7 million for the six months ended June
30, 1999. Substantially all of this increase was due to an increase in
telecommunication and collocation costs reflecting the expansion of the
Company's network infrastructure from approximately 14,500 ports as of June
30, 1999 to 64,000 ports as of June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $7.8 million for the six months ended June 30, 2000 from
$2.9 million for the six months ended June 30, 1999. This increase was primarily
due to salaries and other related expenses from an increase in headcount to 109
employees as of June 30, 2000 compared with 62 employees as of June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased to $3.9 million
for the six months ended June 30, 2000 from $1.8 million for the six months
ended June 30, 1999. Substantially all of this increase resulted from the effect
of additional capital assets purchased and placed in service in support of the
network expansion during 1999 and the six months ended June 30, 2000, and the
addition of goodwill amortization related to the Interhop acquisition in January
2000.
INTEREST EXPENSE. Interest expense decreased to $0.5 million for the six months
ended June 30, 2000 from $0.6 million for the six months ended June 30, 1999.
The net decrease was due to a reduction of interest expense due to the repayment
of $20.0 million of indebtedness outstanding under the Company's line of credit
in June 1999, and the conversion of convertible debentures to common stock
concurrent with the closing of the Company's IPO, offset by an increase from the
interest expense associated with the increase in capital leases during fiscal
year 2000.
11
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INTEREST INCOME. Interest income increased to $0.3 million for the six months
ended June 30, 2000 from $0.1 million for the six months ended June 30, 1999.
The increase was due to interest income earned from cash balances for the six
months ended June 30, 2000 compared to interest income earned from cash balances
resulting from the Company's IPO on June 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) was $(1.4) million and $13.8 million at June 30, 2000
and December 31, 1999, respectively. The Company had cash and cash equivalents
totaling $6.6 million and $17.4 million at June 30, 2000 and December 31,1999,
respectively. The Company currently invests in commercial paper and repurchase
agreements backed by U.S. Treasury securities 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 $5.8 million and $2.9 million for the
six months ended June 30, 2000 and June 30, 1999, respectively. Net cash used in
the six months ended June 30, 2000 was primarily attributable to the Company's
net loss, increase in accounts receivable, partially offset by an increase in
depreciation and amortization, accounts payable and accrued expenses. Net cash
used in operating activities for the six months ended June 30, 1999 was
primarily attributable to the Company's net loss, increase in accounts
receivable, decrease in accrued expenses and decreases in amounts due to
affiliates, partially offset by an increase in depreciation and amortization and
increases in accounts payable and deferred revenue.
Net cash used in investing activities was $3.9 million and $0.6 million for the
six months ended June 30, 2000 and June 30, 1999, respectively. Principal
investments in the six months ended June 30, 2000 were purchases of property and
equipment of $2.7 million and $1.2 million used in the acquisition of Interhop
Network Services, Inc. For the six months ended June 30, 1999, net cash used
included purchases of $1.0 million of network equipment to continue the
expansion of the Company's network, partially offset by a $.4 million reduction
in certain installation costs. Subject to its capital resources, the Company
currently expects that its capital expenditures will range from approximately
$12.0 million to 15.0 million in fiscal 2000 in connection with the expansion of
its network capacity and the increase in its area of service coverage, and the
data center build-out at the Lowell, MA facility.
Net cash (used in) or provided by financing activities was $(1.1) million and
$26.3 million for the six months ended June 30, 2000 and June 30,1999,
respectively. Net cash used in financing activities for the six months ended
June 30, 2000 was primarily for payments on the Company's capital lease
obligations. Net cash provided by financing activities for the six months ended
June 30, 1999 includes $44.2 million in proceeds received in June 1999 from the
Company's IPO. The Company utilized $20.0 million of the net proceeds to repay
the outstanding balance of $20.0 million under its line of credit.
Since November 1999, the Company secured approximately $20.0 million of capital
lease financing from four major network equipment providers, of which $14
million was used for network equipment purchases from November 1999 through June
30, 2000. The Company is currently seeking expansion of its existing capital
leases facilities with its major capital equipment vendors.
12
<PAGE>
On July 26, 2000, the Company entered into a secured revolving loan and
security agreement with a commercial bank which provides for maximum
borrowings up to $10 million and is secured by substantially all of the
Company's assets. The agreement is personally guaranteed by the Co-Chairman
and Chief Executive Officer of the Company who owns directly or indirectly a
majority of the outstanding shares of the Company's common stock. The
agreement is further secured by non-affiliated stock held by the Co-Chairman
and Chief Executive Officer pursuant to a pledge agreement. The total amount
available to borrow is subject to, among other things, conditions related to
the fair market value of the pledged collateral and the guarantor's approval
of each Company drawdown under the agreement. Certain compensation, is
payable to the Co-Chairman and Chief Executive Officer in consideration for
his guaranty. The agreement expires on July 26, 2002. There were no
outstanding amounts under the agreement as of August 11, 2000.
In the absence of unforeseen circumstances, Company believes that funds provided
from operations and its existing cash and cash equivalent balances and the $10.0
million line of credit entered into on July 26, 2000, should be sufficient to
execute its operating plan and expansion plans through 2000.
The Company is continuing to seek one or more debt and or equity financings
approximating $10.0 million to be used for capital expenditures, working capital
and other general corporate purposes. There can be no assurance that the Company
will be able to obtain such financings on reasonable terms, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition." This bulletin, as amended, established
guidelines for revenue recognition and is effective for periods beginning in
Fiscal 2000. We do not expect that the adoption of the guidance required by SAB
101 will have a material impact on our financial condition or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25." This interpretation clarified the application of Opinion 25, among other
issued (a) the definition of employee for purposes of applying Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. The Interpretation is
effective July 1, 2000 and the effects of applying the Interpretation are
recognized on a prospective basis. We do not expect that the adoption will have
a material impact on our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is the preservation
of principal and liquidity while at the same time maximizing the income it
receives from investments without significantly increasing risk. The Company
currently invests in commercial paper and repurchase agreements backed by U.S.
Treasury securities 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
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<PAGE>
available for operating purposes. As such, the Company considers its 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
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 2000, the Company held its annual meeting of stockholders for the
purpose of electing directors of the Company for the ensuing year and to ratify
the appointment of Arthur Andersen LLP as the Company's independent public
accountant for the fiscal year ending December 31, 2000.
1. Election of Directors of the Company :
The following persons, all of whom were Company directors immediately prior
to the vote, were elected directors, each to hold office until the next
annual meeting of stockholders and until his successor shall have been duly
elected and qualified, pursuant to the following vote tabulation:
<TABLE>
<CAPTION>
Number of Votes For Number of Votes
Withheld
<S> <C> <C>
Henry M. Zachs 10,553,295 4,110
Eric M. Zachs 10,313,295 244,110
Christopher W. Jenkins 10,553,295 4,110
Russel S. Bernard 10,553,295 4,110
Jai P. Bhagat 10,553,295 4,110
Wayne A. Martino 10,553,295 4,110
Alan M. Mendelson 10,553,295 4,110
</TABLE>
2. The appointment of Arthur Andersen LLP as the Company's independent
accountant for the fiscal year ending December 31, 2000 was ratified by the
vote indicated:
<TABLE>
<S> <C>
For 10,534,990
Against 19,425
Abstain 2,990
</TABLE>
14
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Revolving Loan and Security Agreement, dated as of July 26,
2000, by and between ZipLink, Inc. and Fleet National Bank. **
10.2 Revolving Loan Note of ZipLink, Inc. **
10.3 Stock Pledge Agreement, dated as of July 26, 2000, by and
between Henry M. Zachs and Fleet National Bank. **
10.4 Guaranty, dated as of July 26, 2000, from Henry M. Zachs in
favor of Fleet National Bank. **
10.5 Letter Agreement, dated as of July 26, 2000, between ZipLink
Inc., and Henry M. Zachs, regarding compensation in connection
with the Guaranty, and supplemental Letter Agreement, dated
as of July 26, 2000.
10.6+ Agreement between Registrant and 1stUp.com Corporation dated
as of July 23, 1999, and First Amendment dated August, 1999,
Second Amendment dated Deceber 13, 1999, Third Amendment dated
July 1, 2000, and Fourth Amendment dated July 25, 2000
27. Financial data schedule
--------------------
** Incorporated by reference from the Registrant's Form 8-K filed
on August 1, 2000.
+ Confidential treatment has been requested for certain
portions of this exhibit pursuant to Rule 406 promulgated
under the Securities Act of 1933, as amended.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
June 30, 2000.
15
<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 14, 2000
ZIPLINK, INC.
By: /s/ Gary P. Strickland
-----------------------------------------------
Gary P. Strickland
Chief Financial Officer
(Principal Financial and Accounting Officer and
Authorized Signatory)
16
<PAGE>
EXHIBIT INDEX
EXHIBIT
10.1 Revolving Loan Agreement dated July 26, 2000 between Registrant
and Fleet National Bank **
10.2 Revolving Loan Note of ZipLink, Inc. **
10.3 Stock Pledge Agreement, dated as of July 26, 2000, by and
between Henry M. Zachs and Fleet National Bank. **
10.4 Guaranty, dated as of July 26, 2000, from Henry M. Zachs in
favor of Fleet National Bank **
10.5 Letter Agreement, dated as of July 26, 2000, between ZipLink
Inc.,and and Henry M.Zachs, regarding compensation in
connection with Guaranty, and supplemental Letter Agreement
dated as of July 26, 2000.
10.6+ Agreement between Registrant and 1stUp.com Corporation dated
as of July 23, 1999, and First Amendment dated August, 1999,
Second Amendment dated Deceber 13, 1999, Third Amendment dated
July 1, 2000, and Fourth Amendment dated July 25, 2000
27. Financial data schedule
--------------------
** Incorporated by reference from the Registrant's Form 8-K filed
on August 1, 2000.
+ Confidential treatment has been requested for certain
portions of this exhibit pursuant to Rule 406 promulgated
under the Securities Act of 1933, as amended.
17
