<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 September 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:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 2000
<S> <C>
Common Stock, par value $0.001 per share 12,982,433 shares
</TABLE>
<PAGE>
ZIPLINK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 3
(Unaudited) and December 31, 1999
Consolidated Statements of Operations for the 4
Three Months ended September 30, 2000 and 1999 and the Nine
Months Ended September 30, 2000 and 1999 (Unaudited)
Consolidated Statements of Cash Flows for the Nine 5
Months ended September 30, 2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIPLINK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $3,251 $17,384
Accounts receivable, net.................................... 3,929 1,491
Prepaid expenses and other current assets................... 2,372 2,256
--------------- --------------
Total current assets................................... 9,552 21,131
Property and Equipment, net.................................... 21,639 15,917
Other Long Term Assets, net.................................... 4,789 1,557
--------------- --------------
Total assets........................................... $35,980 $38,605
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations................ $4,755 $2,197
Note Payable to Bank........................................ 3,000 --
Accounts payable............................................ 6,030 3,511
Accrued expenses............................................ 3,019 1,550
Deferred revenue............................................ 77 95
Other current liabilities.................................. 371 --
--------------- --------------
Total current liabilities.............................. 17,252 7,353
Capital Lease Obligations, less current portion................ 7,588 3,943
Long Term Liabilities, less current portion.................... 70 --
--------------- --------------
Total liabilities...................................... 24,910 11,296
Stockholders' Equity :
Common stock, $.001 par value, 50,000 shares authorized,
12,982 and 12,770 shares issued and outstanding at
September 30, 2000 and December 31,1999, respectively... 13 13
Additional paid-in capital................................. 63,133 60,690
Accumulated deficit........................................ (51,982) (33,320)
Other Comprehensive Loss................................... (94) --
Deferred stock-based compensation.......................... -- (74)
--------------- --------------
Total stockholders' equity................................. 11,070 27,309
--------------- --------------
Total liabilities and stockholders' equity............. $35,980 $38,605
=============== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ZIPLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ $ 8,271 $ 3,403 $ 20,649 $ 9,196
----------- ------------ ----------- ------------
Costs and Expenses:
Cost of revenues..................... 8,641 2,615 21,087 6,323
Selling, general and administrative.. 3,792 2,250 11,605 5,165
Depreciation and amortization........ 2,111 1,003 6,052 2,781
----------- ------------ -------------- ---------------
Total costs and expenses........ 14,544 5,868 38,744 14,269
----------- ------------ -------------- ---------------
Loss from operations............ (6,273) (2,465) (18,095) (5,073)
Other Income (Expenses):
Interest expense..................... (473) (18) (930) (622)
Interest income...................... 56 290 363 395
Other income (expense) .............. -- -- -- (38)
----------- ------------- ------------- ---------------
(417) 272 (567) (265)
----------- ------------ -------------- ---------------
Net loss........................ $ (6,690) $ (2,193) $ (18,662) $ (5,338)
=========== ============ ============== ===============
Net Loss per Share (Note 5):
Basic and diluted................... $ (0.52) $ (0.17) $ (1.44) $ (0.52)
=========== ============ ============== ===============
Weighted Average Shares -
Basic and diluted................... 12,982 12,717 12,943 10,297
=========== ============ ============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ZIPLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................. $ (18,662) $ (5,338)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash telecommunications expense............... 724 --
Depreciation and amortization..................... 6,052 2,781
Loss on disposal of property and equipment........ -- 38
Compensation expense associated with the granting
of options and warrants......................... (8) 50
Amortization of deferred financing costs.......... 34 --
Changes in assets and liabilities, net of acquired
amounts:
Accounts receivable, net........................ (2,292) (608)
Prepaid expenses and other current assets....... (116) (358)
Accounts payable................................ 2,103 595
Accrued expenses................................ 1,403 (564)
Deferred revenue................................ (18) (23)
Due to affiliates............................... -- (476)
Other assets.................................... 160 --
------------ -----------
Net cash used in operating activities...... (10,620) (3,903)
Cash Flows from Investing Activities:
Purchases of property and equipment.................. (1,599) (1,233)
Decrease in other assets............................ -- 18
Cash used in acquisition............................ (1,150) --
------------ -----------
Net cash used in investing activities........ (2,749) (1,215)
Cash Flows from Financing Activities:
Net proceeds from sale of common stock............... -- 44,168
Proceeds from borrowings under notes payable......... 3,000 2,400
Payments made on notes payable....................... -- (20,000)
Proceeds from exercise of stock options.............. 137 --
Deferred financing costs............................. (270) --
Payments of principal made on capital lease
obligation........................................ (3,537) (345)
------------ -----------
Net cash (used in) provided by financing
activities................................ (670) 26,223
------------ -----------
Effect of exchange rates on cash and cash
equivalents........................................ (94) --
------------ -----------
Net (decrease) increase in Cash and Cash Equivalents.... (14,133) 21,105
Cash and Cash Equivalents, beginning of period.......... 17,384 512
Cash and Cash Equivalents, end of period................ $ 3,251 $21,617
============ ===========
</TABLE>
5
<PAGE>
ZIPLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ -----------
<C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................... $ 902 $ 773
============ ===========
Acquisition of Interhop:
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....... $ 8,869 $ --
============ ===========
Forgiveness of accrued compensation by
Capital Member..................................... $ -- $ 180
============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ZIPLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY - Ziplink Inc., a Delaware corporation (the "Company"), is a
wholesale connectivity provider in North America for the Business-to-Business
marketplace including Internet service providers, or ISPs, competitive local
exchange carriers, or CLECs, Web appliance vendors, pc manufacturers and
distributors.
The Company 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 September 30, 2000
and the results of its consolidated operations and consolidated cash flows
for the three and nine months periods ended September 30, 2000 and 1999, and
are of a normal and recurring nature. The results of operations for September
30, 2000 are not necessarily indicative of the operating results to be
expected for the full year.
The financial statements have been prepared assuming the Company will
continue as a going concern. As further discussed in Note 7, MCI WorldCom has
demanded payment of $1.9 million for past services; however, the Company
currently does not have sufficient funds on hand to satisfy this obligation.
Additionally, financing support from Mr. Henry Zachs, a majority shareholder
and Co-Chairman of the Company, is limited as further described in Note 7.
As a result, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that may result should the Company be unable to continue as a
going concern.
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.
7
<PAGE>
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
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(in thousands)
<S> <C> <C>
Net loss............................. $(6,690) $(2,193)
Foreign currency
translation adjustment........... (22) --
============ ============
Comprehensive loss............... $(6,712) $(2,193)
============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
<S> <C> <C>
Net loss............................. $(18,662) $ (5,338)
Foreign currency
translation adjustment............ (94) --
=========== ============
Comprehensive loss................... $(18,756) $ (5,338)
=========== ============
</TABLE>
4. SIGNIFICANT CUSTOMER
WebTV Networks, Inc., a wholly-owned subsidiary of Microsoft Corporation,
represented approximately 27%, 35%, 62% and 72% of the Company's revenues during
the three and nine months ended September 30, 2000 and 1999, respectively; and
17 % and 52% of the Company's accounts receivable at September 30, 2000 and
December 31, 1999, respectively.
Spinway MediaNetwork Inc., a subsidized access provider of Internet services,
comprised 21% and 15% of the Company's revenues during the three and nine months
ended September 30, 2000, respectively; and represented approximately 17% and 0%
of the Company's accounts receivable at September 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 19% and 16% of the
Company's revenues during the three and nine months ended September 30, 2000,
respectively; and represented approximately 30% and 13% of the Company's
accounts receivable at September 30, 2000 and December 31, 1999,
respectively. On November 13, 2000, CMGI, Inc. issued a press release stating
that it is their intention to divest 1stUp.com. Based on the information in
the press release, the financial impact to ZipLink of the divestiture is
unclear.
8
<PAGE>
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 1,169,478 shares for the three and nine
months ended September 30, 2000 and 780,112 shares for the three and nine
months ended September 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 for a two year period
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 Company's Co-Chairman 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
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 (See Note 7). 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 in consideration for his
guaranty. As of September 30, 2000, the Company had outstanding borrowings of
$3 million bearing interest at LIBOR at 7.26%. As of November 14, 2000, the
original drawdown of $3.0 million has been paid and additional borrowings
totaling $1.0 million are currently outstanding bearing interest at LIBOR at
6.92%. Interest is payable quarterly commencing December 13, 2000 and
principal payments are due and payable upon the expiration of the Agreement,
July 26, 2002. However, the Company is classifying the outstanding borrowings
as current obligation based on the recent events and matters described in
Note 7.
Compensation to the Co-Chairman for providing the guarantee totaled
approximately $255,000 of which $250,000 was paid in September 2000 and the
remaining amount representing interest of approximately $5,500 is accrued as
of September 30, 2000. See Note 7 for additional discussion regarding the
guaranty.
Deferred financing fees related to the Agreement totaled $270,000 including
the related compensation to the Co-Chairman of $250,000, and are amortized
ratably over the remaining life of the Agreement, or July 2002, and are
included in interest expense. Deferred financing fees of approximately
$236,000 are included in other long term assets as of September 30, 2000.
7. RECENT EVENTS
On October 30, 2000, the Company received a letter from MCI WorldCom
demanding payment for past due undisputed amounts of $1.9 million by November
10, 2000. The Company and WorldCom negotiated an extension of the payment
date for such amounts until November 30, 2000, provided that ZipLink makes
payments to MCI WorldCom of $196,000 per week commencing November 3, 2000.
ZipLink does not have sufficient funds on hand to satisfy the MCI WorldCom
obligation, as well as other day-to-day obligations, without drawing down on
its $10.0 million line of credit which is guaranteed by Henry M. Zachs,
Co-Chairman of the Board of ZipLink. Mr. Zachs notified the Company that
although he was willing to guarantee amounts under the line of credit to fund
several payrolls and the $196,000 payment to MCI WorldCom due November 3,
2000, he was unwilling to guarantee amounts under the line of credit beyond
the payments described above. Mr. Zachs subsequently notified the Company
that he was willing to guarantee certain additional borrowings under the line
of credit while the Company seeks an acquirer or additional financing. The
Company believes that the amounts Mr. Zachs is willing to guarantee will be
sufficient to allow it to continue operations until November 17, 2000. There
can be no assurance, however, that the Company will be able to continue
operations until November 17, 2000 if unanticipated events or circumstances
arise. If Mr. Zachs does not agree to guarantee further drawdowns in excess
of his present commitments or if the Company is unable to find a buyer for
the Company or alternative sources of capital in a timely manner the Company
will be unable to conduct its operations.
The Company's auditors have advised the Company that if this situation is not
resolved, its opinion on the Company's December 31, 2000 financial statements
will raise substantial doubt about the Company's ability to continue as a
going concern.
9
<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. 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.
OVERVIEW
ZipLink is a wholesale connectivity provider in North America for the
Business-to-Business marketplace including Internet service providers,
Internet service providers, or ISPs, competitive local exchange carriers, or
CLECs, Web appliance vendors, pc manufacturers and distributors.
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
September 30, 2000 of $52.0 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 obtain sufficient
capital and to continue 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. If the Company does not obtain sufficient capital and
future revenues fall short of its estimates or if its operating expenses
exceed its expectations, then the Company may never obtain or sustain
profitability.
The financial statements have been prepared assuming the Company will
continue as a going concern. As further discussed in Note 7, MCI WorldCom has
demanded payment of $1.9 million for past services; however, the Company
currently does not have sufficient funds on hand to satisfy this obligation.
Additionally, financing support from Mr. Henry Zachs, a majority shareholder
and Co-Chairman of the Company, is limited as further described in Note 7. As
a result, there is substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments
that may result should the Company be unable to continue as a going concern.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the three months and nine months ending September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 104.5 76.8 102.1 68.8
Selling, general and administrative 45.8 66.1 56.2 56.2
Depreciation and amortization 25.5 29.5 29.3 30.2
----------- ----------- ----------- -----------
Loss from operations (75.8) (72.4) (87.6) (55.1)
Interest and other expense, net (5.0) 8.0 (2.7) (2.9)
----------- ----------- ----------- -----------
Net loss (80.9)% (64.4)% (90.4)% (58.0)%
=========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 143% to $8.3 million for the
three months ended September 30, 2000 from $3.4 million for the three months
ended September 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 $4.1 million for the three months ended
September 30, 2000 compared to $0.3 million for the three months ended
September 30, 1999. The increase was also due to an increase in revenues from
monthly subscriber revenue, primarily attributable to the ZipDial program and
WebTV primary traffic, to $4.2 million for the three months ended September
30, 2000 compared to $3.1 million for the three months ended September 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 $8.6 million for the three months ended September 30, 2000 from
$2.6 million for the three months ended September 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 to
approximately 70,000 ports as of September 30, 2000 from approximately 16,500
ports as of September 30, 1999.
11
<PAGE>
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 $3.8 million for
the three months ended September 30, 2000 from $2.3 million for the three
months ended September 30, 1999. This increase was primarily due to salaries
and other related expenses resulting from an increase in headcount to 98
employees as of September 30, 2000 compared with 72 employees as of September
30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased to $2.1 million
for the three months ended September 30, 2000 from $1.0 million for the three
months ended September 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 nine months ended September
30, 2000, and the addition of goodwill amortization related to the Interhop
acquisition in January 2000.
INTEREST EXPENSE. Interest expense increased to $56,100 for the three months
ended September 30, 2000 from an insignificant balance for the three months
ended September 30, 1999. The increase was primarily due to interest expense
associated with the increase in capital leases during fiscal year 2000.
INTEREST INCOME. Interest income decreased to less than $0.1 million for the
three months ended September 30, 2000 from $0.3 million from the same period in
the prior year due to lower investment income on lower cash balances during the
three months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30,1999
REVENUES. Revenues increased 124% to $20.6 million for the nine months ended
September 30, 2000 from $9.2 million for the nine months ended September 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 $8.0 million for the nine months ended
September 30, 2000 from $0.7 million for the nine months ended September 30,
1999. The increase was also due to an increase in revenues from monthly
subscriber revenues, primarily attributable to the ZipDial program and WebTV
primary traffic, to $12.7 million for the nine months ended September 30, 2000
from $8.5 million for the nine months ended September 30, 1999.
COST OF REVENUES. Cost of revenues increased to $21.1 million for the nine
months ended September 30, 2000 from $6.3 million for the nine months ended
September 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 to approximately 70,000 ports at September
30, 2000 from approximately 16,500 ports as of September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $11.6 million for the nine months ended September 30, 2000
from $5.2 million for the nine months ended September 30, 1999. This increase
was primarily due to salaries and other related expenses from an increase in
headcount to 98 employees as of September 30, 2000 compared with 72 employees as
of September 30, 1999.
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DEPRECIATION AND AMORTIZATION. Depreciation expense increased to $6.1 million
for the nine months ended September 30, 2000 from $2.8 million for the nine
months ended September 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 nine months ended September
30, 2000, and the addition of goodwill amortization related to the Interhop
acquisition in January 2000.
INTEREST EXPENSE. Interest expense increased to $0.9 million for the nine
months ended September 30, 2000 from $0.6 million for the nine months ended
September 30, 1999. The net increase 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 initial public offering ("IPO"), offset by an increase from the
interest expense associated with the increase in capital leases during fiscal
year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) was $(4.7) million and $13.8 million at September 30,
2000 and December 31, 1999, respectively. The Company had cash and cash
equivalents totaling $3.3 million and $17.4 million at September 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 $10.6 million and $2.9 million for the
nine months ended September 30, 2000 and September 30, 1999, respectively. Net
cash used in the nine months ended September 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 nine months ended
September 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.
Net cash used in investing activities was $2.6 million and $1.2 million for
the nine months ended September 30, 2000 and September 30, 1999,
respectively. Principal investments in the nine months ended September 30,
2000 were $1.6 million for purchases of property and equipment and $1.2
million used in the acquisition of Interhop Network Services, Inc. For the
nine months ended September 30, 1999, net cash used included purchases of
$1.2 million of network equipment to continue the expansion of the Company's
network, partially offset by a $0.7 million reduction in certain installation
costs. For the nine months ended September 30, 2000, the Company's capital
expenditures were $11.0 million, including $8.9 million of equipment purchased
under capital leases, 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.
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Net cash (used in) or provided by financing activities was $(0.4) million and
$26.3 million for the nine months ended September 30, 2000 and September
30,1999, respectively. Net cash used in financing activities for the nine
months ended September 30, 2000 was primarily for payments on the Company's
capital lease obligations offset by proceeds from the note payable. Net cash
provided by financing activities for the nine months ended September 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 then line of credit.
Since November 1999, the Company has secured approximately $20.0 million of
capital lease financing from four major network equipment providers, of which
$17 million was used for network equipment purchases from November 1999
through September 30, 2000.
On July 26, 2000, the Company entered into a secured Revolving Loan and
Security Agreement ("Agreement") with a commercial bank for a two year period
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 Company's Co-Chairman 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
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 (See Note 7). 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 in consideration for his
guaranty. As of September 30, 2000, the Company had outstanding borrowings of
$3 million bearing interest at LIBOR at 7.26%. As of November 14, 2000, the
original drawdown of $3.0 million has been paid and additional borrowings
totaling $1.0 million are currently outstanding bearing interest at LIBOR at
6.92%. Interest is payable quarterly commencing December 13, 2000 and
principal payments are due and payable upon the expiration of the Agreement,
July 26, 2002. However, the Company is classifying the outstanding borrowings
as current obligation based on the recent events and matters described in
Note 7.
On October 30, 2000, the Company received a letter from MCI WorldCom
demanding payment for past due undisputed amounts of $1.9 million by
November 10, 2000. The Company and WorldCom negotiated an extension of
the payment date for such amounts until November 30, 2000, provided that
the Company makes payments to MCI WorldCom of $196,000 per week
commencing November 3, 2000.
ZipLink does not have sufficient funds on hand to satisfy the MCI WorldCom
obligation, as well as other day-to-day obligations, without drawing down on
its $10.0 million line of credit which is guaranteed by Mr. Zachs. Mr. Zachs
has agreed to guarantee certain additional borrowings under the line of
credit while the Company seeks an acquirer or additional financing. The
Company believes that the amount Mr. Zachs is willing to guarantee will be
sufficient to continue operations until November 17, 2000. There can be no
assurance, however, that the Company will be able to continue operations
until November 17, 2000 if unanticipated events or circumstances arise. If
Mr. Zachs does not agree to guarantee further drawdowns in excess of his
present commitments or if the Company is unable to find a buyer for the
Company or alternative sources of capital in a timely manner, it will be
unable to conduct its operations.
ZipLink is seeking a potential acquirer to purchase the Company as well as
alternate sources of capital. No assurance can be given that ZipLink will
succeed in attracting a potential acquirer or alternative sources of capital
in a timely manner, 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 year 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.
14
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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 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
None
ITEM 5. OTHER INFORMATION
(a) The Company issued a press release on November 10, 2000
announcing that its Co-Chairman agreed to guarantee certain
additional borrowings under the Company's $10.0 million line of
credit while it seeks an acquirer or additional financing. The
Company believes that such borrowings will be sufficient to allow
it to continue operations until November 17, 2000.
(b) The Company is currently in discussions with several potential
acquirers. There can be no assurance, however, that the Company
will be successful in its efforts to sell the Company or if so,
on what terms and how much of the proceeds from a sale will be
available for distribution to shareholders. In addition, there can
be no assurance that the Company will be able to continue
operations until November 17, 2000 if unanticipated events or
circumstances arise.
(c) On November 13, 2000, CMGI, Inc. issued a press release stating
that it is their intention to divest 1stUp.com. Based on the
information in the press release, the financial impact to ZipLink
of the divestiture is unclear.
(d) Effective September 1, 2000, the Company entered into Amendment
No. 5 of its agreement with WebTV, which at September 30, 2000
represented approximately 27% of the Company's revenue. A copy of
the Amendment No. 5 is attached hereto as Exhibit 10.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1.+ Amendment No. 5 entered into as of September 1, 2000
to ZipLink-WebTV Network Services Agreement made and
entered into on October 23, 1996 between ZipLink, LLC and
WebTV Networks, Inc., as amended by Amendment No. 1 thereto
effective as of May 13, 1997, Amendment No. 2 thereto
effective as of February 1, 1998, Amendment No. 3 thereto
effective as of March 9, 1999 and Amendment No. 4 thereto
effective as of October 1, 1999.
27. Financial data schedule
---------------------------
+ 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:
The Company filed a Report on Form 8-K dated August 1, 2000 under
which the Company announced it had entered into a $10 million line
of credit with Fleet National Bank for working capital purposes.
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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: November 14, 2000
ZIPLINK, INC.
By: /s/ Albert A. Gabrielli
--------------------------
Albert A. Gabrielli
Chief Financial Officer
(Principal Financial and Accounting Officer and
Authorized Signatory)
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EXHIBIT INDEX
EXHIBIT
10.1.+ Amendment No. 5 entered into as of September 1, 2000
to ZipLink-WebTV Network Services Agreement made and
entered into on October 23, 1996 between ZipLink, LLC and
WebTV Networks, Inc., as amended by Amendment No. 1
thereto effective as of May 13, 1997, Amendment No. 2
thereto effective as of February 1, 1998, Amendment No. 3
thereto effective as of March 9, 1999 and Amendment No. 4
thereto effective as of October 1, 1999.
27. Financial data schedule
---------------------------
+ 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
