UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-17973
I-LINK INCORPORATED
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13751 S. Wadsworth Park Drive, Suite 200, Draper, Utah 84020
(Address of principal executive offices)
(801) 576-5000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
______________
As of November 7, 1997, the small business issuer had outstanding 14,370,916
shares of $0.007 par value common stock.
Traditional Small Business Disclosure Format (Check One): Yes No X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30,
ASSETS 1997
-------------
<S> <C>
Current assets:
Cash and cash equivalents $ 558,011
Accounts receivable, less allowance of $1,489,192 4,259,206
Certificate of deposit - restricted 75,000
Inventory, less allowance of $260,033 974,065
Other current assets 419,333
----------
Total current assets 6,285,615
----------
Property and equipment:
Property and equipment 8,020,595
Less accumulated depreciation ( 3,496,528)
----------
Net property and equipment 4,524,067
----------
Other assets:
Intangible assets, net of amortization of $1,150,617 14,394,810
Certificate of deposit - restricted 1,866,878
Other assets 310,796
----------
Total other assets 16,572,484
----------
Total assets $ 27,382,166
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,466,476
Notes payable - related party 88,000
Notes payable - other 236,444
Current portion of long-term debt - related party 1,043,554
Current portion of long-term debt - other 590,991
Current obligations under capital lease 172,764
----------
Total current liabilities 10,598,229
Convertible promissory notes - to be converted
into equity securities 717,000
Long-term debt, net of debt issuance costs of $4,001,400 2,925,131
Long-term debt, related party 750,000
Obligations under capital leases 113,318
Minority interest in consolidated subsidiaries 283,177
----------
Total liabilities 15,386,855
----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10 par value, authorized 10,000,000 shares,
issued and outstanding 225,518 shares 2,255,180
Common stock, $.007 par value, authorized 75,000,000 shares,
issued and outstanding 12,180,165 shares 85,261
Additional paid-in capital 51,776,753
Deferred compensation from stock options ( 4,906,572)
Common stock to be issued 2,414,583
Preferred stock to be issued 6,250,000
Accumulated deficit (45,879,894)
----------
Total stockholders' equity 11,995,311
----------
Total liabilities and stockholders' equity $ 27,382,166
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Telecommunications services $ 2,705,135 $ - $ 7,119,960 $ -
Marketing services 902,736 - 1,623,226 -
Health care services 620,566 506,099 1,800,121 1,680,769
Technology licensing and development 139,700 - 139,700 -
Other - 64,297 - 136,661
---------- ---------- ---------- ----------
Net operating revenue 4,368,137 570,396 10,683,007 1,817,430
---------- ---------- ---------- ----------
Operating costs and expenses:
Telecommunications network expense 3,500,867 475,347 10,566,657 797,882
Marketing services costs 1,082,543 - 1,723,282 -
Selling, general and administrative 2,547,123 1,096,852 7,573,160 3,127,137
Provision for doubtful accounts 510,746 66,668 1,014,244 157,531
Depreciation and amortization 981,762 378,315 1,801,699 903,506
Provision for asset valuation - - 213,944 -
Acquired in-process research and development 4,235,830 9,800,000 4,235,830 14,577,943
Research and development 282,319 - 627,654 -
---------- ---------- ---------- ----------
Total operating costs and expenses 13,141,190 11,817,182 27,756,470 19,563,999
---------- ---------- ---------- ----------
Operating loss ( 8,773,053) (11,246,786) (17,073,463) (17,746,569)
---------- ---------- ---------- ----------
Other income (expense):
Interest expense ( 1,292,170) ( 585,850) ( 1,912,645) ( 1,653,616)
Interest and other income 44,495 33,039 186,609 45,801
---------- ---------- ---------- ----------
Total other expense ( 1,247,675) ( 552,811) ( 1,726,036) ( 1,607,815)
---------- ---------- ---------- ----------
Loss before minority interest in net loss
of consolidated subsidiaries (10,020,728) (11,799,597) (18,799,499) (19,354,384)
Minority interest in net loss of
consolidated subsidiaries 16,020 2,281 45,151 2,344
---------- ---------- ---------- ----------
Net loss $(10,004,708) $(11,797,316) $(18,754,348) $(19,352,040)
========== ========== ========== ==========
Loss per common share after preferred dividends $( 0.88) $( 2.31) $( 1.79) $( 5.16)
========== ========== ========== ==========
Weighted average common shares outstanding 11,684,775 9,051,408 10,989,906 5,519,449
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements
<PAGE>
<TABLE>
<CAPTION>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,754,348) $(19,352,040)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,801,699 903,506
Provision for doubtful accounts 1,014,244 157,531
Imputed interest on convertible notes 320,000 1,435,000
Acquired in-process research and development 4,235,830 14,577,943
Provision for asset valuation 213,944 -
Amortization of deferred stock option compensation 435,583 -
Amortization of debt issuance costs 1,299,600 -
Gain on the sale of property and equipment - ( 3,251)
Minority interest in net loss of consolidated subsidiaries ( 45,151) ( 2,344)
Change in assets and liabilities net of effects from purchase
of FTI and MiBridge:
Accounts receivable ( 2,814,495) ( 15,674)
Inventory ( 472,370) ( 678)
Other assets ( 27,470) ( 823,605)
Other current assets ( 339,754) ( 26,192)
Accounts payable and accrued expenses 5,524,285 134,408
---------- ----------
Net cash used by operating activities ( 7,608,403) ( 3,015,396)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ( 1,176,428) ( 201,768)
Proceeds from the sale of property and equipment - 3,251
Cash received from purchase of MiBridge 79,574 -
Cash received from purchase of FTI 435,312 -
---------- ----------
Net cash used by investing activities ( 661,542) ( 198,517)
---------- ----------
Cash flows from financing activities:
Repayment of note payable - related party - ( 693,333)
Proceeds from long-term debt - other 5,000,000 -
Repayment of notes payable - other ( 117,404) -
Proceeds from note payable - other - 557,425
Repayment of long-term debt ( 173,694) ( 61,983)
Repayment of long-term debt - related party ( 294,128) -
Payment of capital lease obligations ( 137,670) ( 346,958)
Exercise of stock options 50,625 -
Issuance of common stock - 1,329
Issuance of preferred stock - 2,400,000
Additional paid in capital from issuance of stock - 10,291,196
Minority interest distributions - ( 36,865)
Increase in restricted cash - ( 1,682,211)
Release of certificate of deposit as collateral - 60,000
---------- ----------
Net cash provided by financing activities 4,327,729 10,488,600
---------- ----------
Increase (decrease) in cash and cash equivalents ( 3,942,216) 7,274,687
Cash and cash equivalents at beginning of period 4,500,227 79,316
---------- ----------
Cash and cash equivalents at end of period $ 558,011 $ 7,354,003
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 1 - Financial Statements
Organization. The consolidated financial statements include the accounts of
Medcross, Inc. and its subsidiaries (the "Company"). Effective October 7,
1997, the Company's shareholders approved the change of the Company's name to
"I-Link Incorporated". In addition, the name of one of its wholly owned
subsidiaries, Family Telecommunications Incorporated, was changed to "I-Link
Communications, Inc.". All significant intercompany accounts and transactions
have been eliminated in consolidation. The interim financial data are
unaudited; however, in the opinion of the management of the Company, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of (a) the results of operations for the
three-month and nine-month periods ended September 30, 1997 and September 30,
1996, (b) the financial position at September 30, 1997, and (c) cash flows for
the nine-month periods ended September 30, 1997 and 1996. The financial
statements should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 and its quarterly reports on
Form 10-QSB for the three months ended March 31, 1997 and the six months ended
June 30, 1997.
The results of operations for the three-month and nine-month periods ended
September 30, 1997 are not necessarily indicative of those to be expected for
the entire year.
Reclassification. Certain balances in the September 30, 1996 financial
statements as amended have been reclassified to conform to the current period
presentation. These changes had no effect on previously reported net loss,
total assets, liabilities or stockholders' equity.
Marketing services revenue and costs. During the second quarter of 1997 the
Company launched a multi-level marketing (MLM) channel to market its
telecommunication services. Marketing services revenues from the MLM channel
include revenues recognized from independent representatives ("IRs") for
training, promotional and presentation materials. Marketing services revenues
are presented net of estimated returns which represents management's best
estimate of costs associated with providing refunds on MLM kit sales.
Marketing services costs include commissions and the costs of providing
training, promotional and presentation materials. Commissions are paid to IRs
based upon the acquisition and training of new IRs. Commissions are also paid
based upon the selling of long-distance usage and are included in
telecommunications network expense.
Technology licensing and development revenues. The Company, through its wholly
owned subsidiary, MiBridge, Inc. develops and licenses communications software
that supports multimedia communications (voice, fax and audio) over the public
switched network, local area networks and the Internet. Revenues are generally
recognized as products are shipped or services are performed. Revenues on
long-term development projects are recognized under the percentage of
completion method of accounting and are based upon the level of effort expended
on the project, compared to total billings allowed by the contract.
Intangibles. The Company regularly evaluates whether events or circumstances
have occurred that indicate the intangible assets may not be recoverable. When
factors indicate the asset may not be recoverable, the Company uses an estimate
of the related undiscounted future cash flows compared to the carrying value of
intangibles to determine if an impairment exists. Adjustments are made if the
sum of the expected future net cash flows is less than carrying value. No such
adjustments were necessary in the periods being reported on.
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 2 - Supplemental Cash Flow Information
In February 1996, the Company acquired all of the issued and outstanding stock
of I-Link Worldwide, Inc. (now named "I-Link Systems, Inc.") in exchange for the
issuance of an aggregate of 4,000,000 shares of common stock of the Company, of
which 1,000,000 shares were held in escrow as of December 31, 1996. In June
1997, the Company became obligated to issue the remaining 1,000,000 shares of
common stock (fair value of $8,875,000) from escrow.
In April, June, July and August of 1996, holders of certain promissory notes
issued by the Company converted $10,000, $180,542, $69,612 and $25,000
respectively, into 140,000, 64,372, 24,750 and 350,000, shares of Common Stock,
respectively.
Through September 1996, the Company financed approximately $500,000 of
equipment purchases through capital leases.
In January 1997, the Company agreed to issue 400,000 shares of common stock to
acquire all of the issued and outstanding stock of Family Telecommunications
Incorporated (now renamed "I-Link Communications, Inc.") effective January 1,
1997.
In April 1997, the Company issued warrants to purchase 175,000 shares of common
stock in connection with an $821,000 litigation settlement payable.
In July 1997 the Company released from escrow 1,000,000 shares of Common Stock
related to the acquisition of I-Link Worldwide Inc. The value of the common
stock, $8,875,000 (based on the closing market price of the common stock on June
30, 1997), has been recorded in the financial statements as an intangible asset
representing excess cost over fair value of net assets acquired and is being
amortized over five years.
In June and August 1997, the Company issued warrants to purchase a total of
800,000 shares of common stock, in connection with loans totaling $5,000,000.
The value of the warrants was recorded as debt issuance costs.
In September of 1997, the Company acquired MiBridge, Inc. in exchange for a
note payable of $2,000,000 and $6,250,000 in convertible preferred stock.
Note 3 - Acquisition of Subsidiaries
Family Telecommunications Incorporated. On January 13, 1997, pursuant to the
terms of a Share Exchange Agreement for the acquisition of Family
Telecommunications Incorporated by Medcross, Inc. effective as of January 1,
1997 (the "Exchange Agreement"), the Company acquired the outstanding stock of
Family Telecommunications Incorporated, a Utah corporation ("FTI"), from the
stockholders of FTI, namely Robert W. Edwards, Jr. and Jerald L. Nelson. The
consideration for the transaction consists of an aggregate of 400,000 shares of
the Company's common stock to be issued by the Company upon approval by the
Company's shareholders of an amendment to the Articles of Incorporation
authorizing an increase in the number of shares of common stock from 20 million
to at least 50 million. The purchase price was determined based upon the
negotiated value of the assets and operations of FTI. The acquisition has been
accounted for using the purchase method of accounting in the quarter ended March
31, 1997. FTI is an FCC licensed long-distance carrier and provider of
telecommunications services. FTI has been renamed "I-Link Communications, Inc."
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 3 - Acquisition of Subsidiaries, continued
John W. Edwards, President, a Director and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the principal shareholder of FTI, are
brothers. There was no affiliation or relationship between the Company, its
affiliates, officers or directors or associates of such persons and FTI or any
if it's officers, directors or stockholders prior to the execution of the
Exchange Agreement except as set forth herein.
The acquisition cost of $2,415,000 (representing the fair value of the 400,000
shares to be issued) was allocated to the tangible net liabilities of $135,000
(based on their fair market value) with the excess acquisition cost over fair
value of assets acquired of $2,550,000 allocated to intangible assets. The
intangible assets are being amortized over periods ranging between three and
ten years. The fair values of assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
Current assets (including cash of $435,312) $ 1,740,000
Long-term assets 3,716,000
Current liabilities ( 1,330,000)
Long-term liabilities ( 1,711,000)
----------
Net purchase price $ 2,415,000
==========
As part of the common stock acquisition of FTI, the Company assumed current
and long-term obligations in the amount of $1,991,000 as of December 31, 1996
to a long-distance provider for FTI's line costs. The note was increased
approximately $700,000 for long-distance usage for January 1997. The note bears
interest at 7% per annum. The note calls for payments of $50,000 per month
beginning May 5, 1997 increasing to $75,000 on April 5, 1998 and $150,000 on
October 5, 1998 with the balance of $1,100,000 due on April 5, 1999. Remaining
principal payments under this specific note as of September 30, 1997 are as
follows:
September 30, 1998 $ 591,000
September 30, 1999 1,910,000
----------
Total $ 2,501,000
==========
MiBridge, Inc. In the third quarter of 1997 the Company completed its
acquisition of 100 percent of the issued and outstanding stock of MiBridge,
Inc. ("MiBridge"). The consideration ($8,250,000) for the transaction
consisted of: (1) an aggregate of 1,000 shares of Series D Preferred stock,
which preferred stock is convertible into such a number of common shares as
shall equal the sum of $6,250,000 divided by the lower of $9.25 or the average
closing bid price of the Company's common stock for the five consecutive
trading days immediately preceding the conversion date and (2) a note payable
in the amount of $2,000,000 payable in cash in quarterly installments over two
years. The acquisition was accounted for using the purchase method of
accounting. MiBridge is the owner of patent-pending audio-conferencing
technology and is a leader in creating speech-encoding and compression
algorithms designed to produce superior audio quality and lower delay over
low-band networks.
The acquisition cost of $8,250,000 (representing the fair value of the common
stock into which the 1,000 shares of Series D Preferred stock can be converted
and the $2,000,000 note payable) was allocated to tangible net assets of
$552,760 (based on their estimated fair value at final closing) with the
balance of $7,697,240 allocated to acquired technology ($1,450,000),
acquired in-process research and development ($4,235,830), employment contracts
for the assembled workforce ($606,000) and excess acquisition cost over fair
value of net assets acquired ($1,405,410). These assets are being amortized
over three years, with the
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 3 - Acquisition of Subsidiaries, continued
exception of the excess acquisition cost over fair value of net assets acquired
which is being amortized over five years. Acquired in-process research and
development was expensed upon acquisition, as the research and development had
not reached the requirements for technological feasibility at the closing date.
The purchase price in conjunction with this acquisition was allocated as
follows:
Current assets (including cash of $79,574) $ 534,074
Current liabilities ( 54,473)
Tangible long-term assets 73,159
Intangible long-term assets 3,461,410
In-process research and development 4,235,830
----------
Net purchase price $ 8,250,000
==========
Pro forma financial information. As discussed above, the Company acquired FTI
and MiBridge during the nine months ended September 30, 1997. The acquisitions
were accounted for using the purchase method of accounting. The consolidated
financial statements as presented include the operating results of FTI and
MiBridge from the dates of acquisition. The following unaudited pro forma
information presents a summary of consolidated results of operations of the
Company, FTI and MiBridge as if the acquisitions had occurred at March 20, 1996
(date of inception of FTI) and March 18, 1996 (date of inception of MiBridge),
with pro forma adjustments to give effect to amortization of intangible assets
and expensing of acquired in process research and development costs.
<TABLE>
<CAPTION>
Three months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue $ 4,402,000 $ 2,207,000
Net loss $( 6,126,000) $(17,021,000)
Loss per share $( 0.55) $( 1.88)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue $ 11,214,000 $ 4,166,000
Net loss $(15,314,000) $(25,296,000)
Loss per share $( 1.47) $( 4.59)
</TABLE>
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 4 - Long-Term Debt - Winter Harbor Financing
On June 6, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with Winter Harbor , LLC ("Winter
Harbor") pursuant to which Winter Harbor agreed to loan to the Company the
principal sum of $2,000,000 ("the Loan") for capital expenditures and working
capital purposes. As further consideration for Winter Harbor's commitment to
make the Loan, the Company granted to Winter Harbor a warrant ("Loan Warrant")
to purchase up to five hundred thousand (500,000) shares of common stock of the
Company (the "Common Stock") at a purchase price of $4.97 per share, subject to
adjustment, pursuant to the terms of a Warrant Agreement between the parties.
The Loan Warrant expires on March 11, 2002, and contains demand and piggyback
registration rights and customary anti-dilution terms. The maturity date of
the note is October 15, 1998.
In August 1997, the Company amended the existing Note allowing for additional
borrowings of up to $3,000,000, for an aggregate borrowing of $5,000,000.
The incremental borrowings under this amendment have a maturity date of
February 15, 1998. The Company issued 300,000 warrants at the then current
market price ($6.38 per share) in connection with the loan. All other
provisions of this extension are the same as the Note discussed above.
The fair value of the warrants issued in connection with these loans have been
reflected as debt issuance costs of $5,301,000, which amount is being
amortized over the life of the loans. Subsequent to September 30, 1997, these
loans were exchanged for Series M Preferred Stock (see note 10), and
accordingly, the unamortized debt issuance costs of $4,001,400 will be
expensed in the fourth quarter. The loan balance and unamortized debt
issuance costs as of September 30, 1997, are reflected in the financial
statements as follows:
Long-term portion of note payable to
a long-distance provider $ 1,910,638
Long-term debt - other 15,893
Long-term debt - Winter Harbor 5,000,000
Debt issuance costs, net of amortization ( 4,001,400)
----------
Long-term debt, net of debt issuance costs $ 2,925,131
==========
Note 5 - Imputed Interest on Convertible Notes
Simultaneous with the closing of the Company's offering of Class C Preferred
Stock in September 1996, the Company issued an aggregate of $717,000 in
principal amount of Convertible Promissory Notes. The Company recorded
interest expense (non-cash) of $320,000 related to these promissory notes in
the three months ended March 31, 1997. The interest expense is calculated as
the difference between the conversion price per common share per the promissory
notes as compared to the market price for the common stock on the date the notes
were issued. The interest expense was recognized over the period between the
date the promissory notes were issued and the date the promissory notes could
first be converted.
In October 1997, the Convertible Promissory Notes were converted into 11,950
shares of Class C Preferred Stock. Accordingly, the debt has been removed
from current liabilities and identified as "Convertible Promissory Notes - to
be Converted into Equity Securities".
Note 6 - Income Taxes
The Company recognized no income tax benefit for the losses generated in 1997
and 1996 because of the uncertainty of the realization of the deferred tax
asset.
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 7 - Loss Per Common Share After Preferred Dividends
Loss per common share is calculated as the net loss for the respective period
plus cumulative preferred stock dividends not paid in the current period of
$288,815 and $1,154 for the three months ended September 30, 1997 and 1996
respectively, and $866,738 and $54,476 for the nine months ended September 30,
1997 and 1996, respectively, divided by the weighted average number of common
shares outstanding. Options, warrants and convertible preferred stock are
excluded from the calculation when their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing EPS and makes
them comparable to international EPS standards. This statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
Note 8 - Options and Warrants
During the first nine months of 1997, the Company granted options to purchase
4,265,500 shares of common stock to employees and consultants of the Company
at a price (ranging from $4.875 to $9.938) equal to the common stock price on
the day of grant. During the nine months ended September 30, 1997, 45,000
options were exercised to purchase common stock.
Included in the above grants, were 1,000,000 options granted to non-employees.
The fair market value of the options was recorded as deferred compensation for
stock options in the amount of $5,342,155. Of this amount, $1,773,000 vested
upon the completion of the equity investment by Winter Harbor which occurred
in October 1997, and accordingly, this amount will be expensed in the fourth
quarter of 1997. The balance of the deferred compensation is being amortized
over the vesting period of the options (primarily three years).
Note 9 - Changes in Stockholders' Equity
During the nine months ended September 30, 1997 changes in stockholders' equity
were as follows:
Preferred stock decreased $219,820 due to the conversion of 21,982
shares preferred stock, $10 par value into 527,568 shares of common
stock.
Common stock increased due to the following:
* $315 related to the exercise of options to purchase 45,000 shares of
common stock (see note 8).
* $7,000 related to the issuance of 1,000,000 shares released from
escrow during the second quarter.
* $3,693 related to the conversion of 21,982 shares of preferred stock
into 527,568 shares of common stock.
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 9 - Changes in Stockholders' Equity, continued
Additional paid-in capital increased due to the following:
* $303,251 related to amortization of interest expense associated with
issuance of convertible notes at a discount in 1996.
* $821,000 which was associated with issuance of warrants in connection
with a litigation settlement payable.
* $50,310 related to the exercise of options to purchase 45,000 shares
of common stock (see note 8).
* $5,301,000 related to issuance of 800,000 warrants in connection with
a debt financing arrangement (see Note 4).
* $5,342,155 related to the issuance of options to non-employees (see
note 8).
* $8,868,000 from the issuance of 1,000,000 shares released from escrow
in the second quarter.
* $216,127 related to the conversion of 21,982 preferred shares into
common shares.
Common stock to be issued increased $2,414,583 in relation to the
acquisition of FTI. The amount has been recorded as common stock to be
issued as the Company did not have authorized shares to issue to FTI
until the shareholders' meeting in October 1997 (see notes 3 and 10).
Preferred stock to be issued increased $6,250,000 in relation to the
acquisition of MiBridge. The amount has been recorded as preferred
stock to be issued as the Company did not have authorized shares to
issue to the prior shareholders of MiBridge until the shareholders'
meeting in October 1997 (see notes 3 and 10).
Deferred compensation increased by $4,906,572 (net of $435,583
amortized during the nine-month period ended September 30, 1997)
related to the issuance of stock options to non-employees (see note 8).
Accumulated deficit increased by $18,754,348 which is the net loss for
the first nine months of 1997.
Note 10 - Subsequent Events
Shareholders' meeting. On October 7, 1997, the Shareholders approved an
increase from 500,000 to 10,000,000 in the number of authorized shares of
preferred stock and an increase from 20,000,000 to 75,000,000 in the number of
authorized shares of commons stock. In addition, the shareholders approved
the 1997 Recruitment Stock Option Plan.
Winter Harbor equity investment. In October 1997, Winter Harbor agreed to
acquire 4,400 shares of Series M Preferred Stock for $12.1 million. The
equity investment was completed by Winter Harbor transferring approximately
$7.0 million to the Company and electing to exchange the $5.0 million of debt
(plus approximately $100,000 of accrued interest) for the preferred shares.
The Series M Preferred Stock is convertible into 4,400,000 common shares, and
entitle Winter Harbor to representation on the Company's Board of Directors.
In connection with the equity investment, Winter Harbor was issued warrants to
purchase a total of 10 million shares of the Company's common stock at an
aggregate purchase price of $40,325,000. In the fourth quarter of 1997, the
Company will recognize a (non-cash) preferred stock dividend of approximately
$89,000,000. Calculation of the dividend is based upon the common stock price
on the date the equity investment was finalized. The amount is calculated as
the difference between the exercise price per common stock per the agreement
and the market price of the common stock on the date of closing, plus the value
of the warrants issuable in connection with the investment.
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
Note 10 - Subsequent Events, continued
Legal proceeding. On November 14, 1997, the Company filed a Notice of Claim
commencing an arbitration proceeding against MCI Telecommunications, Inc.
("MCI"). The Company purchases from MCI long-distance telecommunications
capacity on lines operated by MCI in order to provide long-distance
telecommunications services to the Company's customers who reside in geographic
areas not yet serviced by the Company's dedicated telecommunications network
("off-net" traffic). Currently, approximately half the Company's long-distance
telecommunications traffic is carried off-net. The arbitration proceeding was
commenced by the Company pursuant to the provisions of the Carrier Agreement
between the Company and MCI, and pursuant to the arbitration rules set forth
in MCI's FCC Tariff No. 1. In its Notice of Claim, the Company seeks (1) to
have the arbitrator declare that MCI has materially breached its Carrier
Agreement with the Company, (2) to have the arbitrator declare that due to MCI's
material breach the Carrier Agreement is terminated without the Company being
held liable for early termination payment provided for under the Carrier
Agreement, and (3) to recover damages from MCI in an as yet undetermined amount.
The Company has made arrangements with an alternative national provider of long-
distance telecommunications capacity to augment or replace some or all of the
capacity provided by MCI, as determined by the Company. At the present time,
Management cannot determine the impact, if any, of this arbitration proceeding
on the Company's financial statements.
<PAGE>
Item 2- MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto
appearing elsewhere herein and in conjunction with the Management's Discussion
and Analysis set forth in the Company's Form 10-KSB/A#1 for the year ended
December 31, 1996 and Form 10-QSB/A#1 for the quarters ended March 31 and June
30, 1997.
Forward Looking Information
This report contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in this document, the words "anticipate", "believe", "estimate",
"expect", and "intended" and similar expressions, as they relate to the
Company or its management, are intended to identify forward-looking statements.
Such statements reflect the current view of the Company respecting future events
and are subject to certain risks, uncertainties noted. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated, expected, or intended.
Operations
Prior to 1997 the Company's primary source of revenue was related to health
care services. The primary expenses of the Company prior to 1997 were related
to delivery of health care services and the development of a proprietary data
communications network. With the Company's acquisition of FTI (effective
January 1, 1997), a regional long-distance telecommunications carrier with
nation-wide delivery of telecommunications services over traditional switched
telecommunications networks, the Company launched its marketing efforts and
began to obtain customers for these long distance telecommunications services.
The Company expanded its existing customer base through these marketing
activities and plans further expansion through the strategic acquisition of
existing customer bases. The Company continues to believe that the multi-level
marketing channel is an excellent vehicle through which to acquire new
customers. There are numerous revenue sources derived from the sales through
a multi-level marketing channel. These revenues include the sale of long
distance service and sales marketing materials. The multi-level marketing
channel began selling services and materials in June of 1997. Revenues from
this channel increased during the third quarter and are expected to continue
rapid growth in the future. In addition, it should be noted that the increase
in long distance revenue in the third quarter as compared to the second quarter
of 1997 was primarily due to the multi-level marketing channel.
In September 1997 the Company finalized its acquisition of MiBridge, Inc., a
leading provider of telephone and conferencing software and hardware. This
acquisition facilitates the Company's ability to further expand its product
offerings as well as open a new source of revenue from technology licensing and
development. In addition to this new source of revenue, MiBridge brings to the
Company patent-pending compression, encoding and audio conferencing technologies
that improve and expand the Company's dedicated communications network
capabilities, and accelerate the Company's ability to develop and deliver
additional enhanced services to users across its dedicated communications
network. The Company provides communications capabilities to residential,
business and wholesale customers via both a proprietary communications network
established by the Company that operates in the same manner as the Internet
(the "I-Link Intranet") and traditional switched telecommunications networks,
resulting both in reduced costs of delivery and the capability of providing the
type of enhanced services traditionally available only over a computer network.
The Company has developed patent-pending technology and has deployed a national
network infrastructure of communications equipment and dedicated lines that
enable it to route traditional telecommunications services over the I-Link
Intranet in a manner that is transparent to the user, utilizing the user's
existing telecommunications equipment. MiBridge's compression and encoding
technology forms a portion of the backbone of the I-Link Intranet.
<PAGE>
Operations, continued
The Company continues to build out the I-Link Intranet to reduce long-distance
costs. When FTI was purchased effective January 1, 1997, the existing intranet
covered two states. The I-Link Intranet currently covers nine states with
plans to continue that expansion. Currently, approximately half of the
Company's telecommunications traffic is carried over the I-Link Intranet, with
the balance delivered by volume purchasing of capacity on other switched
telecommunications networks. The Company expects to continue to increase the
percentage of its communications traffic over the I-Link Intranet.
In October 1997 the Company introduced its new V-Link[TM] Communications Center
and NetLink/1+[TM] products. The V-Link[TM] Communications Center is a
revolutionary communications tool for the home and small-business that combines
a telephone with built-in keypad and visual display screen. As a platform for
the V-Link[TM] suite of integrated communications services, the V-Link[TM]
Communications Center telephone allows the residential user to access from a
telephone a powerful yet easy-to-use set of communications tools including
e-mail, nationwide directory service, group messaging, direct text paging,
stock quotes, home banking, news, weather and other practical services.
NetLink/1+[TM] is an automatic call routing device that attaches between any
phone or fax machine and the wall jack, and works simultaneously for all
extensions. NetLink/1+[TM] allows the user's calls to be automatically routed
to the I-Link telephone network, irrespective of who may be designated as the
user's long-distance carrier with the local exchange carrier. Not only does
this make I-Link service immediately available to new subscribers, it also
stops the illegal switching of customer's long-distance service to another
carrier without his or her consent. Revenues from these products will begin
in the fourth quarter of this year.
Financial Condition
Working Capital
The working capital position of the Company was a deficit of $4,312,614 at
September 30, 1997 and $1,579,501 at December 31, 1996. Cash on hand at
September 30, 1997 was $558,011 as compared to $4,500,227 as of December 31,
1996. The decrease in cash on hand was primarily attributable to cash used by
operating activities during the nine months ended September 30, 1997 and
purchase of equipment. Cash used by operating activities was $7,608,403 in the
first nine months of 1997 as compared to cash used by operating activities of
$3,015,396 for the same period in 1996. Cash expenditures for purchase of
equipment for the nine months ended September 30, 1997 were $1,176,428 compared
to $201,768 for the same period of 1996.
Investing Activities
Effective January 1,1997, the Company entered into an agreement to acquire all
of the outstanding shares of Family Telecommunications Incorporated ("FTI") in
exchange for 400,000 shares of the Company's common stock. FTI is an FCC
licensed long-distance carrier and provider of telecommunication services and as
such provides the Company with an existing customer base and related revenues.
In September 1997, the Company finalized its acquisition of MiBridge, Inc. in
which the Company acquired all of the issued and outstanding stock of MiBridge.
The Company will pay the stockholders of MiBridge (the "Selling Stockholders")
consideration consisting of (i.) an aggregate $2,000,000 in cash, payable in
quarterly installments over two years, and (ii.) an aggregate 1,000 shares of
the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock is be convertible at the option of the
selling shareholder at any time during the nine months following the closing of
the Acquisition, into such number of shares of Common Stock as shall equal the
sum of $6,250,000 divided by the lower of $9.25 or the average closing bid
price of the Company's common stock for the five consecutive trading days
immediately preceding the conversion date. On the nine-month anniversary of
the closing of the Acquisition, any unconverted Series D Preferred
<PAGE>
Financial Condition, continued
Stock shall automatically convert to Common Stock. In either case, the Series
D Preferred Stock shall be converted at the lower of the Conversion Price or
the average closing bid price for the five trading days immediately preceding
the date the Company receives notice of conversion or the automatic conversion
date, as the case may be.
Investing activities during the first nine months of 1997 resulted in a net
cash outflow of $661,542 including cash acquired in the amount of $514,886 from
the acquisition of FTI and MiBridge. The Company expended $1,176,428 for
acquisition of property and equipment during the first nine months of 1997.
Financing Activities
During the nine months ended September 1997, the Company had proceeds from
borrowings of $5,000,000 from Winter Harbor, LLC ("Winter Harbor"). In October
1997, Winter Harbor completed a $12.1 million equity investment in the Company
by transferring approximately $7,000,000 of cash to the Company and electing
to apply approximately $5,100,000 (including accrued interest of approximately
$100,000) of debt financing previously provided to the Company in exchange for
Series M Preferred Shares in the Company which are convertible into common
shares, and warrants to acquire additional common shares. The Series M
Preferred Shares acquired by Winter Harbor are convertible into 4,400,000
common shares, and entitle Winter Harbor to representation on the Company's
board of directors. In connection with the equity investment, Winter Harbor
was issued warrants to purchase an aggregate of 10 million shares of the
Company's common stock at an aggregate purchase price of $40,325,000.
In October 1997 convertible notes of $717,000 were converted into Class C
Preferred Stock and thus will not require future resources of the Company to
satisfy the obligation.
During the nine months ended September 30, 1997, the Company received $50,625
in proceeds from the exercise of common stock options.
In the first nine months of 1997, the Company reduced its notes payable,
long-term debt and capital lease obligations by $722,896. These reductions
include a payment in the amount of $250,000 relative to debt incurred as part
of the MiBridge acquisition purchase price.
The Company may require additional financing from sources of equity, third-
party debt or similar financing, in order to successfully operate the business
as planned. The ability of the Company to meet the demands for growth and
expansion will be dependent upon the success the Company achieves in meeting
its forecasted sales objectives and anticipated expenses. The availability of
capital remains a significant element to the Company's success. There can be
no assurance that financing from such additional financing sources as described
above will be available to the Company should the need for additional funding
arise.
Results of Operations
Comparison of Third Quarter 1997 to Third Quarter 1996
Telecommunications Service Revenue
Telecommunications service revenue in the third quarter of 1997 was $2,705,135.
There was no such revenue in the third quarter of 1996 as this service began
with the acquisition of FTI in January 1997.
<PAGE>
Results of Operations, continued
Health Care Service Revenue
Health care service revenue was $620,566 in the third quarter of 1997 as
compared to $506,099 in the same quarter of 1996. In the third quarter of
1997, the source of health care service revenue is the retail segment of
diagnostic imaging as compared to retail services and services rendered to
hospitals through contracts in 1996. The transition from contracts with
hospitals has resulted in increased revenue in the quarter ended September 30,
1997 as compared to the same quarter of 1996.
Marketing Services Revenue
Marketing services revenue, which includes revenues recognized from independent
representatives for training, promotional and presentation materials, and
ongoing administrative support was $902,736 in the third quarter of 1997 as
compared to $0 in the same quarter of 1996. This channel of distribution of
telecommunication services was begun late in the second quarter of 1997 and
thus had no comparable revenue in 1996.
Technology Licensing and Development Revenue
Technology licensing and development revenue was $139,700 in the third quarter
of 1997. This revenue source is a direct result of the acquisition of
MiBridge, Inc. in September 1997. Accordingly there was no such revenue in
the same period of 1996.
Other Revenue
Other revenue decreased $64,297 in the third quarter of 1997 to $0 as compared
to $64,297 in the same quarter of 1996. The decrease is primarily due to
internet service provider revenue in 1996 that did not recur in 1997.
Telecommunications Network Expenses
Telecommunications expenses increased $3,025,520 in the third quarter of 1997
to $3,500,867 as compared to $475,347 for the same quarter of 1996. These
expenses include the costs related to the continuing development and
deployment of the Company's communication network and expenses related to the
telecommunication service revenue that began in 1997 with the acquisition of
FTI.
Marketing Services Expenses
Marketing service costs were $1,082,543 in the third quarter of 1997 as
compared to $0 for the same quarter of 1996. The expenses directly relate to
the Company's marketing service revenue that began late in the second quarter
of 1997. Marketing service expenses include commissions and the costs of
providing training, promotional and presentation materials and ongoing
administrative support.
Selling, General and Administrative
Selling, general and administrative expense increased $1,450,271 to $2,547,123
in the third quarter of 1997 as compared to $1,096,852 in the third quarter of
1996. The increase was primarily due to increased administrative expense
associated with the launch of the multi-level marketing channel and general
increase in overhead and personnel expenses associated with growing the
Company's telecommunication business.
<PAGE>
Results of Operations, continued
Provision for Doubtful Accounts
Provision for doubtful accounts increased $444,078 to $510,746 in the third
quarter of 1997 as compared to $66,668 in the same quarter of 1996. This
increase is primarily related to the Company's growth in telecommunication
service revenue.
Depreciation and Amortization
Depreciation and amortization increased $603,447 to $981,762 in the third
quarter of 1997 as compared to $378,315 in the third quarter of 1996. The
increase is primarily due to increased amortization of intangible assets
acquired in the acquisition of FTI and MiBridge in 1997 and the issuance of
the final 1,000,000 shares of common stock in connection with the acquisition
of I-Link Worldwide Inc. in 1996. Depreciation expense also increased due to
the acquisition of telecommunication equipment in late 1996 and throughout 1997.
Acquired In-Process Research and Development
Acquired in-process research and development of $4,235,830 in the third quarter
of 1997 related to the acquisition of MiBridge, Inc. in September 1997.
Acquired in-process research and development of $9,800,000 in the third quarter
of 1996 related to the acquisition of I-Link Worldwide in 1996. These were
expensed as technological feasibility of the in-process technology had not yet
been established and the technology had no alternative future use. These
expenses related to specific acquisitions of other companies and as such are
not of a recurring nature other than as may occur if the Company were to
acquire other entities in the future.
Research and Development
Research and development was $282,319 in the third quarter of 1997 as compared
to $0 in 1996. The increase is associated with the Company's continuing
telecommunication network research and development efforts.
Interest Expense
Interest expense increased $706,320 to $1,292,170 in the third quarter of 1997
as compared to $585,850 in the same quarter of 1996. The net increase is
primarily due to $1,100,000 in amortization of debt issuance costs (non-cash)
related to certain warrants granted in connection with $5,000,000 in loans to
the Company in the second and third quarters of 1997 and interest of $91,000
on the loans. As the loans were converted into equity in the fourth quarter
of 1997, the Company will recognize approximately $4,000,000 of interest
expense (non-cash) representing the unamortized balance of debt issuance costs
as of September 30, 1997. The increase due to amortization of debt issuance
costs was offset by a decrease of $460,000 in imputed interest expense (non-
cash) on certain convertible promissory notes issued in 1996, to $0 in the
quarter ended September 30, 1997 as compared to $460,000 in the same quarter
of 1996.
Interest and Other Income
Interest and other income increased $11,456 to $44,495 in the third quarter of
1997 as compared to $33,039 in the third quarter of 1996. The increase was
primarily due to an increase in the average balance of cash on hand as a
result of proceeds from $5,000,000 in loans to the Company in the second and
third quarters of 1997.
<PAGE>
Results of Operations, continued
Comparison of Nine Months Ending September 1997 to Nine Months Ending September
1996
Telecommunications Service Revenue
Telecommunications service revenue for the nine months ending September 30,
1997 was $7,119,960. There was no such revenue for the same period ending
September 30, 1996 as this service began with the acquisition of FTI in
January 1997.
Health Care Service Revenue
Health care service revenue increased $119,352 in the nine months ending
September 30, 1997 to $1,800,121 as compared to $1,680,769 in the same period
ending September 30, 1996. The increase in revenue is a result of an increase
in the number of procedures performed as the Company transitions all of its
diagnostic imaging services to the retail market as compared to 1996 when the
Company also performed procedures for hospitals through contracts.
Marketing Services Revenue
Marketing service revenue was $1,623,226 in the nine months ending September
30, 1997 as compared to $0 in the same period ending September 30, 1996. This
channel of distribution of telecommunication services began late in the
second quarter of 1997 and thus had no comparable revenue in 1996.
Technology Licensing and Development Revenue
Technology licensing and development revenue was $139,700 in the first nine
months of 1997. This revenue source is a direct result of the acquisition of
MiBridge, Inc. in September 1997. Accordingly, there was no such revenue in
the same period of 1996.
Other Revenue
Other revenue decreased $136,661 in the nine months ending September 30, 1997
to $0 as compared to $136,661 in the same period ending September 30, 1996.
The decrease is primarily due to internet service provider revenue in 1996
that did not recur in 1997.
Telecommunications Network Expenses
Telecommunications expenses increased $9,758,775 in the nine months ending
September 30, 1997 to $10,556,657 as compared to $797,882 for the same period
ending September 30, 1996. These expenses include the costs related to the
continuing development and deployment of the Company's communication network
and expenses related to the telecommunication service revenue that began in
1997 with the acquisition of FTI.
Marketing Services Expenses
Marketing service costs were $1,723,282 in the first nine months of 1997 as
compared to $0 for the same period of 1996. The expenses directly relate to
the Company's marketing service revenue that began late in the second quarter
of 1997. Marketing service expenses include commissions and the costs of
providing training, promotional and presentation materials and ongoing
administrative support.
<PAGE>
Results of Operations, continued
Selling, General and Administrative
Selling, general and administrative expense increased $4,446,023 to $7,573,160
in the nine months ending September 30, 1997 as compared to $3,127,137 in the
same period ending September 30, 1996. The increase was primarily due to
increased administrative expense associated with the launch of the multi-level
marketing channel and an increase in overhead and personnel expenses
associated with the growth of the Company's telecommunication business.
Provision for Doubtful Accounts
Provision for doubtful accounts increased $856,713 to $1,014,244 in the nine
months ending September 30, 1997 as compared to $157,531 in the same period
ending September 30, 1996. This increase is primarily related to the Company's
growth in telecommunication service revenue.
Depreciation and Amortization
Depreciation and amortization increased $898,193 to $1,801,699 in the nine
months ending September 30, 1997 as compared to $903,506 in the same period
ending September 30, 1996. The increase is primarily due to increased
amortization of intangible assets acquired in the acquisition of FTI and
MiBridge in 1997 and the issuance of the final 1,000,000 shares of common
stock in connection with the acquisition of I-Link Worldwide Inc. in 1996.
Depreciation expense also increased due to the acquisition of telecommunication
equipment in late 1996 and throughout 1997.
Provision for Asset Valuation
The provision for asset valuation occurred in the first quarter of 1997 (none
in 1996) and includes a valuation allowance for inventory of $55,341 and a
write off of tenant improvements abandoned when I-Link moved corporate
headquarters in January 1997 in the amount of $158,603.
Acquired In-Process Research and Development
Acquired in-process research and development in the nine months ending
September 30, 1997 was $4,235,830 which was related to the acquisition of
MiBridge, Inc in September 1997. Acquired in-process research and development
in the nine months ending September 30, 1996 was $14,577,943 which related to
the acquisition of I-Link Worldwide Inc. in February 1996. These amounts were
expensed as technological feasibility of the in-process technology had not yet
been established and the technology had no alternative future use. These
expenses related to specific acquisitions of other companies and as such are
not of a recurring nature other than as may occur if the Company were to
acquire other entities in the future.
Research and Development
Research and development was $627,654 in the nine months ending September 30,
1997 as compared to $0 in the same period ending September 30, 1996. The
increase is associated with the Company's continuing telecommunication network
research and development efforts.
<PAGE>
Results of Operations, continued
Interest Expense
Interest expense increased $259,029 to $1,912,645 in the nine months ending
September 30, 1997 as compared to $1,653,616 in the same period ending
September 30, 1996. The net increase is primarily due to $1,300,000 in
amortization of debt issuance costs (non-cash) related to certain warrants
granted in connection with $5,000,000 in loans to the Company in the second
and third quarters of 1997 and interest of $103,000 on the loans. As the loans
were converted into equity in the fourth quarter of 1997, the Company will
recognize approximately $4,000,000 of interest expense (non-cash) representing
the unamortized balance of debt issuance costs as of September 30, 1997. The
increase in interest expense due to amortization of debt issuance costs was
offset by a decrease of $1,115,000 in imputed interest expense (non-cash) on
certain convertible promissory notes issued in 1996, to $320,000 in the nine
months ended September 30, 1997 as compared to $1,435,000 in the same period
of 1996.
Interest and Other Income
Interest and other income increased $140,808 to $186,609 in the nine months
ending September 30, 1997 as compared to $45,801 in the same period ending
September 30, 1996. The increase was primarily due to an increase in interest
income in the first nine months of 1997 as compared to the same period in 1996
due to an increased average balance of cash on hand primarily as a result of
proceeds from the Company's sale of Class C Preferred Stock in the third quarter
of 1996 and proceeds from $5,000,000 in loans in the second and third quarters
of 1997.
Other Items
The Company has reviewed all recently issued, but not yet adopted accounting
standards in order to determine their effects, if any, on the results of
operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
On November 14, 1997, the Company filed a Notice of Claim commencing an
arbitration proceeding against MCI Telecommunications, Inc. ("MCI"). The
Company purchases from MCI long-distance telecommunications capacity on lines
operated by MCI in order to provide long-distance telecommunications services
to the Company's customers who reside in geographic areas not yet serviced by
the Company's dedicated telecommunications network ("off-net" traffic).
Currently, approximately half the Company's long-distance telecommunications
traffic is carried off-net. The arbitration proceeding was commenced by the
Company pursuant to the provisions of the Carrier Agreement between the Company
and MCI, and pursuant to the arbitration rules set forth in MCI's FCC Tariff
No. 1. In its Notice of Claim, the Company seeks (1) to have the arbitrator
declare that MCI has materially breached its Carrier Agreement with the
Company, (2) to have the arbitrator declare that due to MCI's material breach
the Carrier Agreement is terminated without the Company being held liable for
early termination payment provided for under the Carrier Agreement, and (3) to
recover damages from MCI in an as yet undetermined amount. The Company has
made arrangements with an alternative national provider of long-distance
telecommunications capacity to augment or replace some or all of the capacity
provided by MCI, as determined by the Company. At the present time, Management
cannot determine the impact, if any, of this arbitration proceeding on the
Company's financial statements.
Item 6(a) - Exhibits
None
Item 6(b) - Reports on Form 8-K
Reports on Form 8-K during the quarter ended September 30, 1997 were as
follows:
Form 8-K/A#1 filed on August 15, 1997 and 8-K/A#2 filed on September 4, 1997
amending original 8-K filed on June 5, 1997 regarding the MiBridge audited
financial statements.
Form 8-K/A#2 filed on September 5, 1997 amending original 8-K filed on January
13, 1997 regarding the Family Telecommunications Incorporated audited
financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
I-Link Incorporated
(Registrant)
Date: November 19, 1997 By: /s/ John W. Edwards
John W. Edwards
President, Chief Executive Officer
By: /s/ Karl S. Ryser, Jr.
Karl S. Ryser, Jr.
Chief Financial Officer, Chief
Accounting Officer, and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
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