UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
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 registrant 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
(Registrant's telephone number)
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter time 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
______________
As of May 15, 1998, the registrant had outstanding 16,993,889 shares of $0.007
par value common stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTIONS>
ASSETS March 31, December 31,
1998 1997
(Unaudited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,851,311 $ 1,643,805
Accounts receivable, less allowance for
doubtful accounts of $1,257,000 and
$1,385,000 as of March 31, 1998 and
December 31, 1997, respectively 4,354,118 3,233,207
Certificates of deposit - restricted 1,628,610 1,628,500
Other current assets 526,531 321,488
---------- ----------
Total current assets 8,360,570 6,827,000
Furniture, fixtures and equipment, net 3,924,722 3,551,917
Other assets:
Intangible assets, net 11,590,655 12,314,080
Certificates of deposit restricted 259,000 259,000
Other assets 858,706 705,502
Net assets of discontinued operations 587,935 595,377
---------- ----------
Total assets $25,581,588 $24,252,876
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,159,527 $ 4,833,452
Accrued liabilities 3,082,791 2,770,997
Current portion of long-term debt 6,110,643 2,008,416
Current portion of obligations under
capital leases 171,014 169,315
---------- ----------
Total current liabilities 14,523,975 9,782,180
Long-term debt 254,000 1,854,341
Obligations under capital leases 14,551 67,159
---------- ----------
Total liabilities 14,792,526 11,703,680
Commitments and contingencies (notes 6, 7 and 8)
Stockholders' equity:
Preferred stock, $10 par value, authorized
10,000,000 shares, issued and outstanding
98,563 and 119,926 at March 31, 1998 and
December 31, 1997, respectively,
liquidation preference of $22,983,440 at
March 31, 1998 985,630 1,199,260
Common stock, $.007 par value, authorized
75,000,000 shares, issued and outstanding
16,737,705 and 16,036,085 at March 31,
1998 and December 31, 1997, respectively 117,162 112,251
Additional paid-in capital 76,000,016 70,511,697
Deferred compensation ( 1,984,309) ( 2,289,765)
Accumulated deficit (64,329,437) (56,984,247)
---------- ----------
Total stockholders' equity 10,789,062 12,549,196
---------- ----------
Total liabilities and stockholders' equity $25,581,588 $24,252,876
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 1
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTIONS>
Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Telecommunication services $ 4,780,977 $ 2,147,216
Marketing services, net 1,341,247 -
Technology licensing and development 205,950 -
---------- ----------
Total revenues 6,328,174 2,147,216
---------- ----------
Operating costs and expenses:
Telecommunication network expenses 4,898,216 3,051,082
Marketing services costs 1,867,885 -
Selling, general and administrative 2,411,587 2,112,486
Provision for doubtful accounts 773,662 75,000
Depreciation and amortization 1,010,727 298,101
Research and development 568,095 271,088
---------- ----------
Total operating costs and expenses 11,530,172 5,807,757
---------- ----------
Operating loss ( 5,201,998) ( 3,660,541)
---------- ----------
Other income (expense):
Interest expense ( 2,181,042) ( 335,592)
Interest and other income 45,292 84,308
---------- ----------
Total other expense ( 2,135,750) ( 251,284)
---------- ----------
Loss from continuing operations ( 7,337,748) ( 3,911,825)
---------- ----------
Income (loss) from discontinued operations
(less applicable income tax provision of
$0 for the three months ended March 31,
1998 and 1997) ( 7,442) 5,084
---------- ----------
Net loss $( 7,345,190) $( 3,906,741)
========== ==========
Net loss per common share - Basic and diluted:
Loss from continuing operations $( 0.48) $( 0.40)
Income (loss) from discontinued operations - -
---------- ----------
Net loss per common share $( 0.48) $( 0.40)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statments
<PAGE> 2
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTIONS>
Preferred Stock Common Stock
--------------------- ----------------------
Additional
Deferred Capital Accumulated
Shares Amount Shares Amount Compensation Paid-in Deficit
--------- ----------- ---------- -------- ------------ ----------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 119,926 $ 1,199,260 16,036,085 $112,251 $(2,289,765) $70,511,697 $(56,984,247)
Conversion of preferred stock into
common stock ( 21,363) ( 213,630) 512,720 3,589 - 210,041 -
Amortization of deferred compensation on
stock options issued for services - - - - 305,456 - -
Exercise of stock options - - 188,900 1,322 - 274,278 -
Warrants issued in connection
with certain notes payable - - - - - 5,004,000 -
Net loss - - - - - - ( 7,345,190)
------- ---------- ---------- ------- --------- ---------- ----------
BALANCE AT MARCH 31, 1998 98,563 $ 985,630 16,737,705 $117,162 $(1,984,309) $76,000,016 $(64,329,437)
======= ========== ========== ======= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 3
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTIONS>
For the Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,345,190) $(3,906,741)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,010,727 298,101
Provision for doubtful accounts 773,662 75,000
Provision for asset valuation - 213,944
Amortization of discount on notes payable 2,061,000 -
Amortization of deferred compensation on
stock options issued for services 305,456 -
Interest expense associated with issuance
of convertible notes - 320,000
Increase (decrease) from changes in operating
assets and liabilities, net of effects of
acquisitions:
Accounts receivable (1,894,573) ( 764,832)
Other assets ( 358,357) 71,400
Accounts payable and accrued liabilities 637,869 1,103,290
Discontinued operations ( 15,354) 82,219
--------- ---------
Net cash used in operating activities (4,824,760) (2,507,619)
--------- ---------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment ( 660,107) ( 87,995)
Cash received from the purchase of I-Link
Communications, Inc. - 435,312
Investing activities of discontinued operations - ( 280)
--------- ---------
Net cash provided by (used in) investing
activities ( 660,107) 347,037
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and
warrants 5,768,000 -
Repayment of long-term debt ( 323,114) ( 102,835)
Payment of capital lease obligations ( 50,909) -
Proceeds from exercise of common stock
warrants and options 275,600 -
Financing activities of discontinued operations - ( 40,465)
--------- ---------
Net cash provided by (used in) financing
activities 5,669,577 ( 143,300)
--------- ---------
Increase (decrease) in cash and cash equivalents 184,710 (2,303,882)
Cash and cash equivalents at beginning of period 1,727,855 4,500,225
Cash and cash equivalents at end of period:
Continuing operations 1,851,311 2,057,022
Discontinued operations 61,254 139,321
--------- ---------
Total cash and cash equivalents at end of period $1,912,565 $2,196,343
========= =========
Supplemental schedule of non-cash investing and financing activities:
Common stock issued in connection with the
acquisition of I-Link Communications, Inc. $ - $2,414,583
Conversion of preferred stock into common stock 213,630 -
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE> 4
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 1 - Description of Business, Principles of Consolidation and Liquidity
The consolidated financial statements include the accounts of I-Link
Incorporated and its subsidiaries (the "Company"). The Company's principal
operation is the development, sale and delivery of enhanced communications
products and services utilizing its own private intranet and both owned and
leased network switching and transmission facilities. The Company provides
unique communications solutions through its use of proprietary technology
acquired in the acquisitions of I-Link Worldwide, Inc. and MiBridge, Inc.
Telecommunications services are marketed primarily through independent
representatives to subscribers throughout the United States.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
On March 23, 1998, the Company's Board of Directors approved a plan to dispose
of the Company's medical services businesses in order to focus its efforts on
the sale of telecommunication services and technology licensing. The Company
intends to sell all of the assets of the medical services subsidiaries, with the
proceeds being used to satisfy outstanding obligations of the medical services
subsidiaries. The Company recognized a $1,007,453 loss on disposal of these
subsidiaries during the quarter ended December 31, 1997. The results of the
medical services operations have been classified as discontinued operations for
all periods presented in the Consolidated Statements of Operations. The
assets and liabilities of the discontinued operations have been classified in
the Consolidated Balance Sheets as "Net assets - discontinued operations".
Discontinued operations have also been segregated for all periods presented in
the Consolidated Statements of Cash Flows.
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 periods ended March 31, 1998 and
1997, (b) the financial position at March 31, 1998, and (c) cash flows
for the three-month periods ended March 31, 1998 and 1997. The year-end
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The financial statements should be read in conjunction with the Company's annual
report on Form 10-K for the year ended December 31, 1997.
The results of operations for the three-month period ended March 31, 1998 are
not necessarily indicative of those to be expected for the entire year.
The Company incurred a net loss from continuing operations of $7,337,748 for
the three months ended March 31, 1998, and as of March 31, 1998 had an
accumulated deficit of $64,329,437 and negative working capital of $6,163,405.
The Company anticipates that revenues generated from its continuing operations
will not be sufficient during 1998 to fund its ongoing operations, the continued
expansion of its private telecommunications network facilities, and anticipated
growth in subscriber base. In order to meet its working capital needs, the
Company has entered into two financing arrangements (see Note 4). In
January 1998, the Company signed a term loan agreement with Winter Harbor
providing aggregate borrowings of $5.768 million. On March 31, 1998, the
Company entered into a credit facility in the aggregate amount of $20,000,000
with a private investor group (the "Lender"), a portion of which is to be
utilized to repay the Winter Harbor term loan. As of May 19, 1998 the Lender
has not completed its advance of an initial portion of its funding to the
Company in accordance with the timing schedule provided for under the credit
facility. However, the Lender has given the Company assurances that it intends
to fully fund the credit facility. Winter Harbor has agreed to increase its
loan to the Company by an additional $2,000,000. Additionally, the Company has
reached terms with an institutional source of equity funding; however, there
can be no assurance that such additional equity funding will be completed.
<PAGE> 5
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies
Net loss per share
The Company has adopted SFAS No. 128, "Earnings per Share" for 1998 and 1997.
The standard requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Options, warrants, convertible
preferred stock and convertible debt are included in the calculation of diluted
earnings per share, except when their effect would be anti-dilutive. As the
Company had a net loss from continuing operations for the three months ended
March 31, 1998 and 1997, basic and diluted loss per share are the same.
Basic and diluted loss per common share for the three months ended March 31,
1998 and 1997 were calculated as follows:
<TABLE>
<CAPTIONS>
1998 1997
------------ ------------
<S> <C> <C>
Loss from continuing operations $(7,337,748) $(3,911,825)
Cumulative preferred stock dividends
not paid in the current quarter ( 361,764) ( 289,147)
--------- ---------
Loss from continuing operations applicable
to common stock $(7,669,512) $(4,200,972)
========= =========
Income (loss) from discontinued operations $( 7,442) $ 5,084
========= =========
Weighted average shares outstanding 16,124,800 10,607,597
========== ==========
Loss from continuing operations $( 0.48) $( 0.40)
Income (loss) from discontinued operations - -
--------- ---------
Net loss per common share $( 0.48) $( 0.40)
========= =========
</TABLE>
Recently issued financial accounting standards
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires the
prominent display of comprehensive income and its components. There were no
items of other comprehensive income during the periods being reported on and
accordingly, no additional disclosures are required. Also effective January 1,
1998 the Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for reporting information about operating segments
in annual and interim financial statements. Interim disclosures are not
required in the year of adoption. The Company does not expect that the effect
on year end disclosures, if any, that these new accounting standards may have on
its financial statements will be significant.
In addition, the Accounting Standards Executive Committee issued Statement of
Position No. 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". The SOP was issued to address the
diversity in practice regarding whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The Company
has not determined the effect which SOP 98-1 will have on its consolidated
financial position or results of operations.
<PAGE> 6
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies, continued
Reclassifications
Certain balances in the March 31, 1997 statements of operations and cash flows
have been reclassified to conform to the current year presentation. These
changes had no effect on previously reported net loss, total assets, liabilities
or stockholders' equity.
Note 3 - Discontinued Operations
Net assets of the Company's discontinued operations (excluding intercompany
balances which have been eliminated against the net equity of the discontinued
operations) are as follows as of March 31, 1998 and December 31, 1997:
<TABLE>
1998 1997
(Unaudited)
----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 61,254 $ 84,050
Accounts receivable 1,147,499 1,033,376
Inventory 555,291 555,939
Other 46,477 24,951
--------- ---------
Total current assets 1,810,521 1,698,316
Furniture, fixtures and equipment, net 878,452 958,153
Intangible assets 391,757 391,757
Other non-current assets 8,706 8,706
--------- ---------
Total assets 3,089,436 3,056,932
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,828,355 1,781,541
Notes payable 417,343 412,126
--------- ---------
Total current liabilities 2,245,698 2,193,667
Other liabilities 255,803 267,888
--------- ---------
Total liabilities 2,501,501 2,461,555
--------- ---------
Net assets $ 587,935 $ 595,377
========= =========
</TABLE>
Revenues of the discontinued operations were $587,865 and $597,257 for the
three month period ending March 31, 1998 and 1997, respectively.
<PAGE> 7
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 4 - Capital Financing
In the first quarter of 1998 the Company obtained a total of $5.768 million in
new interim debt financing from Winter Harbor, L.L.C. Pursuant to the terms of
the loan agreement with Winter Harbor, the loan (which bears interest at prime
plus one) is payable upon demand by Winter Harbor no earlier than May 15, 1998,
and is collateralized by essentially all of the assets of the Company's
subsidiaries. As consideration for Winter Harbor's commitment to make the loan,
the Company agreed to issue 5,000,000 warrants to purchase common stock of the
Company at exercise prices ranging from $5.50 to $7.22 based upon 110% of the
closing price of the common stock on the day loan funds are advanced. The
warrants expire on October 15, 2005. The Company also agreed to extend the
exercise period on all warrants previously issued to Winter Harbor (10,800,000)
to seven and one-half years. Because the loan was not repaid by May 15, 1998,
the loan continues on a demand basis with interest accruing at prime plus four
percent, and Winter Harbor has the right to elect at any time until the loan is
repaid to convert the unpaid balance of the loan into additional shares of the
Company's Series M Preferred Stock, reduce the exercise price of the 5,000,000
Loan Warrants to $2.50 per share, and receive an additional 5,000,000 warrants
to purchase common stock of the Company at an exercise price of $2.50 per share.
The Company intends to repay the loan from the credit facility described in a
following paragraph.
In the first quarter of 1998 the Company recorded $5,004,000 as a discount
against the new debt representing the relative fair value of the new warrants
issued and the relative fair value attributed to the change of the exercise
period on prior warrants issued. The debt discount is being amortized over the
term of the loan. Amortization of debt discount was $2,061,000 for the quarter
ended March 31, 1998.
On March 31, 1998 the Company entered into a credit facility of up to $20
million with a private investor group (the "Lender"). The credit facility
provides for an initial borrowing of $10 million collateralized by a pledge of
3,226,000 newly issued restricted shares of the Company's common stock. Upon
approval by the Company's shareholders, the Company may increase the borrowing
an additional $10 million on similar terms collateralized by a pledge of
additional newly issued restricted shares of the Company's common stock. Beyond
the pledged shares, the loan is non-recourse to the Company. In the event of a
decrease in the market price of the Company's publicly traded shares, the
Company may be required to pledge additional common shares to maintain a
loan-to-value ratio in the security of 2:1 based upon a 5-day moving average of
the lowest bid price of the Company's publicly traded shares. The term of the
credit facility is two years, with an option exercisable by the Company to
extend for an additional third year. The credit facility may not be repaid until
after the first year. The credit facility may be repaid in cash or common stock
at the option of the lender. If repaid in common stock, the number of shares to
be retained by the lender in satisfaction of the credit facility will be based
upon the then current market price of the Company's publicly traded shares, less
a discount of 30% the credit facility bears interest quarterly at prime
plus one percent. Interest-only payments are to be made on the first day of
each quarter, beginning the first quarter following the funding. It is
anticipated that borrowing under the Winter Harbor interim financing will be
repaid from this credit facility. As of May 19, 1998 the lender has not
completed its advance of an initial portion of its funding to the Company in
accordance with the timing schedule provided for under the credit facility.
However, the lender has given the Company assurances that it intends to fully
fund the credit facility.
Winter Harbor has agreed to increase its loan to the Company by an additional
$2,000,000. Additionally, the Company has reached terms with an institutional
source of equity funding; however, there can be no assurance that such
additional equity funding will be completed.
Note 5 - Income Taxes
The Company recognized no income tax benefit from the losses generated in the
first quarter of 1998 and 1997 because of the uncertainty of the realization of
the related deferred tax asset.
<PAGE> 8
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 6 - Legal Proceedings
On May 12, 1998, I-Link and MCI Telecommunications agreed to a settlement of
the arbitration action filed in November 1997 by I-Link against MCI in which it
sought to terminate the carrier agreement with MCI for alleged breach without
being held liable for under-usage and early termination penalties, and recover
damages. Under the terms of the settlement, I-Link has agreed to drop its
claims for damages against MCI, and MCI has agreed to drop all claims against
I-Link for under-usage and early termination penalties. I-Link will pay charges
representing agreed actual long-distance usage which amounts were previously
recorded in the financial statements in the period the services were provided
and totaled approximately $2 million, half to be paid in August 1998 and half in
November 1998.
Note 7 - Commitments
The Company has entered into employment and consulting agreements with a
consultant and ten of its employees, primarily executive officers and management
personnel. These agreements generally continue over the entire term unless
terminated by the employee or consultant of the Company, and provide for salary
continuation for a specified number of months. Certain of the agreements
provide additional rights, including the vesting of unvested stock options in
the event a change of control of the Company occurs or termination of the
contract without cause. The agreements contain non-competition and
confidentiality provisions. As of March 31, 1998, if the contracts were to be
terminated by the Company, the Company's liability for salary continuation would
be approximately $1,730,000.
Purchase commitments
The Company has certain purchase commitments relative to its network
infrastructure. Under the terms of the agreements, the Company has a minimum
monthly usage commitment of $50,000, with a $225,000 penalty if the agreement is
canceled prior to December 2000. In addition, the Company has commitments to
purchase long-distance telecommunications capacity on lines from a national
provider in order to provide long-distance telecommunications services to the
Company's customers who reside in areas not yet serviced by the Company's
dedicated telecommunications network. The Company's minimum monthly commitment
is approximately $500,000. If the agreement were terminated prior to October
1999, the Company would be obligated to pay 50% of the remaining monthly minimum
usage amounts.
Note 8 - Termination of Marketing Agreement
Subsequent to March 31, 1998, the Company terminated its telecommunications
marketing agreement with one of its wholesale agents. This reflects a change in
strategy from marketing its telecommunications products primarily through
wholesale agents to marketing through independent representatives in the network
marketing channel. Revenues from subscribers signed up by this wholesale agent
accounted for approximately 21 percent of total telecommunications revenues for
the quarter ended March 31, 1998. While revenues (and related expenses) from
this marketing group will end in the second quarter of 1998, it is anticipated
that growth in the Network Marketing Channel will exceed the lost revenues such
that total revenues will continue to grow.
<PAGE> 9
Item 2- Management's Discussion and Analysis and Results 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-K for the year ended December
31, 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 and uncertainties as 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.
Among many factors that could cause actual results to differ materially are
the following: the Company's ability to finance and manage expected rapid
growth; the Company's ability to attract support and motivate a rapidly growing
number of independent representatives; competition in the long distance
telecommunications and ancillary industries; the Company's ongoing relationship
with its long distance carriers and vendors; dependence upon key personnel;
subscriber attrition; the adoption of new, or changes in, accounting policies,
litigation, federal and state governmental regulation of the long distance
telecommunications and internet industries; the Company's ability to maintain,
operate and upgrade its information systems and network; the Company's success
in deploying it's Communication Engine network in internet telephony and the
Company's success in the offering of other enhanced service products.
Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements. The
Company's ability to consummate such transactions and achieve such results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance of
the Company's products and services, regulatory approvals and developments,
economic conditions, the impact of competition and pricing, results of the
Company's financing efforts and other factors affecting the Company's business
that are beyond the Company's control. The Company undertakes no obligation and
does not intend to update, revise or otherwise publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
future events or circumstances.
Operations
In January 1997 the Company acquired I-Link Communications (formerly Family
Telecommunications, Inc. and referred to herein as "ILC") and in August 1997 the
Company acquired MiBridge, Inc. In 1997, the Company launched operations of a
network marketing program through I-Link Worldwide, L.L.C., to market its
products. In December 1997, the Company made the decision to dispose of the
operations of the subsidiaries of the Company operating in the medical services
industry in order to concentrate on its telecommunications and technology
sectors. Accordingly, medical services operations during the three-month
periods ending March 31, 1998 and 1997 have been reported as discontinued
operations.
In March of 1998, the Company announced the nationwide availability of
V-Link[TM]. V-Link[TM] is a fully integrated communications service that
enhances the value of telephones, cellular phones, pagers and fax machines by
combining them into a single communications environment. V-Link[TM] also
provides conference calling, e-mail, fax-on-demand and V-Link One Number[TM]
calling features. In addition, the Company announced a new 4.9-cent-per-minute
long-distance calling rate. The 4.9-cent-per-minute rate is available to
I-Link's V-Link[TM] subscribers whose long-distance calls both originate and
terminate in calling areas connected to I-Link's enhanced IP (Internet protocol)
telephony network. These V-Link local access areas currently include 25 calling
areas located in the metro markets surrounding Los Angeles; Orange County,
Calif.; Dallas/Ft. Worth; Houston; Phoenix; and Salt Lake City. For V-Link[TM]
calls that originate in a V-Link[TM] local access area and terminate anywhere
else in the continental United States, rates are 6.9 cents per minute. For
customers not within V-Link[TM] local access areas, extended access is available
to most customers in Arizona, California, Colorado, Idaho, New Mexico, Texas and
Utah with long distance rates from 5.9 to 7.9 cents per minute. And V-Link[TM]
customers outside
<PAGE> 10
V-Link[TM] local or extended calling areas in the continental U.S. can take
advantage of long-distance rates of 8.9 cents per minute.
In the first quarter of 1998, the Company formed ViaNet Technologies,
Ltd. ("ViaNet"). ViaNet, headquartered in Ramat Hasharon, Israel, operates as a
wholly owned subsidiary of I-Link. The subsidiary will focus on research and
development of new communications access devices. ViaNet is I-Link's third
research and development group.
Liquidity and Capital Resources
Cash and cash equivalents as of March 31, 1998 were $1,851,311, restricted
certificates of deposits were $1,628,610 and the working capital deficit was
$6,163,405. Cash used by operating activities during the first quarter of 1998
was $4,824,760 as compared to $2,507,619 in the first quarter of 1997. The
increase in cash used by operating activities in 1998 was primarily due to an
increase in accounts receivable and other assets and the increased operating
loss as the Company continued to developed its infrastructure and product base.
Net cash used by investing activities in the first quarter of 1998 was $660,107
as compared to net cash provided of $347,037 in the first quarter of 1997. The
increase in cash used by investing activities in 1997 was attributable to the
purchase of furniture, fixtures and equipment of $660,107. In the first quarter
of 1997 the cash provided by investing activities was primarily due to cash
received of $435,312 in the acquisition of ILC which was offset by purchases of
furniture, fixtures and equipment of $87,995.
Financing activities provided net cash of $5,669,577 in the first quarter of
1998 as compared to cash used of $143,300 in the same period of 1997. Cash
provided in 1998 included $5,678,000 from short-term debt and warrants and
$275,600 in proceeds from exercises of common stock warrants and options.
Repayments of $374,023 on long-term debt and capital lease obligations offset
these proceeds. During the same quarter in 1997, the Company used cash of
$143,300 to repay certain debt and capital lease obligations.
The Company incurred a net loss from continuing operations of $7,337,748 for
the quarter ended March 31, 1998, and as of March 31, 1998 had an accumulated
deficit of $64,329,437. The Company anticipates that revenues generated from
its continuing operations will not be sufficient during 1998 to fund the
continued expansion of its private telecommunications network facilities and
anticipated growth in subscriber base. In order to meet its working capital
needs, the Company has entered into two financing arrangements as described
below.
Current Position/Future Requirements
During 1998, the Company plans to use available cash to fund the development
and marketing of I-Link products and services. During the first quarter of 1998
revenues from continuing operations increased 22% from the fourth quarter
of 1997 primarily due to increases of 21% in telecommunications services
and 32% in marketing services revenues. The Company anticipates that revenues
from all sources of continuing operations will grow in 1998 and will
increasingly contribute to the cash requirements of the Company. The Company
released several new products in late 1997 and early 1998 such as V-Link and has
deployed several of its Communication Engines all of which should increase
revenues and profit margins in the future. The Company also believes that
revenues and cash flows from MiBridge will increase in 1998 due to maturation of
its products and royalty and licensing agreements.
However, the Company anticipates that cash requirements for operations and the
continued market penetration and deployment of I-Link products and services will
be at increasingly higher levels than those experienced in 1997. The
Company also expects that expenditures for research and development will
continue at approximately the same level as the first quarter for the remainder
of 1998 as it continues development of new technology. In March 1998, the
Company committed approximately $2.2 million to development of a new internal
information system that will encompass primarily all computer systems. In early
1998, the Company determined that it would refocus the resources of the Company
to concentrate on the network marketing channel to distribute its products.
Accordingly, the Company agreed to terminate the relationship with its single
largest marketing group. That group accounted for approximately 21% of the
Company's revenues in the first quarter of 1998. While revenues (and related
expenses) from this marketing group will end in the
<PAGE> 11
second quarter of 1998, it is anticipated that growth in the network marketing
channel will exceed the lost revenues such that total revenues will continue to
grow.
In order to provide for capital expenditure and working capital needs, from
January through March 1998 the Company obtained a total of $5.768 million in new
interim debt financing from Winter Harbor, L.L.C. Pursuant to the terms of the
loan agreement with Winter Harbor, the loan (which bears interest at prime plus
one) is payable upon demand by Winter Harbor no earlier than May 15, 1998, and
is collateralized by essentially all of the assets of the Company's
subsidiaries. As consideration for Winter Harbor's commitment to make the loan,
the Company agreed to issue 5,000,000 warrants to purchase common stock of the
Company at exercise prices ranging from $5.50 to $7.22 based upon 110% of the
closing price of the common stock on the day loan funds are advanced. The
warrants expire on October 15, 2005. The Company also agreed to extend the
exercise period on all warrants previously issued to Winter Harbor (10,800,000)
to seven and one-half years. Because the loan was not repaid by May 15, 1998,
the loan will continue on a demand basis with interest accruing at prime plus
four percent, and Winter Harbor may elect at any time until the loan is repaid
to convert the unpaid balance of the loan into additional shares of the
Company's Series M Preferred Stock, reduce the exercise price of the 5,000,000
Loan Warrants to $2.50 per share, and receive an additional 5,000,000 warrants
to purchase common stock of the Company at an exercise price of $2.50 per share.
The Company intends to repay the loan from the credit facility described in a
following paragraph.
On March 31, 1998 the Company entered into a credit facility of up to $20
million with a private investor group. The credit facility provides for an
initial borrowing of $10 million collateralized by a pledge of 3,226,000 newly
issued restricted shares of the Company's common stock. Upon approval by the
Company's shareholders, the Company and lender intend to increase the borrowing
an additional $10 million on similar terms, collateralized by a pledge of
additional newly issued restricted shares of the Company's common stock. Beyond
the pledged shares, the loan is non-recourse to the Company. In the event of a
decrease in the market price of the Company's publicly traded shares, the
Company may be required to pledge additional common shares to maintain a
loan-to-value ratio in the security of 2:1 based upon a 5- day moving average of
the lowest bid price of the Company's publicly traded shares. The term of the
credit facility is two years, with an option exercisable by the Company to
extend for an additional third year. The credit facility may not be repaid
until after the first year. The credit facility may be repaid in cash or common
stock at the option of the lender. If repaid in common stock, the number of
shares to be retained by the lender in satisfaction of the credit
facility will be based upon the then current market price of the Company's
publicly traded shares, less a discount of 30%. The credit facility bears
interest quarterly at prime plus one percent. Interest-only payments are to be
made on the first day of each quarter, beginning the first quarter following the
funding. It is anticipated that borrowing under the Winter Harbor interim
financing will be repaid from this credit facility. As of May 19, 1998 the
Lender has not completed its advance of an initial portion of its funding to
the Company in accordance with the timing schedule provided for under the credit
facility. However, the Lender has given the Company assurances that it intends
to fully fund the credit facility.
Winter Harbor has agreed to increase its loan to the Company by an additional
$2,000,000. Additionally, the Company has reached terms with an institutional
source of equity funding; however, there can be no assurance that such
additional equity funding will be completed.
While the Company believes that the aforementioned sources of funds will be
sufficient to fund operations into 1999, the Company anticipates that additional
funds may be necessary from public or private financing markets to successfully
integrate and finance the planned expansion of the business communications
services and to discharge the financial obligations of the Company. The
availability of such capital sources will depend on prevailing market
conditions, interest rates, and financial position and results of operations of
the Company. There can be no assurance that such financing will be available,
that the Company will receive any proceeds from the exercise of outstanding
options and warrants or that the Company will not be required to arrange for
additional debt, equity or other type of financing.
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
In December 1997, the Company made the decision to dispose of the operations
of the subsidiaries of the Company operating in the medical services industry in
order to concentrate on its telecommunications and technology sectors.
Accordingly, medical services operations during the three-month periods ending
March 31, 1998 and 1997 have been reported as discontinued operations.
<PAGE> 12
Revenues
Telecommunications service revenue increased $2,633,761 to $4,780,977 in the
first quarter of 1998 as compared to $2,147,216 in the first quarter of 1997.
The increase is due primarily to the new customers obtained through the Network
Marketing channel which was launched in the second quarter of 1997.
Marketing services revenue, which includes revenues recognized from independent
representatives for training, promotional and presentation materials, V-Phone
and Netlink 1+ product sales, and ongoing administrative support was $1,341,247
in the first quarter of 1998 as compared to $0 in the same quarter of 1997. The
network marketing channel and its related product offerings began late in the
second quarter of 1997 and thus had no comparable revenue in the first quarter
of 1997.
Technology licensing and development revenue was $205,950 in the first quarter
of 1998. These revenues are from the licensing and development of technology
through MiBridge, Inc., which was acquired in September 1997. Accordingly there
was no such revenue in the first quarter of 1997.
Operating Costs and Expenses
Telecommunications expenses increased $1,847,134 in the first quarter of 1998
to $4,898,216 as compared to $3,051,082 for the same quarter of 1997. 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
ILC.
Marketing service costs were $1,867,885 in the first quarter of 1998 as
compared to $0 for the same quarter of 1997. The expenses relate directly 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 expense increased $299,100 to $2,411,586
in the first quarter of 1998 as compared to $2,112,486 in the first quarter of
1997. The increase was primarily due to increased administrative expense
associated with the launch of the Network Marketing channel and general
increases in overhead and personnel expenses associated with growing the
Company's telecommunication business.
The provision for doubtful accounts increased $698,662 to $773,662 in the
first quarter of 1998 as compared to $75,000 in the same quarter of 1997. This
increase is primarily due to two events, namely: (1) the dramatic growth in the
Company's telecommunication service revenue, and (2) an increase in
uncollectible accounts receivable associated the Company's decision in early
1998 to refocus the resources of the Company to concentrate on the Network
Marketing channel of distributing its products, the effect of which was to
terminate its' relationship with several accounts including the Company's single
largest wholesale marketing group.
Depreciation and amortization increased $712,626 to $1,010,727 in the first
quarter of 1998 as compared to $298,101 in the first quarter of 1997. The
increase is primarily due to increased amortization of intangible assets
associated with the issuance of the final 1,000,000 shares of common stock in
the third quarter of 1997 in connection with the acquisition of I-Link Worldwide
Inc. in 1996 and the acquisition of MiBridge in the third quarter of 1997. This
resulted in $12,336,410 of additional intangible assets. Depreciation expense
also increased due to continued acquisition of telecommunication equipment.
Research and development increased $297,007 to $568,095 in the first quarter
of 1998 as compared to $271,088 in 1997. The increase is associated with the
Company's acquisition of MiBridge, Inc in the 3rd quarter of 1997 and the
formation of a wholly owned Israeli subsidiary, ViaNet, in early 1998 to
increase the Company's research and development efforts.
Interest expense increased $1,845,450 to $2,181,042 in the first quarter of
1998 as compared to $335,592 in the same quarter of 1997. The net increase is
primarily due to $2,061,000 in amortization of debt discount related to certain
warrants granted in connection with $5,678,000 in loans to the Company in the
first quarter of 1998 as compared to $320,000 on certain convertible notes in
the same period of 1997. Additional amortization of approximately $2.9 million
(non-cash) will be recorded
<PAGE> 13
in the second quarter of 1998 in connection with the discount.
Interest and other income decreased $39,016 to $45,292 in the first quarter
of 1998 as compared to $84,308 in the same quarter of 1996. The decrease was
primarily due to a decrease in the average balance of cash on hand in the first
quarter of 1998.
<PAGE> 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 12, 1998, I-Link and MCI Telecommunications agreed to a settlement of
the arbitration action filed in November 1997 by I-Link against MCI in which it
sought to terminate the Carrier Agreement with MCI for alleged breach without
being held liable for under-usage and early termination penalties, and recover
damages. Under the terms of the settlement, I-Link has agreed to drop
its claims for damages against MCI, and MCI has agreed to drop all claims
against I-Link for under-usage and early termination penalties. I-Link will pay
charges representing agreed actual long-distance usage which amounts were
previously recorded in the financial statements in the period the services were
provided and totaled approximately $2 million, half to be paid in August 1998
and half in November 1998.
The Company is also involved in litigation relating to claims arising out of
its operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 6(a) - Exhibits
None
Item 6(b) - Reports on Form 8-K
None
<PAGE> 15
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: May 19, 1998 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
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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STATEMENTS.
</LEGEND>
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