As filed with the Securities and Exchange Commission on September 3, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
I-LINK INCORPORATED
(Exact name of registrant as specified in its charter)
(formerly Medcross, Inc.)
Florida 4822 59-2291344
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801) 576-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------------------------
John W. Edwards
Chairman of the Board, President and Chief Executive Officer
I-Link Incorporated
13751 S. Wadsworth Park Drive, Suite 200
Draper, Utah 84020
(801) 576-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Ralph V. De Martino, Esquire David Hardy, Esquire
De Martino Finkelstein Rosen & Virga Hardy & Allen
1818 N Street, N.W., Suite 400 60 East South Temple, Suite 2200
Washington, DC 20036-2492 Salt Lake City, UT 84111
Phone (202) 659-0494, Phone (801) 364-6660,
Facsimile (202) 659-1290 Facsimile (801) 364-6664
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<PAGE> i
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED PROPOSED AMOUNT
TITLE OF EACH CLASS AMOUNT TO MAXIMUM MAXIMUM OF
OF SECURITIES TO BE BE OFFERING AGGREGATE REGISTRA-
REGISTERED REGISTERED PRICE PER OFFERING TION FEE
SHARE (1) PRICE (1)
Common Stock, $.007 272,280 $3.438 $936,099 $ 276.15
par value (2)(4)
Common Stock, $.007 167,035 3.438 574,266 169.41
par value (3)(4)
Total $445.56
</TABLE>
(cover continued overleaf)
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933. The closing bid
price of the Common Stock on NASDAQ on August 31, 1998 was $3.438.
(2) To be issued as payment of dividends accrued and payable to holders and
former holders of Class C Preferred Stock.
(3) Estimated. To be issued as payment of dividends to be become payable
through and including May 15, 2001.
(4) Pursuant to Rule 416, this Registration Statement also covers such
additional number of shares of Common Stock as may be issuable pursuant to
anti-dilution provisions of the Class C Preferred Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE> ii
PROSPECTUS
I-LINK INCORPORATED
439,315 shares of Common Stock issuable as dividends payable
and to become payable on Class C Preferred Stock
This Prospectus relates to the distribution, and the offer and resale of
272,280 shares of common stock, par value $.007 per share (the "Common Stock")
issuable as dividends accrued and payable, and up to approximately 167,035
shares of Common Stock issuable as dividends to become payable through May 15,
2001 (collectively, the "Dividend Shares" or "Securities") to holders of issued
and outstanding shares of Class C Convertible Preferred Stock ("Class C
Preferred Stock") previously issued by I-Link Incorporated, a Florida
corporation formerly known as Medcross, Inc. (the "Company"). See "Description
of Securities."
On August 31, 1998 the closing sale price of the Company's Common
Stock as reported by the NASDAQ SmallCap Market ("NASDAQ") was $3.438.
So long as the Registration Statement of which this Prospectus forms a part
is effective and the disclosure set forth herein is current, the holders of
Dividend Shares may sell such shares publicly. The Securities offered by this
Prospectus may be sold from time to time by the holders of the Dividend Shares.
The distribution of the Securities by the holders thereof may be effected in one
or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as principals
at market prices prevailing at the time of sale at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the holders
of Dividend Shares in connection with sales of such securities.
The Company will not receive any of the proceeds from the resale of the
Dividend Shares by the holders thereof. All costs incurred in the registration
of the Securities offered hereby have been borne by the Company. See "Use of
Proceeds."
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND DILUTION.
SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH OR APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is September [ ], 1998
<PAGE> 1
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith, files reports, proxy statements and other information including
annual and quarterly reports on Forms 10-K and 10-Q (File No. 0-17973) (the
"1934 Act Filings") with the Securities and Exchange Commission (the
"Commission"). The Company filed with the Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the securities described herein. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information about the Company
and the securities described herein, reference is made to the Registration
Statement and to the exhibits filed therewith. The statements contained in this
Prospectus with respect to the contents of any agreement or other document
referred to herein are not necessarily complete and, in each instance, reference
is made to a copy of such agreement or document as filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
reference to the provisions of the relevant documents. The Registration
Statement, including the exhibits thereto, and the Company's 1934 Act Filings
may be inspected at: (i) the public reference facilities of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549; and (ii) the offices of the Commission located at Citicorp Center, 500
West Madison Street, Room 1400, Chicago, Illinois 60661, and (iii) the offices
of the Commission located at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may also be obtained upon request and
payment of the appropriate fee from the Public Reference Section of the
Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a website on the
Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any
information which has been incorporated by reference herein (not including
exhibits to the information incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Such requests should be
made to I-Link Incorporated, 13751 S. Wadsworth Park Drive, Suite 200, Draper,
Utah 84020, Attention: Secretary.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements and notes thereto appearing elsewhere in this Prospectus.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis" and "Business" are forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct.
THE COMPANY
I-Link Incorporated (formerly known as Medcross, Inc.), a Florida
corporation (the "Company"), was formed in 1983. 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, LLC, to market its products.
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.
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
<PAGE> 2
technology acquired and developed by its subsidiaries I-Link Systems, Inc.
(formerly I-Link Worldwide, Inc.), ViaNet and MiBridge, Inc. Telecommunications
services are marketed primarily through independent representatives to
subscribers throughout the United States. The Company's telecommunication
services operations began primarily with the acquisition of ILC, an FCC licensed
long-distance carrier.
The technology that distinguishes I-Link from other telecommunications
companies is the capability to carry high volumes of long-distance traffic at
significantly reduced cost and provide enhanced services through its proprietary
combination of Internet Protocol (IP) and compression technologies, while
maintaining the ease of use, high quality, and reliability of traditional phone
systems. During the first and second quarters of 1998, the Company benefitted
from the commercial deployment of its technology through its Communication
Engines established at its facilities in Los Angeles, Dallas/Ft. Worth, Phoenix
and Salt Lake City, and steadily increased the commercial telecommunications
traffic carried over its Communications Engines. This permitted the Company to
announce a new 4.9-cent-per-minute long-distance calling rate to customers whose
long-distance calls both originate and terminate in the more than 25 calling
areas located in these metropolitan markets. The Company intends to continue to
expand the geographic areas covered by its Communications Engines.
During the second quarter of 1998, the Company announced the development of
a communications product that would increase the telephone line capacity in any
household or business. Initially dubbed "C4" (Customer Communications Control
Center), the product will provide home and small business customers the capacity
of up to 24 phone lines using the existing telephone lines and wires that are
connected to their homes or offices today. In addition, C4 will provide around-
the-clock Internet access and access to the enhanced services I-Link currently
offers, including voice mail, fax, paging, e-mail, conference calling and
follow-me-anywhere one-number service. C4 uses existing telecommunications
networks, including the standard copper-wire lines currently installed in nearly
every home and business, as well as high-speed data lines and infrastructure
that have been announced or are being installed by local and long-distance
telecommunications companies. The C4 should undergo early field trials in the
fourth quarter of 1998 and the Company anticipates shipping in 1999.
Diagnostic and clinical service, consisting primarily of magnetic
resonance imaging (MRI) and ultrasounds, is provided through the Company's
wholly-owned subsidiaries Medcross Asia, Ltd. and Waters Edge Scanning
Associates, Inc. and partially owned subsidiaries Medcross Imaging, Ltd.
(81.75%) and Shenyang Medcross Huamei Medical Equipment Company, Ltd. (51%). On
March 23, 1998, the Company's Board of Directors approved a plan to discontinue
these operations. See "Business of the Company - Medical Imaging Division".
The Company's corporate offices are located at 13751 S. Wadsworth Park Drive,
Suite 200, Draper, Utah 84020; telephone (801) 576-5000.
THE OFFERING
Each share of Common Stock of the Company has a par value of $.007 and
entitles the holder thereof to equal ratable rights to dividends from funds
legally available therefore when, as and if declared by the Board of Directors,
to share ratably in all of the assets of the Company available for distribution
to holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company and to have one non-cumulative vote per share upon all
matters which stockholders may vote at all meetings of stockholders. Holders of
shares of Common Stock do not have preemptive, subscription or conversion rights
and there are no redemption or sinking fund provisions applicable thereto. See
"Description of Securities."
<TABLE>
<S> <C>
Common Stock Outstanding Prior to Offering 18,556,384 (1)
Common Stock Outstanding After the Offering 18,995,699 (2)
NASDAQ Symbol ILNK
</TABLE>
(1) As of August 19, 1998. Does not include: (a) 1,248,192 shares of Common
Stock issuable upon conversion of the outstanding Class C Preferred Stock;
(b) 272,280 shares of Common Stock proposed to be distributed on or before
November 15, 1998 as payment of dividends due on Class C Preferred Stock
and up to approximately 167,035 shares of Common Stock to be distributed as
dividends to become payable on Class C Preferred Stock through May 15,
2001; (c) options to purchase 10,030,042 shares of Common Stock granted to
<PAGE> 3
officers, directors, employees and consultants of the Company; (d)
29,764,727 shares of Common Stock issuable upon exercise of warrants,
conversion of the Series M Preferred Stock and conversion of certain
convertible promissory notes issued to Winter Harbor, LLC; (e)
approximately 2,670,000 shares of Common Stock issuable upon conversion of
the Series F Preferred Stock , exercise of related warrants or as payment
of dividends thereon.
(2) Includes 272,280 shares of Common Stock proposed to be distributed on or
before November 15, 1998 as payment of dividends due on Class C Preferred
Stock and up to approximately 167,035 shares of Common Stock to be
distributed as dividends to become payable on Class C Preferred Stock
through May 15, 2001. Does not include: (a) 1,248,192 shares of Common
Stock issuable upon conversion of the outstanding Class C Preferred Stock;
(b) options to purchase 10,030,042 shares of Common Stock granted to
officers, directors, employees and consultants of the Company; (c)
29,764,727 shares of Common Stock issuable upon exercise of warrants,
conversion of the Series M Preferred Stock and conversion of certain
convertible promissory notes issued to Winter Harbor, LLC; or (d)
approximately 2,670,000 shares of Common Stock issuable upon conversion of
the Series F Preferred Stock, exercise of related warrants or as payment of
dividends thereon. See "Recent Transactions."
USE OF PROCEEDS
The Company will not receive any of the proceeds from the offer or resale
of the Dividend Shares. See "Use of Proceeds."
SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 are derived from the audited financial statements included
elsewhere herein. The selected financial data set forth below for the Company as
of December 31, 1995, 1994 and 1993 and for each of the two years in the period
ended December 31, 1994 are derived from the audited financial statements not
included elsewhere herein. The Selected Financial Data set forth below for the
Company as of June 30, 1998 and for the six months ending June 30, 1998 and
1997 are derived from the unaudited financial statements included elsewhere
herein. The Selected Financial Data as of June 30, 1997 is derived from
unaudited financial statements not included elsewhere herein. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis" and the Consolidated Financial Statements of the Company, set forth
in full elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except for per share data and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications Services $ - $ - $ - $ - $ 11,081 $ 4,415 $ 8,916
Marketing Services - - - - 2,637 721 2,305
Other - - - 170 347 - 581
------ ------ ------ ------ ------ ------ ------
Total revenues - - - 170 14,065 5,136 11,802
Loss from continuing operations - - - (22,164) (28,668) ( 8,659) (18,072)
Basic and diluted net loss from
continuing operations - - ( 0.07) ( 6.40) ( 10.07) ( 0.87) ( 1.14)
</TABLE>
<TABLE>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except for per share data and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
<PAGE> 4
BALANCE SHEET DATA:
Working capital $ - $ - $ - $ 1,306 $( 2,955) $( 2,976) $(14,123)
Property and Equipment - - - 1,576 3,552 3,054 4,856
Net assets of discontinued 3,148 2,461 2,125 1,668 595 1,600 487
operations
Total assets 3,148 2,461 2,125 9,865 24,253 22,318 23,815
Long term obligations 525 525 670 237 1,922 691 -
Shareholders' equity. 2,623 1,936 1,455 6,299 12,549 14,000 2,853
</TABLE>
In January 1997 the Company acquired I-Link Communications (formerly
Family Telecommunications, Inc.), an FCC-licensed long-distance carrier. With
the acquisition, the Company began its telecommunications services operations.
Also, on March 23, 1998, the Company's Board of Directors approved a plan to
discontinue the operations of its Medical Imaging Division. The net assets from
the Medical Imaging Division are presented separately in the above table.
RISK FACTORS
THE SECURITIES DESCRIBED HEREIN ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. SUCH SECURITIES SHOULD BE PURCHASED ONLY BY PROSPECTIVE
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH
PROSPECTIVE INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH
ELSEWHERE HEREIN AND IN THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS
AND THE NOTES THERETO.
ONGOING CAPITAL REQUIREMENTS; NEED TO RAISE ADDITIONAL FINANCING
The conduct of the Company's business and the continued
implementation of its business plans and operations has required and will
continue to require the availability of substantial amounts of capital. While
the Company currently has no material commitments for capital or other
expenditures, other than as set forth herein, it is the Company's intention to
continue to implement the growth of its business and expand its operations. 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. To provide a portion of the required capital, the
Company has entered into two financing arrangements as follows: (1) during the
first six months of 1998, the Company obtained an aggregate of $7.768 million in
new interim debt financing from Winter Harbor, LLC and (2) on July 9, 1998, the
Company entered into an agreement for the sale of a new series of Preferred
Stock for consideration in the amount of $10,000,000 (net proceeds received of
$9.47 million) with JNC Opportunity Fund Ltd. ("JNC"). The $7.768 million
Winter Harbor debt financing is due on demand. The Company anticipates that
additional funds will be necessary from public or private financing markets to
fund continued operations and to successfully integrate and finance the planned
expansion of the business communications services and to discharge the financial
obligations of the Company.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent upon the continued efforts and
employment of its senior management. The officers of the Company have the
principal responsibility for management of the Company and are responsible for
making recommendations to the Board of Directors which exercises final authority
over business decisions. While the Company has entered into employment
agreements with senior management, the loss of the services of any of the
officers or directors could be detrimental to the Company.
Furthermore, the future performance of I-Link, ILC, ViaNet and MiBridge
depends in significant part upon their ability to attract and retain key
technical, systems and sales personnel, most of whom are not bound by an
employment agreement. Competition for such personnel is intense and there can
be no assurance that the Company will be able to retain its key technical,
systems and sales personnel or that it will be able to attract highly qualified
personnel in the future.
GROWTH STRATEGY AND ACQUISITION ACTIVITIES
The Company's ability to achieve planned levels of growth and the timing
thereof will be materially impacted by its ability to acquire business
communication companies and related businesses. The Company intends to acquire
such additional companies with cash and equity securities such as common stock
or preferred stock, and/or debt instruments. To the extent that the Company
issues equity securities in connection with acquisitions, the equity interest of
<PAGE> 5
its then current stockholders will be diluted. There can be no assurance,
however, that the Company will be able to acquire such additional companies or
that it will be able to use its securities in connection with such purchases or
that it will have the necessary capital resources to purchase such companies.
Although the Company believes that its acquisition strategy will make it
attractive to acquisition candidates, there can be no assurance that the Company
will successfully implement its acquisition program. See "The Company."
POTENTIAL LIABILITY IN CONNECTION WITH ACQUISITIONS
The Company could become subject to liabilities arising from any
acquisition which it has effected or may hereafter effect in the event that the
Company assumes unknown or contingent liabilities or in the event that such
liabilities are imposed on the Company under theories of successor liability.
If the Company becomes subject to such a liability of sufficient magnitude, such
liability could have a material adverse effect on the financial condition and
results of operations of the Company. See "The Company."
EXPECTATION OF GROWTH
The Company plans to expand I-Link's network, which expansion will require
additional capital expenditures. There is no assurance that such capital will be
available or that it will be available on terms beneficial to the Company.
Moreover, the Company's ability to effectively achieve growth will require it to
implement and improve operational, financial and management information systems
and to train, motivate and manage employees, as well as to successfully market
its products and services. These demands require the addition of new management
personnel and the development of additional expertise by existing management.
Failure to enhance customer support resources adequately to support increases in
subscribers, or to adequately expand and enhance telecommunications
infrastructure, may adversely affect the Company's ability to successfully
conduct I-Link's business in the future. There can be no assurance that
customer support or other resources will be sufficient to achieve future growth
or that the Company will be able to implement in whole or in part the planned
expansion. Any failure to do so could have a material adverse effect on the
Company's future operating results. See "Business of the Company."
I-LINK BUSINESS COMPETITION
The market for telecommunications services is extremely competitive. The
Company believes that its ability to compete in I-Link's business successfully
will depend upon a number of factors, including the pricing policies of
competitors and suppliers; the capacity, reliability, availability and security
of I-Link's Intranet infrastructure; market presence and channel development;
the timing of introductions of new products and services into the industry; ease
of access to and navigation of the Internet or other such Data Communication
Networks; the Company's ability in the future to support existing and emerging
industry standards; the Company's ability to balance network demand with the
fixed expenses associated with network capacity; and industry and general
economic trends.
While the Company believes there is currently no competitor in the North
American market providing the same type of capabilities in the same manner as
I-Link will offer using the I-Link Intranet, there are many companies that offer
business communications services, and therefore compete with the Company at some
level. These range from large telecommunications companies and carriers such as
AT&T, MCI, Sprint and LDDS, to smaller, regional resellers of telephone line
access. These companies, as well as others, including manufacturers of hardware
and software used in the business communications industry, could in the future
develop products and services that could compete with those of the Company on a
more direct basis. These entities are far better capitalized than the Company
and control significant market share in their respective industry segments. In
addition, there may be other businesses that are attempting to introduce
products similar to the Company's for the transmission of business information
over the Internet. There is no assurance that the Company will be able to
successfully compete with these market participants. See "Business of the
Company."
DEPENDENCE ON SUPPLIERS
I-Link relies on other companies to provide data communications capacity
via leased telecommunications lines. A significant portion of the leased
telecommunications lines used by I-Link are currently provided by Sprint, US
West, Pacific Telesis, Southwest Bell, and IXC. Further, the Company uses Sprint
as the primary supplier of inbound and outbound telephone services in geographic
areas the Company's own network does not cover. If any of Sprint, US West,
Pacific Telesis, Southwest Bell, and IXC are unable or unwilling to provide or
<PAGE> 6
expand their current levels of service to the Company in the future, the
Company's operations could be materially adversely affected. Although leased
telecommunications lines are available from several alternative suppliers, there
can be no assurance that the Company could obtain substitute services from other
providers at reasonable or comparable prices or in a timely fashion. The
Company is also subject to risks relating to potential disruptions in such
telecommunications services. No assurance can be given that significant
interruptions of telecommunications services to the Company will not occur in
the future. Changes in tariffs, regulations, or policies by any of the Company's
telecommunications providers may adversely affect the Company's ability to
continue to offer long-distance service on what it considers to be commercially
reasonable or profitable terms. See "Business of the Company."
I-Link is also dependent on certain third party suppliers of hardware
components. Although I-Link currently attempts to maintain a minimum of two
vendors for each required product, certain components used by I-Link in
providing networking services are currently acquired from only one source.
I-Link may from time to time experience delays in the receipt of certain
hardware components. A failure by a supplier to deliver quality products on a
timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could materially adversely affect the
Company's ability to integrate, conduct and implement expansion of I-Link's
business.
SOFTWARE AND SERVICE DEVELOPMENT; TECHNOLOGICAL CHANGE
The Company's success in I-Link's business is highly dependent upon its
ability to develop new software and services that meet changing customer
requirements. The market for I-Link's services is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new software and service introductions. There can be no assurance that
the Company can successfully identify new service opportunities and develop and
bring new software and services to the market in a timely manner, or that
software, services or technologies developed by others will not render I-Link's
software, services or technologies noncompetitive or obsolete in the future.
The Company's pursuit of technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
the services currently provided by I-Link to alternate access devices and
conduits.
DEPENDENCE ON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
Key to the quality of I-Link services and the future success of the Company
is the capacity, reliability and security of its network infrastructure to
support the services. The Company must expand and adapt network infrastructure
as the number of users and the amount of information they wish to transfer
increases and to meet changing customer requirements. The expansion and
adaptation of the network infrastructure will require substantial financial,
operational and management resources. There can be no assurance, however, that
the Company will be able to expand or adapt the network infrastructure to meet
additional demand or subscribers' changing requirements on a timely basis, at a
commercially reasonable cost, or at all, or that the Company will be able to
deploy successfully the contemplated network expansion. Any failure of the
Company to expand the network infrastructure, as needed, on a timely basis or to
adapt to changing subscriber requirements or evolving industry standards could
have a material adverse effect on the Company's overall business, financial
condition and results of operations in the future.
NEW AND UNCERTAIN BUSINESS
I-Link is a young business enterprise that is subject to all of the risks
that present themselves to early stage companies, including but not limited to
limited infrastructure, managerial resources, capitalization and market share.
There can be no assurance that I-Link will be able to successfully compete with
larger, more mature, better capitalized enterprises.
In order to realize subscriber growth, the Company must be able to replace
terminating subscribers and attract additional subscribers. However, the sales
and marketing expenses and subscriber acquisition costs associated with
attracting new subscribers are substantial. Accordingly, the Company's ability
to improve operating margins will depend in part on the ability to retain
subscribers. The Company plans to invest significant resources in the
telecommunications infrastructure, customer support resources, sales and
marketing expenses and subscriber acquisition costs. There can be no assurance
that the Company's future efforts in this area will improve subscriber
retention. Since the market for the Company's services is new and the utility
of available services is not well understood by new and potential subscribers,
<PAGE> 7
it is not possible to predict future subscriber retention rates. See "Business
of the Company."
NETWORK MARKETING SALES PROGRAM
The Company has targeted all residential and small-business
telecommunications users through the establishment of a Network Marketing sales
program, providing individuals the opportunity to earn commissions on the sale
of the Company's products. The Company formally launched its Network Marketing
sales program in June 1997. A significant portion of the Company's current
subscriber base was recruited through the Network Marketing sales program and
future subscription growth depends in part on continued exploitation of this
sales channel. See "Business of the Company".
CERTAIN RELATED PARTY TRANSACTIONS
During the first and second quarters of 1998 the Company obtained an
aggregate of $7.768 million in new interim debt financing from Winter Harbor,
LLC as consideration for Winter Harbor's commitment to make the loan, the
Company agreed to issue 6,740,000 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 were advanced. The
warrants have exercise periods of 7.5 years from issuance. 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. Pursuant to the terms of the
loan agreement with Winter Harbor, the initial borrowings of $5,768,000 were
payable upon demand by Winter Harbor no earlier than May 15, 1998, and were
collateralized by essentially all of the assets of the Company's subsidiaries.
Because the loan was not repaid by May 15, 1998, the total loan, including
additional borrowings of $2,000,000 obtained in the second quarter, continues on
a demand basis with interest accruing at prime plus four percent. Additionally,
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 6,740,000 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.
See "The Company" and "Certain Relationships and Related Transactions."
POTENTIAL ADVERSE EFFECTS OF RATE CHANGES
The Company bills its customers for the various long-distance
telecommunications services used by such customers. The total billing to each
customer is generally less than the telephone charges for the same long-distance
service that the customer would pay to a primary seller of such services, such
as Sprint. I-Link's ability to undersell such primary seller arises as a result
of the volume discount offered to I-Link in accordance with the terms of its
contract with Sprint. The Company believes I-Link's lower customer bills is one
of the most important factors in its ability to attract and retain customers.
Therefore, narrowing of the differential between the rates charged to the
Company's customers and the cost of the bulk-rate long-distance
telecommunications services purchased by I-Link for resale to such customers
would have a significant adverse effect on I-Link. To the extent this
differential decreases, the savings I-Link is able to obtain for its customers
would decrease and I-Link would lose customers and face increased difficulty in
attracting new customers, and the Company's operating results would also be
adversely affected. See "Business of the Company."
COMPETITION IN THE SWITCHED NETWORK MARKET
I-Link's competition in the switched network market is all other long-
distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom and local
regional Bell companies. With these carriers controlling the majority of the
market share throughout the U.S., the majority of the potential customers to
which I-Link's products and services are marketed to are customers of one of
these carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources. There can be no assurance that I-Link
will be able to successfully compete with such carriers. See "Business of the
Company."
FAILURE TO MEET SPRINT MINIMUM PURCHASE REQUIREMENTS; CONTINGENT LIABILITIES
In December 1997 the Company signed a two-year negotiated contract with
Sprint for the supply of inbound and outbound telephone services with volume
discounts in return for minimum monthly purchase requirements of $750,000 per
<PAGE> 8
month after the first three months of service under the contract, $1.0 million
after nine months of service under the contract and $1.2 million after twelve
months and through the remainder of service under the contract. Failure to
achieve the minimum will require shortfall payments by the Company. There can
be no assurance that the Company will be able to achieve the required levels of
sales.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications services industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend in part on
its ability to anticipate such changes and to offer on a timely basis market
responsive services that meet these evolving industry standards. There can be
no assurance that the Company will have sufficient resources to introduce new
services that would satisfy an expanded range of customer needs.
CUSTOMER ATTRITION
The Company believes that a high level of customer attrition is common in
the direct dial, long-distance industry. I-Link does not have a long history of
operations and accordingly, the level of customer attrition experienced to date
may not be indicative of future attrition levels. In addition, there can be no
assurance that any steps taken by I-Link to counter increased customer attrition
will be successful.
DEPENDENCE UPON THIRD PARTY TRANSMISSION FACILITIES
The future profitability of the Company is based upon its ability to
transmit its customers' long distance telephone calls on a cost effective basis
over transmission facilities leased from facilities based long distance carriers
that compete with the Company. The Company owns only a limited portion of the
transmission facilities needed to complete all of its customers' long distance
telephone calls. Accordingly, the Company is vulnerable to changes in its lease
arrangements and the Company's direct dial long distance telephone business and
the profitability thereof is dependent upon its ability to enter into cost
effective lease arrangements, both long and short term, with facilities based
carriers for the transmission of calls. While the Company believes that it has
ample access to transmission facilities at attractive rates and expects to
continue to have such access, there can be no assurance that leased capacity
will continue to be available at cost-effective rates.
YEAR 2000 ISSUE
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures. The Company is
continuing its evaluation and upgrade of its computer systems and applications
for the Year 2000. The Year 2000 issue may also affect the systems and
applications of the Company's customers, vendors and resellers.
The Company is seeking or has obtained confirmation from its primary
vendors that they are developing and implementing plans to minimize Year 2000
consequences. The Company's development of an enhanced services billing
platform is being designed to be Year 200 compliant. In addition, proprietary
software and technology for both internal use and for resale has been designed
to be Year 2000 compliant.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for minimizing Year 2000 consequences
and expects to incur internal labor as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare its
systems for the Year 2000. The total cost of modifications and conversions is
not know at this time; However, it is not expected to be material to the
Company's financial position, results of operations or cash flows and is being
expensed as incurred. Also, the Company is currently developing a contingency
plan to deal with potential Year 2000 related business interruptions that may
occur on January 1, 2000 or thereafter. The Company anticipates that the
contingency plan will be completed by June 30, 1999.
If compliance is not achieved in a timely manner, the Year 2000 issue could
have a material adverse effect on the Company's operations. However, the
Company is focusing on identifying and addressing all aspects of its operations
that may be affected by the Year 2000 issue and is addressing the most critical
<PAGE> 9
applications first. As a result, Company management does not believe its
operations will be materially affected.
EQUIPMENT FAILURES; NATURAL DISASTER
Although the Company carries "commercial property/business interruption"
insurance, such insurance does not include coverage of certain natural
disasters. A major equipment failure or a natural disaster affecting any one of
the Company's switching facilities could have a material adverse effect on the
Company's operations.
GOVERNMENT REGULATION
Certain of the Company's operations are subject to regulation by the
Federal Communications Commission ("FCC") under the Communications Act of 1934,
as amended (the "Communications Act"). In addition, certain of the Company's
businesses are subject to regulation by state public utility or public service
commissions. Changes in the regulation of, or the enactment or changes in
interpretation of legislation affecting, the Company's operations could have a
material adverse effect on the Company and the value of the Common Stock.
Recently, the Federal Government enacted the Telecommunications Act of 1996 (the
"Telecommunications Act"), which, among other things, allows the Regional Bell
Operating Companies ("RBOCs") and others to enter the long distance business.
Entry of the RBOCs or other entities, such as electric utilities and cable
television companies, into the long-distance business may have a negative impact
on the Company or its customers. The Company anticipates that certain of such
entrants will be strong competitors because, among other reasons, they may enjoy
one or more of the following advantages: they may (i) be well capitalized; (ii)
already have substantial end user customer bases; or (iii) enjoy cost advantages
relating to local loops and access charges. The introduction of additional
strong competitors into the switched long-distance business would mean that the
Company would face substantially increased competition. This could have a
material adverse effect on the Company and the value of the Common Stock. In
addition, the Telecommunications Act provides that state proceedings may in
certain instances determine access charges the Company is required to pay to the
local exchange carriers. No assurance can be given that such proceedings will
not result in increases in such rates. Such increases could have a material
adverse effect on the Company or its customers and on the value of the Common
Stock. See "Business of the Company -- Government Regulation."
ILC's activities are regulated by the public utility commissions of the
various states in which the Company operates. Also, decisions by the FCC with
respect to the permissible business activities or pricing practices may have an
adverse impact on ILC's operations. ILC could be subject to complaints seeking
damages and other relief filed by parties claiming to be harmed by ILC's failure
to file tariffs. Moreover, any significant change in regulations by state
governmental agencies could significantly increase ILC's costs or otherwise have
an adverse impact on ILC's activities and on its expansion efforts. The FCC has
recently taken or is currently considering action on various proposals,
including proposals relating to interstate access transport services, public
filing of rates, proprietary calling cards and billed party preference.
Additionally, legislation has recently been enacted in Congress further
liberalizing the telecommunications industry, specifically by permitting the
Bell Operating Companies (BOCs) to provide service in the long-distance market
and allowing the long-distance carriers such as AT&T, MCI and the Company into
the local markets. Although safeguards have been inserted into the legislation
to ensure fair competition, there can be no assurance that the entry of the BOCs
into the long-distance market will not have a material adverse effect on the
Company's business. See "Business of the Company
GOVERNMENT REGULATION OF INTERNET-RELATED BUSINESS
I-Link has been moving its customers off the facilities of existing long
distance carriers, and has increased its reliance on a proprietary Internet
protocol network for transmission in the hope of enjoying minimal federal
regulation under current rules. Historically, the FCC has not regulated
companies that provide the software and hardware for Internet telephony, or
other Internet data functions, as common carriers or telecommunications service
providers. Moreover, in May 1997 the FCC concluded that information and enhanced
service providers are not required to contribute to federal universal service
funding mechanisms. Notwithstanding the current state of the rules, the FCC's
potential jurisdiction over the Internet is broad because the Internet relies on
wire and radio communications facilities and services over which the FCC has
long-standing authority. The FCC's framework for "enhanced services" confirms
that the FCC has authority to regulate computer-enriched services, but provides
that carrier-type regulation would not serve the public interest. Only recently
has this general approach been questioned within the industry.
<PAGE> 10
DISCONTINUED MEDICAL OPERATIONS
The majority of the Company's revenue in 1996 and 1995 was derived
from owning and operating outpatient diagnostic imaging facilities in Florida.
This revenue was primarily generated from two subsidiaries operating magnetic
resonance imaging ("MRI") facilities. Effective December 31, 1997, the Company
made the decision to sell its Medical Imaging Division. The Board of Directors
approved the plan of disposal on March 23, 1998. Consequently, the Medical
Imaging Division has been accounted for as a discontinued operation in the
financial statements included herein. To the extent that the proceeds from such
disposition are less than the expected disposition value, that will contribute
further to the loss from discontinued operations.
EXPOSURE TO TORT LIABILITY IN MEDICAL INDUSTRY
The Company's discontinued medical operation operates, and has operated,
medical equipment used to perform procedures on or diagnose disease in patients.
The Company is exposed to tort liability in the event of harm to patients due to
the negligence of the Company, its agents, and employees. The Company currently
maintains professional liability insurance coverage in the amount of
$1,000,000. The Company also maintains an umbrella policy covering, among other
things, workers' compensation, general, and automobile liability in an amount of
$9,000,000 in coverage. Any claims could have a material adverse effect on the
Company. In addition, there is no assurance that the Company will be able to
continue to maintain such insurance coverage in the future. The Company acts as
general partner of a limited partnership controlled by the Company that directly
owns, controls and operates the Company's discontinued medical facilities. As
such, the Company is exposed to general liability for torts committed by such
partnership and its agents and employees and for contracts entered into by those
partnerships.
DILUTION
Holders of Common Stock of the Company will suffer significant dilution in
the event that any of the Company's outstanding convertible securities,
including outstanding shares of Preferred Stock, warrants and options are
converted by the holders thereof. See "Description of Securities" and "Recent
Transactions." Additional dilution may result in the event of the exercise of
warrants and options, including options granted pursuant to the Company's stock
option and purchase plans and employment agreements.
DIVIDENDS
The Company has not paid any dividends on any of its outstanding securities
to date and, other than as set forth herein, does not anticipate paying any cash
dividends on its securities in the foreseeable future. As of August 15, 1998,
undeclared and unpaid cumulative dividends on all shares of Preferred Stock
totaled $2,605,206. The Company currently intends to retain all working capital
and earnings, if any, to finance the operations of its businesses and to expand
its businesses.
Dividends on the Class C Preferred Stock will be payable when, as and if
declared by the Board of Directors, to the extent permissible under the Florida
Business Corporation Act, to the holders of the Class C Preferred Stock in cash
or, at the option of the Company as determined by the Board of Directors, in
shares of Common Stock. Dividends may be paid in shares of Common Stock only if
such shares have been registered under the Securities Act. In connection with
the Winter Harbor equity investment in the Company, the Company has issued an
aggregate of 4,400 shares of Series M Preferred Stock. The Series M Preferred
Stock will be entitled to receive cumulative dividends in the amount of 10% per
annum. The Company's future cash flow and legal capital may be insufficient to
enable the Company to pay dividends. See "Recent Transactions."
FUTURE ISSUANCES OF STOCK BY THE COMPANY; POTENTIAL ANTI-TAKEOVER EFFECT
The Company has authorized capital stock of 75,000,000 shares of Common
Stock, $.007 par value per share and 10,000,000 shares of preferred stock,
$10.00 par value per share (the "Preferred Stock"). As of August 19, 1998,
there were 18,556,384 shares of Common Stock issued and outstanding; 52,208
shares of Class C Preferred Stock were issued and outstanding; 4,400 shares of
Series M Preferred Stock were issued and outstanding; and 1,000 shares of Series
F Preferred Stock were issued and outstanding. Although, other than as
disclosed herein, there are no present plans, agreements or undertakings with
respect to the Company's issuance of any shares of stock or related convertible
securities, the issuance of any of such securities by the Company could have
anti-takeover effects insofar as such securities could be used as a method of
discouraging, delaying or preventing a change in control of the Company. Such
<PAGE> 11
issuance could also dilute the public ownership of the Company. Inasmuch as the
Company may, in the future, issue authorized shares of Common Stock or Preferred
Stock without prior stockholder approval, there may be substantial dilution to
the interests of the Company's stockholders. However, given that the Company is
authorized to issue more stock, there can be no assurance that the Company will
not do so. In addition, a stockholder's pro rata ownership interest in the
Company may be reduced to the extent of the issuance and/or exercise of any
options or warrants relating to the Common Stock or Preferred Stock. The
issuance of additional shares of Common Stock may have the effect of rendering
more difficult or discouraging an acquisition or change in control of the
Company. See "Description of Securities."
FUTURE SALES OF STOCK BY STOCKHOLDERS
As of August 19, 1998, approximately 12,175,000 shares of Common Stock
issued and outstanding were "restricted securities" as that term is defined
under the Securities Act and in the future may only be sold in compliance with
Rule 144 promulgated under the Securities Act or pursuant to an effective
registration statement. Rule 144 provides, in essence, that a person (including
a group of persons whose shares are aggregated) who has satisfied a one-year
holding period for such restricted securities may sell within any three-month
period, under certain circumstances, an amount of restricted securities which
does not exceed the greater of 1% of that class of the Company's outstanding
securities or the average weekly trading volume of that class of securities
during the four calendar weeks prior to such sale. In addition, pursuant to
Rule 144, persons who are not affiliated with the Company and who have held
their restricted securities for at least two years are not subject to the
quantity limitations or the manner of sale restrictions of the rule. As of the
date hereof, substantially all of the Company's restricted securities are
available for resale pursuant to Rule 144 or pursuant to a currently effective
registration statement (separate from the registration statement of which this
Prospectus forms a part), which will allow such shares to be resold into the
market.
In the event that the shares of Common Stock which are not currently
salable become salable by means of registration, eligibility for sale under Rule
144 or otherwise and the holders of such securities elect to sell such
securities in the public market, there is likely to be a negative effect on the
market price of the Company's securities and on the ability of the Company to
obtain additional equity financing. In addition, to the extent that such
securities enter the market, the value of the Company's securities in the over-
the counter market may be reduced. No predictions can be made as to the effect,
if any, that sales of such securities (or the availability of such securities
for sale) will have on the market price of any of such securities which may
prevail from time to time. Nevertheless, the foregoing could adversely affect
such prevailing market prices.
AUTHORIZATION OF PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation, as further
amended (the "Articles of Incorporation"), authorize the issuance of up to
10,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without stockholder approval, issue shares of Preferred Stock
with dividend, liquidation, conversion, voting or other rights which are senior
to the Shares or which could adversely affect the voting power or other rights
of the holders of outstanding shares of Preferred Stock or Common Stock. In
addition, the issuance of additional shares of Preferred Stock may have the
effect of rendering more difficult, or discouraging, an acquisition of the
Company or changes in control of the Company. Although, other than as set forth
herein, the Company does not currently intend to issue any additional shares of
Preferred Stock, there can be no assurance that the Company will not do so in
the future. See "Risk Factors -- Future Issuances of Stock by the Company;
Potential Anti-Takeover Effect," "Risk Factors -- Certain Provisions of Articles
of Incorporation and Bylaws."
CONTINUED NASDAQ LISTING
The Common Stock is traded on the NASDAQ SmallCap Market tier of The NASDAQ
Stock Market ("NASDAQ") under the symbol "ILNK." While the Common Stock is
currently listed for quotation on NASDAQ, there can be no assurance given that
the Company will be able to continue to satisfy the requirements for maintaining
quotation on NASDAQ or that such quotation will otherwise continue. If, for any
reason, the Common Stock becomes ineligible for continued listing and quotation,
holders of the Company's securities may have difficulty selling their securities
should they desire to do so.
<PAGE> 12
Under applicable NASDAQ rules, in order to qualify for continued listing on
NASDAQ, a company must have, among other things: (1) net tangible assets of at
least $2,000,000 or market capitalization of at least $35,000,000 or net income
in two of the previous three years of at least $500,000; (2) 500,000 or more
publicly trading shares (not counting shares held by affiliates of the Company);
(3) market value of public float of at least $1,000,000; (4) minimum bid price
of $1.00; (5) not fewer than two marketmakers; and (6) not fewer than 300
shareholders. Although the Company was able initially to satisfy the
requirements for listing of its securities on NASDAQ, the Company may be unable
to continue to satisfy the requirements for maintaining quotation of its
securities thereon, and trading, if any, in the Company's securities would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets" of the National Quotation Bureau, Inc. or on the NASD OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of or to obtain accurate quotations as to the price of such
securities.
"PENNY STOCK" REGULATIONS
The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price (as defined) of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative, current quotations for the
securities, and information on the limited market in penny stocks. In addition,
the broker-dealer must obtain a written acknowledgment from the customer that
such disclosure information was provided and must retain such acknowledgment
for at least three years. Further, monthly statements must be sent to the
customer disclosing current price information for the penny stock held in the
account. While many NASDAQ-listed securities would otherwise be covered by the
definition of penny stock, transactions in a NASDAQ-listed security would be
exempt from all but the sole marketmaker provision for: (i) issuers who have
$2,000,000 in tangible assets ($6,000,000 if the issuer has not been in
continuous operation for three years); (ii) transactions in which the customer
is an institutional accredited investor; and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a NASDAQ-listed
security directly with a NASDAQ marketmaker for such securities would be subject
only to the disclosure with respect to commissions to be paid to the broker-
dealer and the registered representative. The foregoing rules may materially
adversely affect the liquidity for the market of the Company's securities. Such
rules may also affect the ability of broker-dealers to sell the Company's
securities and may impede the ability of holders of the Company's securities to
sell such securities in the secondary market.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
Pursuant to the Articles of Incorporation, the Board of Directors has the
authority to issue up to 10,000,000 shares of Preferred Stock without action by
the stockholders in one or more series having such preferences, rights and other
provisions as the Board of Directors may designate in providing for the issuance
of such series. The Articles of Incorporation and Bylaws contain provisions
which may discourage certain transactions which involve an actual or threatened
change in control of the Company. See "Description of Securities -- Anti-
Takeover Measures."
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company is classified into three classes.
Members of each class serve for staggered three year terms, with members of one
class coming up for election each year. The classification of the Board of
Directors may make it difficult for shareholders to effect a change in
management. See "Management."
VOTING CONTROL
As of August 15, 1998, Winter Harbor owns 4,400 shares of Series M
Preferred Stock, which are convertible at any time into 4,400,000 shares of
Common Stock, and it holds $7.768 million in promissory notes, which are
convertible into 2,824.727 shares of Series M Preferred Stock, which in turn are
convertible at any time into 2,824,727 shares of Common Stock. Winter Harbor
also holds warrants, exercisable at any time, for the purchase of up to
17,540,000 shares of Common Stock. In addition, should Winter Harbor elect to
convert its $7.768 million in promissory notes into additional shares of Series
M Preferred Stock, it is entitled to receive additional warrants to purchase
5,000,000 shares of Common Stock. Upon the conversion of the Series M Preferred
<PAGE> 13
Stock, conversion of the convertible promissory notes and the exercise of all of
its warrants, securities then held by Winter Harbor would represent up to 61.6%
of the voting securities of the Company. Mr. Keenan serves on the Board of
Directors as the designee of Winter Harbor. As a group, the officers and
directors of the Company may be deemed to beneficially own an aggregate of
3,054,896 shares, or approximately 14.2% of the outstanding voting securities.
By virtue of their ownership of the Company's issued and outstanding Common
Stock, the officers and directors of the Company have the ability to influence
the election of directors and, consequently, influence the Company's business
and affairs. See "Security Ownership of Certain Beneficial Owners and
Management."
LACK OF PATENT PROTECTION
The Company does not currently hold any patents, although I-Link has filed
patent applications for its technology for fax and voice communications over an
internet environment. To the extent any technology included in such products is
patentable, there can be no assurance that any patent will in fact be issued or
that such patents will be effective to protect the Company's products from
duplication by other developers. In addition, there can be no assurance that
the Company will be able to afford the expense of any litigation that may be
necessary to enforce its right under any patent.
NEW PRODUCTS
New products are subject to substantial risks, including high costs of
introduction, market acceptance and duplication by other developers. See "Risk
Factors -- I-Link Business Competition" and "Business of the Company."
DILUTIVE IMPACT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
The holders of outstanding options, warrants and convertible securities
have the opportunity to profit from a rise in the market price of the Common
Stock, if any, without assuming the risk of ownership, with a resulting dilution
in the interest of other shareholders. The Company may find it more difficult
to raise additional equity capital if it should be needed for the business of
the Company while such options and warrants are outstanding. At any time at
which the holders thereof might be expected to exercise them, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by such options and warrants. The holders of such options and warrants
have the right to require registration under the Securities Act of the shares of
Common Stock that are issuable upon exercise of such options and warrants and
have certain demand and/or "piggy-back" registration rights. The cost to the
Company of effecting any such registration may be substantial.
THE COMPANY
I-Link Incorporated (formerly known as Medcross, Inc. and previously
defined as the "Company") was incorporated in Florida in April 1983. 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, LLC, to market its
products.
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.
The technology that distinguishes I-Link from other telecommunications
companies is the capability to carry high volumes of long-distance traffic at
significantly reduced cost and provide enhanced services through its proprietary
combination of IP and compression technologies, while maintaining the ease of
use, high quality, and reliability of traditional phone systems. During the
first and second quarters of 1998, the Company benefitted from the commercial
deployment of its technology through its Communication Engines established at
its facilities in Los Angeles, Dallas/Ft. Worth, Phoenix and Salt Lake City,
and steadily increased the commercial telecommunications traffic carried over
its Communications Engines. This permitted the Company to announce a new 4.9-
cent-per-minute long-distance calling rate to customers whose long-distance
calls both originate and terminate in the more than 25 calling areas located in
these metropolitan markets. The Company intends to continue to expand the
geographic areas covered by its Communications Engines.
<PAGE> 14
During the second quarter of 1998, the Company announced the development of
a communications product that would increase the telephone line capacity in any
household or business. Initially dubbed "C4" (Customer Communications Control
Center), the product will provide home and small business customers the capacity
of up to 24 phone lines using the existing telephone lines and wires that are
connected to their homes or offices today. In addition, C4 will provide around-
the-clock Internet access and access to the enhanced services I-Link currently
offers, including voice mail, fax, paging, e-mail, conference calling and
follow-me-anywhere one-number service. C4 uses existing telecommunications
networks, including the standard copper-wire lines currently installed in nearly
every home and business, as well as high-speed data lines and infrastructure
that have been announced or are being installed by local and long-distance
telecommunications companies. The C4 should undergo early field trials in the
Fourth quarter of 1998 and the Company anticipates shipping in 1999.
Continuing the Company's efforts to provide state of the art quality
services to its customers, the Company furthered the development of its enhanced
services billing (ESB) platform during the second quarter of 1998. The ESB
system is an integrated software solution providing order entry, provisioning,
fulfillment, billing, collections and customer service capabilities for both
retail and wholesale telecommunication markets. ESB will provide among other
things the following specific features: (1) easy product definition for products
and services, (2) quick access to on-line customer information, (3) tracking of
provisioning and fulfillment status, (4) convergent billing of products and
services, (5) seamless integration with third party credit card, collections
and telecommunication tax providers, (6) facilitation of import/export files and
(7) designs for future selling of packet and byte billing increments. These
automated features will enhance our customer service and handling procedures.
In early 1998 the Company determined that it would refocus the resources of
the Company to concentrate on those channels of distribution of its products
which had higher profit margins (primarily the Network Marketing Channel) and
accordingly terminated certain relationships, including its single largest
reseller account, which accounted for 21% of the Company's telecommunication
services revenues during the first quarter of 1998. The loss of these revenues
was the primary cause of the decrease in telecommunications service revenue in
the second quarter of 1998. Telecommunications service revenue from other
channels, including Network Marketing, continued to increase during the second
quarter of 1998.
EMPLOYEES
As of August 15, 1998, the Company employed approximately 206 full-time
employees, including six persons in management and twelve administrative
personnel. The Company is not a party to any collective bargaining agreement
and the Company's employees are not represented by any labor union. The Company
considers its relationship with its employees to be good. The Company's success
depends in large part upon its ability to attract, develop, motivate and retain
highly skilled employees, of which there can be no assurance.
USE OF PROCEEDS
The Securities subject hereto are issuable as dividends on previously
issued shares of Class C Preferred Stock. Consequently, the Company will not
receive any of the proceeds from the sales of the Dividend Shares.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June 30,
1998.
<TABLE>
<S> <C>
Stockholders' Equity:
Preferred Stock, $10.00 par value; 10,000,000
shares authorized; 83,215 shares outstanding,
liquidation preference of $19,357,000 at 6/30/98 $ 832,150
Common Stock, $.007 par value; 75,000,000
shares authorized and 17,918,016 shares
outstanding 125,425
Additional Paid-In Capital 78,550,981
Deferred Compensation from Stock Options ( 1,492,143)
Accumulated Deficit (75,163,845)
----------
Total Capitalization $ 2,852,568
==========
</TABLE>
<PAGE> 15
DIVIDEND POLICY
Other than as set forth herein, the Company does not currently anticipate
paying any dividends on its Common Stock in the foreseeable future. Dividends
on the Class C Preferred Stock may be paid in shares of Common Stock (the
"Dividend Shares") at the option of the Company provided that the Dividend
Shares are the subject of a registration statement which has been declared
effective under the Securities Act. It is the Company's intention henceforth
to pay such dividends in shares of Common Stock. The shares of Common Stock
which are the subject of this Prospectus will be issued in payment of dividends
due and payable and to become payable to holders of Class C Preferred Stock. As
of August 19, 1998, accrued and unpaid dividends on all shares of Preferred
Stock totaled $2,605,206. The Company currently intends to retain all working
capital and earnings, if any, to finance the operations of its businesses and
to expand its businesses.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING INFORMATION
This Prospectus contains certain forward-looking statements and
information relating to the Company that are 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
below. 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.
LIQUIDITY AND CAPITAL RESOURCES - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Cash and cash equivalents as of June 30, 1998 were $930,176, restricted
certificates of deposits were $1,136,661 and the working capital deficit was
$14,123,371. Cash used by operating activities during the six-month period ended
June 30, 1998 was $7,109,634 as compared to $5,040,728 during the same period
ended June 30, 1997. The increase in cash used by operating activities in 1998
was primarily due to an increase in accounts receivable and the increased
operating loss as the Company continued to develop its infrastructure and
product base.
Net cash used by investing activities in the six-month period ended June
30, 1998 was $1,063,444 as compared to net cash used of $48,680 in the same
period ended June 30, 1997. Cash used by investing activities in 1998 was
attributable to the purchase of furniture, fixtures and equipment of $1,906,659
which was offset by $310,000 received from sale of certain assets from
discontinued operations and $533,215 from matured restricted certificates of
<PAGE> 16
deposit. In the first six months of 1997 cash used by investing activities was
primarily due to purchase of furniture, fixtures and equipment of $483,992 which
was offset by cash received of $435,312 in the acquisition of ILC.
Financing activities provided net cash of $7,474,130 in the first six
months of 1998 as compared to cash provided of $1,765,567 in the same period of
1997. Cash provided in 1998 included proceeds of $7,768,000 from notes payable
and warrants and $684,943 in proceeds from exercises of common stock warrants
and options. Payments on long-term debt and capital lease obligations of
$808,348 from continuing operations and $170,465 from discontinued operations
offset these proceeds. During the same six months in 1997, financing activities
provided cash of $1,765,567 including $2,000,000 in proceeds from issuance of
notes payable and warrants and $22,499 from the exercise of common stock
warrants and options which sources were offset by repayments of $185,724 on
long-term debt and capital lease obligations from continuing operations and
$71,208 from discontinued operations.
The Company incurred a net loss from continuing operations of $18,071,592
for the first six months 1998, and as of June 30, 1998 had an accumulated
deficit of $75,163,845. The Company anticipates that revenues generated from
its continuing operations will not be sufficient during 1998 to fund its
operations, continued expansion of its private telecommunications network
facilities and anticipated growth in subscriber base. To provide a portion of
its capital needs, the Company has entered into two financing arrangements as
described below. The Company anticipates that additional funds will be necessary
from public or private financing markets to fund continued operations and to
successfully integrate and finance the planned expansion of the business
communications services and to discharge the financial obligations of the
Company.
LIQUIDITY AND CAPITAL RESOURCES - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cash and cash equivalents as of December 31,1997 were $1,643,805, short term
certificates of deposits were $1,628,500 and working capital deficit was
$2,955,180. Cash used by operating activities during 1997 was $12,008,526 as
compared to $4,840,285 in 1996 and cash provided by operating activities of
$319,362 in 1995. The increase in cash used by operating activities in 1997 and
1996 was primarily due to increased operating losses as the Company continued to
develop its infrastructure and product base.
Net cash used by investing activities in 1997 was $1,387,526 as compared to
$2,573,486 in 1996 and to net cash provided of $4,283 in 1995. The increase in
cash used by investing activities in 1997 was primarily attributable to the
purchase of property and equipment of $1,948,857 which was offset by cash
received in connection with the acquisitions of ILC and MiBridge of $514,886 and
$53,500 from maturity of a certificate of deposit. In 1996 the increase in cash
used by investing activities was due primarily to purchases of property and
equipment of $669,970 and certificates of deposit-restricted of $1,962,601 which
uses were offset by $60,000 from maturity of a certificate of deposit.
Financing activities provided net cash of $10,623,680 in 1997 and
$11,834,681 in 1996. Cash provided in 1997 included $5,000,000 in long-term
debt, which was subsequently exchanged for equity, $6,618,888 of net proceeds
from the sale of preferred stock and $137,933 from the exercise of warrants and
options. During 1997 the Company repaid $1,079,585 of long-term debt and capital
lease obligations. Cash provided in 1996 included $2,502,333 from long-term debt
and $12,290,000 net proceeds from the sale of preferred stock. During 1996 the
Company repaid $2,990,385 of long-term debt and capital lease obligations.
The Company incurred a net loss from continuing operations of $28,667,692
for the year ended December 31, 1997, and as of December 31, 1997 had an
accumulated deficit of $56,984,247. The Company anticipates that revenues
generated from its continuing operations will not be sufficient during 1998 to
fund its operations, continued expansion of its private telecommunications
network facilities and anticipated growth in subscriber base. To provide a
portion of its capital needs, the Company has entered into two financing
arrangements as described below. The Company anticipates that additional funds
will be necessary from public or private financing markets to fund continued
operations and to successfully integrate and finance the planned expansion of
the business communications services and to discharge the financial obligations
of the Company.
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 second
quarter of 1998 revenues from continuing operations decreased $854,585 from the
<PAGE> 17
first quarter of 1998 primarily due to decreases of $646,010 in
telecommunication services and $377,285 in marketing services, both of which
were offset by an increase of $168,710 in technology licensing and development.
The decrease in telecommunication services resulted from the Company's decision
in early 1998 to refocus the resources of the Company to concentrate on the
those channels of distribution of its products which produce higher profit
margins (primarily the Network Marketing Channel). The effect of this decision
was the Company's termination of several reseller accounts during the second
quarter of 1998 including the Company's single largest reseller account.
Terminating these relationships resulted in decreased revenues of $852,000 in
the second quarter as compared to the first quarter of 1998. However, this
decrease in revenue was offset by an increase in telecommunication services
revenue in the Network Marketing Channel of $360,000 which represents growth of
telecommunication services revenue from this channel in the second quarter as
compared to the first quarter of 1998. The decrease from marketing services
revenue was primarily due to the Company's decision to discontinue sale of the
V-Phone and Net Link 1+ products ($179,340) during the second quarter and a
cyclical decrease in revenues from national conventions and training,
promotional and presentation materials ($197,945) (the Company's national
conventions are held in the first and third quarters). The Company anticipates
that revenue from all sources of continuing operations will continue to 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
continue to increase revenues and profit margins. The Company also believes
that revenue and cash flows from software sales and development will continue to
increase in 1998 due to maturation of its products and royalty and licensing
agreements.
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 six months for the remainder of 1998
as it continues development of new technology. In March 1998, the Company
committed approximately $2.2 million (of which $529,000 had been paid as of June
30, 1998) to development of a new internal information system that will
encompass nearly all computer systems.
In order to provide for capital expenditure and working capital needs,
during the second quarter of 1998 the Company obtained a total of $2 million (in
addition to $5.768 million in the first quarter) in new interim debt financing
from Winter Harbor, LLC Pursuant to the terms of the loan agreement with
Winter Harbor, (which bears interest at prime plus four), the Company agreed to
issue 1,740,000 warrants to purchase common stock of the Company at exercise
prices ranging from $6.12 to $6.67 based upon 110% of the closing price of the
common stock on the day loan funds were advanced. The warrants expire seven and
one-half years from the grant date. The loan is due upon demand and
collateralized by essentially all of the assets of the Company's subsidiaries.
Additionally, Winter Harbor has the right to elect at any time until the loan
(including the $5.768 million loan in the first quarter of 1998) 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 6,740,000 Loan
Warrants (including 5,000,000 warrants issued in connection with the $5.768
million loan in the first quarter of 1998) 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.
On July 9, 1998, the Company entered into an agreement with JNC Opportunity
Fund Ltd. ("JNC") by which it obtained a $10,000,000 equity investment which
resulted in net proceeds to the Company of $9,470,000. The terms of the equity
investment were amended on July 28, 1998. Under the original terms of the
equity investment, JNC purchased shares of the Company's newly created 5% Series
E Convertible Preferred Stock (the "Series E Preferred Stock"), which were
convertible into the Company's common shares at a conversion price of the lesser
of 110% of the market price of the Company's publicly traded common shares as of
the date of closing, and 90% of the market price at the time of conversion. In
addition, JNC obtained a warrant to purchase 250,000 shares of the Company's
common stock at an exercise price equal to 120% of the market price of the
Company's publicly traded common shares as of the date of closing. On July 28,
1998, the terms of the equity investment were amended to provide a floor to the
conversion price, and to effect such amendment the Company created the 5% Series
F Convertible Preferred Stock (the "Series F Preferred Stock") with which the
Series E Preferred Shares originally issued to JNC were exchanged. Pursuant to
the amendment, the Series F Preferred Shares are convertible into common shares
at a conversion price of the lesser of $4.00 per common share or 87% of the
market price of the Company's common shares at the time of conversion, subject
<PAGE> 18
to a $2.50 floor. In the event the market price remains below $2.50 for five
consecutive trading days, the floor will be re-set to the lower rate, provided,
however, that the floor shall not be less than $1.25. JNC also received an
additional warrant to purchase 100,000 shares of the Company's common stock at
an exercise price of $4.00 per common share. The Series F Preferred Shares may
be converted at any time, are automatically converted at the end of three years,
and are subject to specific provisions that would prevent any issuance of I-Link
common stock at a discount if and to the extent that such shares would equal or
exceed in the aggregate 20% percent of the number of common shares outstanding
prior to the recent $10,000,000 placement absent shareholder approval as
contemplated by the NASDAQ stock market non-quantitative designation criteria.
In addition, the Company is required to use the net proceeds from the sale of
the Series F Preferred Stock for working capital purposes, except for up to $4
million which can be used in part to retire indebtedness owed to Winter Harbor
LLC and to satisfy the Company's arbitration settlement with MCI Communications,
Inc.
In March 1998, the Company entered into a written agreement with a private
investor under the terms of which the investor agreed to provide to the Company
a credit facility of from $10 million to $20 million. Subsequently, the investor
defaulted in its obligations to make the loans to the Company in the time frames
provided for in the agreement. Despite continued representations from the
investor that it intends to provide the funding to the Company, the investor
remains in default. The Company has declared the investor in breach of the
written agreement
The Company anticipates that additional funds will be necessary from public
or private financing markets to fund continued operations and 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.
RESULTS OF OPERATION
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
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 six-month periods
ending June 30, 1998 and 1997 have been reported as discontinued operations.
REVENUES
Telecommunications service revenue increased $4,501,119 to $8,915,944 in
the first six months of 1998 as compared to $4,414,825 in the first six months
of 1997. The increase is due primarily to the new customers obtained through
the Network Marketing channel which began generating revenues in the third
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 $2,305,209 in the first six months of 1998 as compared to $720,490
in the same period of 1997. The network marketing channel and its related
product offerings began late in the second quarter of 1997.
Technology licensing and development revenue was $580,610 in the first six
months 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
Telecommunication network expenses increased $2,444,760 in the first six
months of 1998 to $9,510,550 as compared to $7,065,790 for the same period in
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 services revenue. The increase in expense was primarily
due to the increase in telecommunications services revenue. The Company expects
that telecommunications network expense will increase as telecommunication
<PAGE> 19
services revenue increases but at a lesser rate of growth as the Company
benefits from economies of scale and increased traffic on the Company's enhanced
IP (Internet protocol) telephony network.
Marketing service costs were $3,210,957 in the first six months of 1998 as
compared to $640,739 for the same period in 1997. The expenses relate directly
to the Company's marketing service revenue that began late in the second quarter
of 1997 and accordingly expenses incurred in the first six months of 1998 and
1997 are not directly comparable. Marketing service expenses include
commissions and the costs of providing training, promotional and presentation
materials and ongoing administrative support to independent representatives.
Selling, general and administrative expense increased $580,175 to
$4,932,092 in the first six months of 1998 as compared to $4,351,917 in the
first six months in 1997. The increase was primarily due to increased
administrative expense associated with the launch of the Network Marketing
channel late in the second quarter of 1997 and general increases in overhead and
personnel expenses associated with growing the Company's telecommunication
business.
The provision for doubtful accounts increased $1,103,662 to $1,448,662 in
the six months of 1998 as compared to $345,000 in the same period in 1997. This
increase is primarily due to the following: (1) growth in the Company's
telecommunication services revenue and (2) an increase in uncollectible accounts
receivable associated with the Company's decision in early 1998 to concentrate
its resources on those channels of distribution of its products with higher
profit margins (primarily Network Marketing), the effect of which was to
terminate relationships with several reseller accounts in the second quarter of
1998, including the Company's single largest reseller account.
Depreciation and amortization increased $1,236,675 to $2,049,826 in the
first quarter of 1998 as compared to $813,151 in the first six months of 1997.
The increase is primarily due to increased amortization associated with
intangible assets recorded in the third quarter of 1997 with the release from
escrow of the final 1,000,000 shares of common stock in connection with the 1996
acquisition of I-Link Worldwide Inc. and the third quarter 1997 acquisition of
MiBridge. 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 $798,821 to $1,144,155 in the first six
months of 1998 as compared to $345,334 in the same period in 1997. The increase
is associated with the Company's acquisition of MiBridge, Inc in the third
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 $7,267,306 to $7,640,577 in the first six months
of 1998 as compared to $373,271 in the same period in 1997. The net increase is
primarily due to $7,274,000 (non-cash) in amortization of debt discount related
to certain warrants granted in connection with $7,768,000 in loans to the
Company in the first six months of 1998 as compared to $320,000 (non-cash) on
certain convertible notes in the same period of 1997.
Interest and other income decreased $77,260 to $63,464 in the first six
months of 1998 as compared to $140,724 in the same period of 1996. The decrease
was primarily due to a decrease in the average balance of cash on hand in the
first six months of 1998.
THREE-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO THE THREE-MONTH PERIOD ENDED
JUNE 30, 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.
REVENUES
Telecommunication services revenue increased $1,867,358 to $4,134,967 in
the second quarter of 1998 as compared to $2,267,609 in the second quarter of
1997. The increase is due primarily to the new customers obtained through the
Network Marketing channel which began generating revenue in the third quarter of
1997.
Marketing services revenue, which includes revenue recognized from
<PAGE> 20
independent representatives for training, promotional and presentation
materials, V-Phone and Netlink 1+ product sales, and ongoing administrative
support was $963,962 in the second quarter of 1998 as compared to $720,490 in
the same quarter of 1997. The network marketing channel and its related product
offerings began late in the second quarter of 1997.
Technology licensing and development revenue was $374,660 in the second
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 second quarter of 1997.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $597,626 in the second quarter
of 1998 to $4,612,334 as compared to $4,014,708 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 services revenue. The increase in expense was primarily due to
the increase in telecommunication services revenue. The Company expects that
telecommunications network expense will increase as telecommunication services
revenue increases but at a lesser rate of growth as the Company benefits from
economies of scale and increased traffic on the Company's enhanced IP (Internet
protocol) telephony network.
Marketing service costs were $1,343,072 in the second quarter of 1998 as
compared to $640,739 for the same quarter of 1997. The expenses relate directly
to the Company's marketing services revenue that began late in the second
quarter of 1997. Marketing services expense includes commissions and the costs
of providing training, promotional and presentation materials and ongoing
administrative support to independent representatives.
Selling, general and administrative expense increased $281,075 to
$2,520,506 in the second quarter of 1998 as compared to $2,239,431 in the second
quarter of 1997. The increase was primarily due to increased overhead and
personnel costs associated with growing the Company's telecommunication
business.
The provision for doubtful accounts increased $405,000 to $675,000 in the
second quarter of 1998 as compared to $270,000 in the same quarter of 1997.
This increase is primarily due to the following: (1) growth in the Company's
telecommunication services revenue and (2) an increase in uncollectible accounts
receivable associated with the Company's decision in early 1998 to concentrate
its resources on those channels of distribution of its products with higher
profit margins (primarily Network Marketing), the effect of which was to
terminate relationships with several reseller accounts in the second quarter of
1998, including the Company's single largest reseller account.
Depreciation and amortization increased $524,049 to $1,039,099 in the
second quarter of 1998 as compared to $515,050 in the second quarter of 1997.
The increase is primarily due to increased amortization associated with
intangible assets recorded in the third quarter of 1997 with the release from
escrow of the final 1,000,000 shares of common stock in connection with the 1996
acquisition of I-Link Worldwide Inc. and the third quarter 1997 acquisition of
MiBridge. 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 $501,814 to $576,060 in the second
quarter of 1998 as compared to $74,246 in the same period of 1997. The increase
is associated with the Company's acquisition of MiBridge, Inc in the third
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 $5,421,856 to $5,459,535 in the second quarter
of 1998 as compared to $37,679 in the same quarter of 1997. The net increase is
primarily due to $5,213,000 (non-cash) in amortization of debt discount related
to certain warrants granted in connection with $7,768,000 in loans to the
Company from Winter Harbor LLC and interest on the same loans of $235,909.
Interest and other income decreased $38,244 to $18,172 in the second
quarter of 1998 as compared to $56,416 in the same quarter of 1997. The
decrease was primarily due to a decrease in the average balance of cash on hand
in the second quarter of 1998 as compared to the same quarter of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Operating results for 1997, 1996 and 1995 are not comparable due to changes
<PAGE> 21
in the operations of the Company. The operations of the Company in 1995 were
related to diagnostic and clinical services to healthcare facilities and sales
of medical equipment through several subsidiaries of I-Link Incorporated
(formerly Medcross, Inc.). In February 1996 I-Link Incorporated acquired I-Link
Systems, Inc. (formerly I-Link Worldwide Inc.). 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
(the "Network Marketing channel") through I-Link Worldwide, LLC, 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 healthcare
industry in order to concentrate on its telecommunications and technology
sectors. Accordingly, the healthcare operation during the three years ended
December 31, 1997 has been reported as discontinued operations. Therefore 1995
has no revenue or expense from continuing operations, 1996 includes the
operations of I-Link Systems and 1997 includes the operations of I-Link
Communications Inc., I-Link Systems Inc., I-Link Worldwide, LLC and MiBridge
Inc.
REVENUES
Net operating revenue of the Company in 1997 included three new sources of
revenue which were: (1) telecommunication service revenues of $11,081,007 which
is a result of the acquisition of ILC in January 1997; (2) marketing services of
$2,637,331 which began in June 1997 and includes revenues from the Network
Marketing channel, including revenues from independent representatives for
training, promotional and presentation materials; and (3) technology licensing
and development revenues of $346,875 which began in August 1997 upon the
acquisition of MiBridge, Inc. which develops and licenses communications
software that supports multimedia communications over the public switched and
local area networks and the Internet. In 1996 the Company had other revenue of
$170,532 which was associated with internet service provider services the
Company did not offer in 1997.
OPERATING COSTS AND EXPENSES
Telecommunications network expenses increased $13,514,220 to $14,634,999 in
1997 as compared to $1,120,779 in 1996. The increase is related to the costs of
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 services costs were $4,294,014 in 1997 and $0 in 1996. These
costs directly relate to the Company's marketing services revenue that began
late in the second quarter of 1997 and include commissions and the costs of
providing training, promotional and presentation materials and ongoing
administrative support of the Network Marketing channel.
Selling, general and administrative expenses increased $9,044,840 to
$11,948,568 in 1997 as compared to $2,903,728 in 1996. The increase was
primarily due to increased administrative expense associated with the launch of
the Network Marketing channel and an increase in overhead and personnel expenses
associated with growing the Company's telecommunication and technology licensing
and development businesses.
Provision for doubtful accounts increased $1,369,004 to $1,385,000 in 1997
as compared to $15,996 in 1996. The increase is related directly to the growth
in telecommunication service revenues, and, specifically, one marketer of the
Company's services, which relationship will be terminated in the first half of
1998.
Depreciation and amortization increased $1,858,362 to $2,549,282 in 1997 as
compared to $690,920 in 1996. The increase is primarily due to increased
amortization ($1,566,500) of intangible assets acquired in the acquisition of
ILC and MiBridge in 1997 and the issuance in 1997 of the final 1,000,000 shares
of common stock associated 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 decreased $10,342,112 to
$4,235,830 in 1997 as compared to $14,577,942 in 1996. The $4,235,830 in 1997
was related to the acquisition of MiBridge in 1997 whereas the $14,577,942 in
1996 was related to the acquisition of I-Link Worldwide Inc. in February 1996.
These amounts were expensed because technological feasibility of the in-process
technology had not yet been established and the technology was deemed to have no
alternative future use. These expenses related to specific acquisition of other
companies and as such are not of a recurring nature other than as may occur if
<PAGE> 22
the Company were to acquire other similar entities in the future.
Research and development increased $531,078 to $878,582 in 1997 as compared
to $347,504 in 1996. The increase is primarily associated with the Company's
continuing telecommunication network research and development efforts.
OTHER INCOME (EXPENSE)
Interest expense increased $1,010,277 to $3,022,619 in 1997 as compared to
$2,012,342 in 1996. The increase is primarily due to the expensing of $2,371,575
in debt discounts (non-cash) related to certain warrants granted in connection
with $5,000,000 in loans to the Company during the year and interest of $103,000
on those loans. These loans were exchanged for equity during the year and
accordingly all of the debt discount was immediately expensed. The increase is
also due to $320,000 (non-cash) of interest expense associated with the issuance
of convertible notes issued at a discount in 1996.
Litigation settlement expense of $821,000 occurred in 1996 only and was
associated with the Company's settlement of the JW Charles litigation. The
expense (non-cash) was directly related to issuance of 175,000 warrants (related
to the settlement) to purchase common stock at an exercise price less than fair
market value of the common stock at the date of issuance.
Interest and other income increased $60,287 to $215,989 in 1997 as compared
to $155,702 in 1996. The increase was primarily due to an increase in the
average balance of cash on hand during 1997 as compared to 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The operations of the Company in 1995 were related to diagnostic and
clinical services to healthcare facilities and sales of medical equipment
through several subsidiaries of I-Link Incorporated (formerly Medcross, Inc.).
The Company decided to dispose of the operations of these subsidiaries and
accordingly, these operations in 1995 and 1996 are reported as discontinued
operations. Therefore 1995 has no revenue or expense from continuing operations
to compare to the continuing operations of 1996.
The results of continuing operations in 1996 reflect only the operations of
I-Link Worldwide Inc., which was acquired in February 1996 and thus had no
comparable results of operation in 1995.
YEAR 2000 ISSUE
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures. The Company is
continuing its evaluation and upgrade of its computer systems and applications
for the Year 2000. The Year 2000 issue may also affect the systems and
applications of the Company's customers, vendors and resellers.
The Company is seeking or has obtained confirmation from its primary
vendors that they are developing and implementing plans to minimize Year 2000
consequences. The Company's development of an enhanced services billing
platform is being designed to be Year 200 compliant. In addition, proprietary
software and technology for both internal use and for resale has been designed
to be Year 2000 compliant.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for minimizing Year 2000 consequences
and expects to incur internal labor as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare its
systems for the Year 2000. The total cost of modifications and conversions is
not know at this time; However, it is not expected to be material to the
Company's financial position, results of operations or cash flows and is being
expensed as incurred. Also, the Company is currently developing a contingency
plan to deal with potential Year 2000 related business interruptions that may
occur on January 1, 2000 or thereafter. The Company anticipates that the
contingency plan will be completed by June 30, 1999.
If compliance is not achieved in a timely manner, the Year 2000 issue could
have a material adverse effect on the Company's operations. However, the
Company is focusing on identifying and addressing all aspects of its operations
that may be affected by the Year 2000 issue and is addressing the most critical
applications first. As a result, Company management does not believe its
<PAGE> 23
operations will be materially affected.
BUSINESS OF THE COMPANY
The primary business of the Company, as carried on through its wholly-owned
subsidiaries I-Link Systems, Inc. (formerly named I-Link Worldwide Inc.), I-Link
Communications, Inc. (formerly named Family Telecommunications Incorporated),
MiBridge, Inc., and I-Link Worldwide, LLC (collectively referred to as the
"Company" or "I-Link"), is the development, sale and delivery of communications
products and services to residential, small business and wholesale customers. I-
Link is an Enhanced Internet Protocol (IP) communications company that, as a
result of new technology and architectural innovations, is able to deliver to
its customers enhanced communications services not available through traditional
telecommunications companies, and lower the cost of telephone service, while
maintaining the traditional reliability, functionality and ease of use of their
existing communications equipment. Unlike other providers of communications
services utilizing IP technology, I-Link does not use the Internet as its
primary source of delivering services. Rather, I-Link's communications services
and products are delivered to customers via both a dedicated data communication
network established by I-Link that operates in the same manner as the Internet
(the "I-Link Intranet") and existing switched telecommunications networks.
I-Link seeks to provide more effective communications solutions and enhanced
capabilities to users of traditional telecommunications services through
utilization of the I-Link Intranet and other existing data communications
networks, as well as through volume purchasing of capacity on traditional
switched telecommunications networks. I-Link has developed patent-pending
technology and has deployed a national network infrastructure of communications
equipment and dedicated lines that enable it to carry traditional
telecommunications services over the I-Link Intranet in a manner that maintains
traditional telecommunications quality, is transparent to the user, and permits
the customer to use his or her existing telecommunications devices and equipment
(telephone, fax, pager, etc.).
With its acquisition of Family Telecommunications Incorporated (now renamed
I-Link Communications, Inc.), a regional long distance telecommunications
carrier with nationwide delivery of telecommunications services over traditional
switched telecommunications networks, the Company in January 1997 launched its
marketing efforts and began to obtain customers for its long distance
telecommunications services through I-Link. In June 1997, I-Link launched its
Network Marketing program, I-Link Worldwide, LLC, to market its products and
services to the residential and small business markets. Through its marketing
activities and through strategic acquisitions of existing customer bases, I-Link
will aggressively seek to enlarge its overall customer base. In a given
geographic area, the I-Link services are initially delivered across existing
switched telecommunications networks. As the number of I-Link customers grows
and reaches targeted customer-base size in the geographic area, customer traffic
is moved from the traditional switched telecommunications networks to the
network of dedicated lines I-Link has established and over which its proprietary
technology is deployed (the "I-Link Intranet"). The move from the traditional
switched telecommunications network to the I-Link Intranet is transparent to the
customer and permits I-Link to make available to the customer an array of
enhanced communications services. It also results in a significant reduction in
the cost of delivering the services, both increasing profitability and
permitting I-Link to offer increased savings to its customers, as well as
differentiating I-Link and its services in a highly commoditized market. I-Link
believes this strategy of building customer bases in geographic areas on
traditional switched networks and transitioning the traffic to the I-Link
Intranet as the size of the customer base increases will result in the most cost
effective nationwide deployment of the I-Link Intranet.
With the acquisition of MiBridge, Inc. ("MiBridge"), a New Jersey-based
communications technology company, I-Link is able to develop and offer further
communications capability to its customers. MiBridge is engaged in the design,
development, integration and marketing of a range of software telecommunication
products that support multimedia communications over the public switched
telephone network (PSTN), local area networks (LAN), and the Internet.
Historically, MiBridge has concentrated its development efforts in compression
systems such as voice and fax over IP. MiBridge has developed patent-pending
technologies which combine sophisticated compression capabilities with IP
telephony technology. The acquisition of MiBridge has permitted I-Link to
accelerate the development and deployment of its own IP technology and add
strength and depth to its research and development team, and provides I-Link
with the opportunity to generate income and develop industry alliances through
the strategic licensing of its technologies to other companies within the
industry, such as Lucent Technologies and others.
<PAGE> 24
I-Link's technology enables the user to employ its existing telephone, fax
machine, pager or modem (hereafter referred to as "conventional communications
equipment") to achieve high-quality communications with other conventional
communications equipment, while exploiting and advancing the capabilities of IP
technology. Transmission takes place on I-Link's V-Link Network, which is
comprised of traditional telecommunication facilities integrated with I-Link's
private Intranet. The Intranet portion of the V-Link Network is comprised of
leased data lines routing TCP/IP packets. Gateways comprised of sophisticated
communications equipment and proprietary software, which I-Link calls
Communication Engines , are used to integrate the traditional segments of the V-
Link Network with the Intranet segments. The resulting network allows for
customers to send and receive communication via the V-Link Network at reduced
rates and with much greater capabilities.
I-Link uses a multi-tiered infrastructure strategy. In some cases, I-Link
has and will continue to establish its own local equipment to route
communications traffic over the switched public telephone network ("switched
facilities"). In others, I-Link will partner with nationally recognized
telephone service resellers and Internet Service Providers ("ISPs") to provide
the needed local switched facilities consistent with I-Link's service
requirements. I-Link will continue to establish its own local switched
facilities incrementally as growth in customer base and business needs dictate.
Establishment of local switched facility sites is a relatively simple process
involving pre-configured Communication Engines (consisting of computer and
networking hardware and proprietary software) and communications lines.
The Communication Engine represents I-Link's patent-pending technology.
This technology provides the method which enables conventional communication
equipment to communicate with other conventional communication devices via
I-Link's combination of traditional switched network and dedicated Intranet. The
unique combination of traditional switched network facilities with new data
facilities is called the V-Link Network. The V-Link Network receives traffic
from the public switched telephone network ("PSTN") as a TDM stream (time
division multiplexing) and converts it to IP (internet/intranet protocol) data
packets. The data is converted from the PCM (pulse code modulation) format
standard to traditional telephony to an I-Link proprietary coding. The I-Link
proprietary coding can distinguish among and handles voice, fax and modem
communications differently. Voice is compressed using a voice coder or codec,
fax and modem traffic are demodulated/modulated. The data can then be stored
(such as recording a message), altered (as in changing a fax call from 14400 BPS
to 9600 BPS) or redistributed to multiple recipients (as in the case of
conferencing).
The data portion of the V-Link network is called an Intranet. Unlike the
traditional telecommunication network, the Intranet uses TCP/IP as its
communication protocol. This is the same protocol used by the Internet for
computer-to-computer communication. I-Link uses TCP/IP because of the potential
for interoperability between diverse technologies. This provides the potential
for the V-Link Network to integrate fax, voice, e-mail, websites, video
conferencing, speech recognition servers, intelligent call processing servers,
Internet Information servers, and other technologies in an efficient way. Not
all of these technologies are currently implemented within the V-Link network.
However, because communication is being carried over a TCP/IP protocol these
solutions can be integrated into I-Link's offerings at a fraction of the cost of
traditional telecommunication implementations. The advantage of communication
via the TCP/IP protocol is that it allows for efficient integration of many
enhanced information services as noted above. I-Link doesn't need to build all
of the services which are presented to the user; it can easily integrate
additional services because the communication protocol offers interoperability
between all types of conventional communication equipment. The other advantage
to TCP/IP is that the cost of integration is substantially less as a result of
network design. New services, enhancements and updates can be enabled at a
central location and linked automatically to a subscriber's packet of services,
thus eliminating the costs and time restrictions of installing the enhancement
at each physical facility. The result of these benefits is lower cost with
higher capabilities.
Customers take advantage of the V-Link network benefits by subscribing to
V-Link. The following two scenarios illustrate V-Link's enhanced communication
environment:
* Caller making a call off-net, or from an area in which I-Link's Intranet
is not fully deployed
* Caller making a call on-net, or from an area in which I-Link's Intranet
is fully deployed
In both cases the caller is attached to V-Link, I-Link's enhanced
<PAGE> 25
communications environment. Connecting to V-Link can be done via a local call or
a toll-free (800) number. Establishing a connection can be done automatically
and transparently via NetLink1+ (an I-Link product which provides intelligent
accesses to the V-Link network) or manually by dialing the local number or (800)
number. Once inside the V-Link communication environment, the same functionality
is obtained for both on-net and off-net calls. Long distance calls are routed
either through the Intranet, or through the traditional network, transparent to
the user. In addition to long distance calling capability, entering the V-Link
communications environment allows a multitude of enhanced capabilities to the
user without the need of any special equipment by the user. Once the
communications session is established, a subscriber has the ability to perform
multiple operations within the session. Following is a short list of
capabilities currently available in the V-Link Communications Environment.
Enhanced Local or Long Distance Service. Long distance calls can be made at
significantly lower rates. The user is provided the ability to multi-task
multiple operations within the session. Options include fax, voice,
conference call, paging, fax to e-mail conversion, information retrieval,
e-mail.
Single Number Service. Set up to ring a subscriber's office phone, home
office phone, cellular phone (or any phone number the subscriber specifies)
and pager simultaneously so that he may be reached wherever he is, and
without the caller having to try multiple numbers or know his party's current
location.
Call Screening. The subscriber can hear the name of the person calling before
deciding to accept the call or send it to voice mail.
The Personal PBX. Enables the type of services used by a large business PBX,
such as putting a caller on hold, music on hold, etc.
Conference Calling. Provides the ability to conference in up to 9 people at
one time.
Portable Fax. The subscriber receives a fax to his Single Number Service, he
is notified that there is a fax in his mailbox, and he can choose to route
the fax to any fax machine, or to his e-mail through a fax-to-e-mail gateway.
Local LEC Services. Services such as voice mail, call waiting, etc.
Other Features. Other features are possible as I-Link continues to integrate
services which it designs and builds as well as those which other providers
design and build. One of the key strengths of the V-Link environment is the
ability to integrate services from other providers. This integration
typically results in systems which are easier to learn and use. Examples of
current integration include news services, stock quotes, directory services,
and address books.
MARKET OPPORTUNITIES
Virtually every home and business in the United States today uses long
distance telephone services. Even though competition between the various
providers of long distance telephone services is intense, I-Link believes the
significant cost savings and the increased capabilities that are achieved
through the utilization of the V-Link Network and technology make I-Link highly
competitive in this marketplace. I-Link targets residential and small-business
customers for its "I-Link" branded services through I-Link Worldwide, LLC, a
nationwide network marketing and sales program. Marketing and sales of the
"I-Link" branded products to larger business users will be carried out by
traditional sales agents. I-Link wholesales its services on a non-branded basis
to various distributors, aggregators, resellers and member organizations that
then resell the products to both residential and business end-users.
Opportunity to Provide Substantial Savings to Users. Use of I-Link services
afford the opportunity to substantially reduce the long distance telephone and
data transmission charges presently borne by the current user of long distance
telephone services. Charges for the use of land-line networks traditionally used
in long distance telecommunications are generally based on time and distance,
often resulting in substantial long distance charges. In contrast, the charges
associated with the new data communications networks (such as I-Link's Intranet
and the Internet) are generally fixed.
Integration of Distinct Networks. There are currently a number of distinct
information-transmission networks. Telephone, cable, wireless, and private and
public networks are primary examples. Technologies supporting these networks
will continue to integrate and evolve, allowing for previously unavailable
<PAGE> 26
opportunities for information distribution and access. The current business
infrastructure presents impediments to the easy use of those networks. For
example, in the fax industry there is a proliferation of fax or fax-like
communication technologies, including fax machines, fax servers, fax software
and e-mail. But these technologies are not well integrated; a party wishing to
send information to others may have to format and send the data several
different ways depending on the messaging equipment and systems available to the
recipients. I-Link's V-Link Network leverages TCP/IP to integrate these networks
and deliver these services to its users.
Opportunity to Deliver Enhanced Capabilities. The TCP/IP networking
protocol and new transmission media such as are often associated with a data
communications network such as I-Link's Intranet or the Internet ("Data
Communications Network") offer substantially reduced cost and improved data
communication capabilities. However, as highlighted above, telephones and fax
machines are not TCP/IP-enabled. In the past, in order to take full advantage
of the TCP/IP protocol and the Data Communications Network, users first must own
or have access to a computer, and then obtain access to the Data Communications
Network. Therefore, telephones and fax machines have used traditional land-line
telecommunications networks to transmit their voice and data. Charges for the
use of those traditional networks are generally based on time and distance,
often resulting in high long distance charges. In contrast, the charges
associated with the new Data Communications Networks are generally fixed.
Market Response. Many of the responses seen in the marketplace to the
opportunities discussed above are problematic in that they are often computer-
oriented. Solutions typically require that a user (i) own a personal computer;
(ii) have access to a Data Communications Network; and (iii) have software
compatible with software other users own and use. This significantly limits the
market for the solution. Moreover, the responses often follow a product approach
rather than a service approach. The product approach, usually modeled after the
same approach followed by computer software vendors, imposes further
requirements on the user. This approach requires version management, with users
required to ensure that their software is current; it requires training and re-
training as procedures change; and gives a customer an interface-driven product
that often has more capacity than a user needs. I-Link's strategic response to
the market is to provide, above all, a true service-based approach, providing
customers access to a Data Communications Network via their existing
conventional communications equipment and offering an array of enhanced
services.
Another important limitation associated with current Internet telephony
solutions is the problem of poor voice quality. I-Link's technology manages and
compresses voice, fax, and modem traffic in such a way that calls made via the
I-Link V-Link Network retain traditional telephone landline quality.
Also problematic in the market's current response to new internet protocol
opportunities is that products and services are impeded by the delays, down
times and intermittent slowness of the traditional Internet. By managing and
controlling its Intranet, I-Link can ensure that communication is as "real-time"
as customers have become dependant upon.
THE RESIDENTIAL MARKET
I-Link, through I-Link Worldwide, LLC, has targeted all residential
users, initially throughout the United States, through the establishment and
implementation of a Network Marketing sales program, providing individuals the
opportunity to earn commissions on the sale of the I-Link Services to their
neighbors and acquaintances. A large amount of interest in I-Link has been
generated throughout the network marketing industry, and I-Link believes a
significant market opportunity exists through the exploitation of this marketing
and sales channel to reach a large number of potential residential customers.
I-Link formally launched its Network Marketing sales operation and began
marketing in this channel in June 1997.
THE BUSINESS MARKET
The management of I-Link categorizes its domestic and international target
business users as follows: (i) small office/home office (SOHO -- up to 10
employees); (ii) small and medium sized businesses (less than 500 employees);
(iii) large businesses (500 or more employees); and (iv) vertical markets.
I-Link's current primary target market is composed of the residential and SOHO
customers. The advantages of I-Link's technology will over time be beneficial to
the other markets. As I-Link grows and matures as a company it will pursue
channels which target the other market segments.
Small and medium-sized businesses often have a difficult time obtaining and
<PAGE> 27
using technology. Typically, they lack the resources and/or expertise needed to
obtain strategic advantage from state-of-the-art technology. Although I-Link
defines small and medium-sized businesses as businesses with less than 500
employees, it is also important to note that departments or offices within
larger businesses may also be placed in this category. Larger businesses can
dedicate resources and/or funds to technology customization or even technology
development. Smaller businesses often must accept off-the-shelf solutions
designed for general use. I-Link believes that its services are of significant
strategic advantage to small and medium-sized businesses. Without having to
adopt new technology or procedures, small and medium-sized businesses can
immediately improve their profitability. Large businesses and high-end national
accounts have significant long distance telephone and fax traffic. Management
believes those businesses could also realize substantial savings from I-Link's
services.
DISTRIBUTION PLAN
I-Link targets the following distribution methods: (i) Network Marketing
sales program; (ii) direct sales using independent sales agents; (iii) selling
through independent telephone company or "Telco" resellers; (iv) acquisition of
smaller carriers with established customer bases; (v) selling through Internet
service providers ("ISPs"); (vi) selling through cable/broadcasting companies;
(vii) selling through direct sales organizations; (viii) direct sales to top
national accounts and vertical market resellers ("VMRs"); (ix) selling through
established channels of distribution in the retail computer/technology markets;
(x) leveraging OEM channels; and (xi) telemarketing/telesales. Distribution
methods currently used by the Company are described below.
Network Marketing Sales Program. I-Link, through I-Link Worldwide, LLC,
has targeted all residential and small-business users, initially throughout the
United States, through the establishment and implementation of a Network
Marketing sales program, providing individuals the opportunity to earn
commissions on the sale of the products to their neighbors and acquaintances. A
large amount of interest in I-Link has been generated throughout the network
marketing industry, and I-Link believes a significant market opportunity exists
through the exploitation of this marketing and sales channel to reach a large
number of potential residential customers. I-Link formally launched its Network
Marketing sales operation and commenced marketing in this channel in June 1997.
Direct Sales. I-Link intends to use independent sales agents for direct sales of
I-Link's products on a commission basis.
Reselling. It is I-Link's intention to offer telephone service resellers,
cable and broadcast companies, ISPs and direct sales organizations significant
partnering opportunities. By adding I-Link enabling services to their current
list of services, these potential partners enhance their competitive position in
highly competitive and increasingly fragmented markets.
Acquisition of Smaller Carriers. In January 1997, the Company acquired
Family Telecommunications Incorporated (now renamed I-Link Communications, Inc.
and referred to herein as "ILC"), a regional long distance carrier with over
17,000 established customers. This acquisition brought to I-Link an existing
customer base, useful facilities and established industry relationships, and
afforded ILC the means to differentiate and enhance the products and services it
could offer to existing and potential customers in a highly competitive
marketplace. I-Link believes that there exist numerous other local and regional
carriers with established customer bases and facilities that could be acquired
in the same manner. I-Link intends to continue to seek out these opportunities
provided it is able to negotiate terms that are in the Company's best interest.
OEM Channels. I-Link currently sells MiBridge software and services through
an OEM ("original equipment manufacturer") channel. MiBridge customers buy
enabling technology which augment their existing or future offerings. These
customers pay I-Link an up-front development fee and a recurring royalty. Over
time some of the V-Link services will be delivered through this channel.
Telemarketing. I-Link will use the telemarketing and telesales channels
employed by many service providers. As in the example of current business
communications providers, I-Link will directly contact customers in strategic
markets, stressing the significant cost benefits associated with I-Link services
while fielding sales inquiries derived from advertising.
TECHNOLOGY ISSUES
I-Link has established Communication Engines at strategic locations in the
United States to allow subscribers to access I-Link's network locally, and
intends to continue to establish Communication Engines in other strategic
<PAGE> 28
locations both in North America and worldwide as the customer base warrants. The
I-Link Intranet is a high-speed interconnected network of Communication Engines.
I-Link has created this network by leasing high-speed data lines and/or
partnering with existing communications and ISPs that currently provide access
to such lines.
Capacity. Capacity, or lack thereof, is a frequently discussed topic with
regard to data transmission via Data Communications Networks such as the
Internet. "Slow service" resulting from inadequate capacity is one of the common
complaints among Internet users. Capacity is a function of "bandwidth" on the
network or the ability of the infrastructure to carry potentially large amounts
of data to and from large numbers of users.
The I-Link Intranet is comprised of dedicated telecommunications lines
leased from large interexchange carriers ("IXCs") with rigorous performance
standards and managed by I-Link. In some cases, parts of the network may be
contractually provided by other entities in the future. Management believes
I-Link has the ability to monitor and manage all of its network capacity. I-Link
Communication Engines monitor and store statistical capacity-related data.
Transmission locations, transmission size, and transmission times are easily
stored and accessed by the I-Link Intranet. A Network Operations Center monitors
data and can immediately detect when utilization levels are high. I-Link can
then add capacity as needed. Because I-Link data is associated with specific
capabilities (e.g., faxes) and is transmitted between (and encoded and decoded
by) I-Link Communication Engines, the type and purpose of the data is well
understood and "overhead" bandwidth needs are better addressed. Data
segmentation gives the Communication Engines additional ability to maximize
capacity. As a result I-Link uses bandwidth up to twelve times as efficiently as
traditional telephony and fax systems do over the same medium.
Security. Security is a major concern associated with data transmission
across Data Communications Networks. I-Link controls the routing of data from
one Communication Engine to another. Management believes that I-Link's system
provides a measure of security that actually makes phone, fax and modem
transmission more secure than using traditional methods.
COMPETITION
The market for business communications services is extremely competitive.
I-Link believes that its ability to compete in I-Link's business successfully
will depend upon a number of factors, including the pricing policies of
competitors and suppliers; the capacity, reliability, availability and security
of the I-Link Intranet infrastructure; market presence and channel development;
the timing of introductions of new products and services into the marketplace;
ease of access to and navigation of the Internet or other such Data
Communication Networks; I-Link's ability in the future to support existing and
emerging industry standards; I-Link's ability to balance network demand with the
fixed expenses associated with network capacity; and industry and general
economic trends.
While I-Link believes there is currently no competitor in the North
American market providing the same capabilities in the same manner as I-Link
will offer using the I-Link Intranet, there are many companies that offer
communications services, and therefore compete with I-Link at some level. These
range from large telecommunications companies and carriers such as AT&T, MCI,
Sprint, LDDS/WorldCom, Excel, and Qwest, to smaller, regional resellers of
telephone line access, and to companies providing Internet telephony. These
companies, as well as others, including manufacturers of hardware and software
used in the business communications industry, which could in the future develop
products and services that compete with those of I-Link on a more direct basis.
These entities may be far better capitalized than I-Link and control significant
market share in their respective industry segments. In addition, there may be
other businesses that are attempting to introduce products similar to I-Link's
for the transmission of business information over the Internet. There is no
assurance that I-Link will be able to successfully compete with these market
participants.
GOVERNMENT REGULATION
General. Traditionally, the Federal Communications Commission (the "FCC")
has sought to encourage the development of enhanced services as well as
Internet-based services by keeping such activities free of unnecessary
regulation and government influence. Specifically in the area of
telecommunications policy and the use of the Internet, the FCC has refused to
regulate most online information services under the rules that apply to
telephone companies. This approach is consistent with the passage of the
Telecommunications Act of 1996 ("1996 Act") which expresses a Congressional
<PAGE> 29
intent "to preserve the vibrant and competitive free market that presently
exists for the Internet and other interactive computer services, unfettered by
Federal or State regulation."
Federal. Since 1980, the FCC has refrained from regulating value-added
networks ("VANs"), software or computer equipment that offer customers the
ability to transport data over telecommunications facilities. By definition, VAN
operators purchase transmission facilities from "facilities-based" carriers and
resell them packaged with packet transmission and protocol conversion services.
Under current rules, such operators are excluded from regulation that applies to
"telecommunications carriers" under Title II of the Communications Act.
In the wake of the 1996 Act, however, the FCC is revisiting many of its
past decisions and could impose common carrier regulation on some of the
transport and resold telecommunications facilities used to provide
telecommunications services as a part of an enhanced or information service
package. The FCC also may conclude that I-Link's protocol conversions, computer
processing and interaction with customer-supplied information are insufficient
to afford the Company the benefits of the "enhanced service" classification, and
thereby may seek to regulate some of the Company's operations as common
carrier/telecommunications services. The FCC could conclude that such decisions
are within its statutory discretion, especially with respect to voice
services.
I-Link has been moving its customers off the facilities of existing long
distance carriers, and has increased its reliance on a proprietary Internet
protocol network for transmission in the hope of enjoying minimal federal
regulation under current rules. Historically, the FCC has not regulated
companies that provide the software and hardware for Internet telephony, or
other Internet data functions, as common carriers or telecommunications service
providers. Moreover, in May 1997 the FCC concluded that information and enhanced
service providers are not required to contribute to federal universal service
funding mechanisms.
Notwithstanding the current state of the rules, the FCC's potential
jurisdiction over the Internet is broad because the Internet relies on wire and
radio communications facilities and services over which the FCC has long-
standing authority. The FCC's framework for "enhanced services" confirms that
the FCC has authority to regulate computer-enriched services, but provides that
carrier-type regulation would not serve the public interest. Only recently has
this general approach been questioned within the industry.
In March 1996, for instance, America's Carriers Telecommunications
Association ("ACTA"), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking that
the FCC regulate Internet telephony. ACTA argued that providers of software that
enable real-time voice communications over the Internet should be treated as
common carriers and subject to the regulatory requirements of Title II of the
Communications Act. The FCC sought comment on the request and has not yet issued
its decision.
Congress directed the FCC to submit a report by April 10, 1998, describing
how its classification of information and telecommunications services is
affecting contributions to universal service charge funds. U.S. Senators from
several states with large rural areas have expressed concern that migration of
voice services to the Internet could erode the contribution base for universal
service subsidies. There will likely be continuing pressure from those Senators
to classify Internet telephony as a telecommunications service, rather than an
information service, so that it can be subjected to a regulatory assessment for
universal service contributions.
Any FCC determination that Internet-based service providers should be
subject to some level of Title II regulation could affect the manner in which
I-Link operates, to the extent it uses the Internet to provide facsimile or
voice capabilities, as well as the costs of complying with federal common
carrier requirements. With the passage of the 1996 Act, the precise dividing
line or overlap between "telecommunications" and "information" services as
applied to Internet-based service providers is uncertain. Consequently, I-Link's
activities may be subject to evolving rules as the FCC addresses novel questions
presented by the increased use of the Internet to offer services that appear
functionally similar to traditionally-regulated telecommunications services. At
this time, it is impossible to determine what effect, if any, such regulations
may have on the future operation of the Company.
State. While states generally have declined to regulate enhanced services,
their ability to regulate the provision of intrastate enhanced services remains
uncertain. The FCC originally intended to preempt state regulation of enhanced
<PAGE> 30
service providers, but intervening case law has cast doubt on the earlier
decision. Moreover, some states have continued to regulate particular aspects of
enhanced services in limited circumstances, e.g., to the extent they are
provided by incumbent local exchange carriers.
Whether the states within which I-Link makes its Intranet services
capabilities available will seek to regulate I-Link's activities as a
telecommunications carrier will depend largely on whether the states determine
that there is a need for or other public benefits of such regulation. The staff
of the Nebraska Public Service Commission, for example, recently informally
concluded that an Internet telephony gateway service operated by a Nebraska
Internet Service Provider was required to obtain state authority to operate as a
telecommunications carrier. The FCC has authority to preempt state regulation
that impedes competition; it has not, however, had occasion to consider this or
similar decisions. Under certain circumstances, the FCC may have occasion to
preempt state regulation. This issue has not yet been squarely placed before the
FCC for resolution.
DELIVERY OF SERVICES OVER EXISTING SWITCHED TELECOMMUNICATIONS NETWORKS
A portion of I-Link's communications services are currently delivered over
existing switched telecommunications networks through I-Link Communications,
Inc. (formerly named Family Telecommunications Incorporated, and referred to
herein as "ILC"). ILC is a long distance telecommunications carrier that
provides long distance service to all states of the United States except Alaska.
In January 1997 ILC was acquired by the Company in a share exchange transaction.
Through this acquisition, ILC provided the Company, through ILC's contractual
agreements with other primary carriers and utilization of telephone facilities
and equipment owned and operated by ILC, access to the switched telephone
network at favorable rates. Access to the switched telephone network is a
necessary component of the I-Link Intranet in order for phone and fax
transmissions to be routed to destinations in lesser populated geographic areas
that are not serviced by one of I-Link's Communication Engines. In addition, the
access to the switched telephone network at favorable pricing permits I-Link to
develop and expand its customer bases in given geographic areas across the
switched telephone network until such time as management determines the size of
the customer base and the capacity and timing of the deployment of the I-Link
Intranet in the area can support the transfer of the customers from the switched
telephone network to the I-Link Intranet.
ILC was incorporated under the laws of the state of Utah in 1996, and
maintains its principal place of business in Phoenix, Arizona. ILC also
maintains facilities in Salt Lake City, Utah. Through its Carrier Agreement with
Sprint, I-Link provides 1-plus long distance service, 800/888 service, worldwide
calling card service, worldwide prepaid phone card service, long distance
cellular phone service, data line service and T-span service. Customers using
Bell South, Bell Atlantic, Ameritech, GTE Corp., NYNEX Corp., Pacific Telesis
Group, US West, Southwestern Bell, Sprint, SNET, ALLTEL Corp., Rochester
Telephone Corp., Cincinnati Bell Telephone, and Citizens as their local
telephone company are being offered I-Link's long distance programs. This
represents approximately 97% of all telephone lines in the United States;
however, there can be no assurance the Company will be successful in attracting
new customers or increasing its market share of long distance services.
ILC currently maintains switch facilities in twelve states. This equipment
allows I-Link to offer additional services in the geographic areas in its home
state and surrounding states, and to offer specialized services, including a
variety of customized 800/888 service, voice mail, voice inter-active services,
debit cards, travel cards and other customized services to its entire customer
base.
TELEPHONY INDUSTRY DESCRIPTION & HISTORY
The telecommunications industry today is an interconnected network
consisting of four corporations (AT&T, MCI, Sprint and LDDS/WorldCom) that
together control a significant majority of the interexchange market, and
hundreds of smaller companies. In recent years, the industry has changed
dramatically due to divestiture, deregulation, and technological innovation.
For most of this century, the industry was divided between the Bell System,
companies owned by or affiliated with AT&T, and the 1,600 or so local telephone
independents, companies not affiliated with AT&T, but often components of large
non-Bell holding companies. Although the independents served more geographic
areas, the Bell System accounted for more than 80% of the telephones and
provided most of the intermediate long distance toll lines. In the 1970's, the
picture began to change when several smaller companies began to offer long
distance services to customers in direct competition with AT&T, usually at lower
<PAGE> 31
prices. Due to this competition, the projected growth of the markets, and rapid
technological changes, among other factors, the Department of Justice in 1974
filed an antitrust suit against AT&T alleging monopolistic practices. The
settlement of the suit that occurred in January 1982 mandated that AT&T spin-off
the local telephone companies into seven regional independent operating
companies (the "Baby Bells") that would remain monopolies in their respective
territories, but would be prohibited from selling long distance services that
crossed geographic boundaries, and permitted AT&T to keep its manufacturing,
research and development, and interexchange assets. Beginning in 1984, the Baby
Bells were required under the settlement to provide access to all long distance
carriers "equal in type, quality and price" to that provided to AT&T.
The AT&T spin-off and the equal access regulation has enabled the long
distance telephone industry to experience significant growth. The telephone
system that has been developed is referred to as a "switched network." In a
switched network the phone call first goes from the terminal (the telephone,
computer or printer) over local lines to a local switch (the local exchange).
The telephone number dialed tells the switch whether the destination is inside
or outside the exchange. If the call is directed to a phone within the exchange,
the switch will send an electronic signal to the number being called. Once the
phone is picked up, the connection is made. If the called number is outside the
exchange, the switch will send the call signal over a trunk line to the switch
in the correct exchange and that switch will signal the phone at the destination
in order to make the connection. The central office is owned by the local phone
company and contains switching equipment that is hardwired to every telephone in
its area. In addition, it has trunk cables that connect the central office to
other central offices. In a seven-digit telephone exchange number, the first
three digits of every phone number designates the local area served by the
central office. Several central offices, and, therefore, several exchange
numbers, are grouped together to form calling areas serviced by the local phone
company.
Often the telephone call is a destination number that crosses a boundary
between groups of central offices, known as the Local Access and Transport Area
(LATA). There are well over a hundred LATAs in the U.S. The area code dialed
signals the local switch that an interexchange or inter-LATA or toll or long
distance call is to be terminated. The local switch then sends the call to a
toll switch, which directs the call over toll, long distance, or interexchange
network lines to the toll switch at the destination city. That switch, in turn,
directs the call to the proper local exchange switch which signals the phone at
the number dialed. At present, most transmission on the local level is by means
of copper wires, coaxial cable or fiber optics, but long distance communication
also takes place by means of wire cable, terrestrial or satellite radio, or by a
combination of transmission media. The trend is to replace these other media
with fiber optics for more flexible services.
The most common method of making long distance calls is to first dial a "1"
plus the number to be called. The number includes an area code destination
comprised of three digits, followed by the three digit telephone exchange and
then the four digit location. The call goes first to the local phone company
central office and then it is handed off to the long distance carrier chosen by
the customer. At the terminating end of the call, it is passed back to the local
phone company in the terminating area code for completion. Both local telephone
companies collect access charges from the long distance carrier for these
services. Whenever an interstate call is preceded by a "1" and an area code, the
local phone company hands the call off to a long distance carrier, who will
complete the call. The local telephone company knows that a long distance call
must be handed off when the number dialed has ten digits.
Although the telecommunications industry was originally developed to send
electronic analog signals representing the speech pattern of the person talking,
the industry is evolving from the analog pattern to a digital network. Digital
lines provide higher quality service and, because of the computer technology,
make it possible for switches and lines to handle many times more calls at one
time than they could previously. The only significant part of the telephone
system that is still analog today is from the phone to the central telephone
office.
While a monumental step, the AT&T breakup and the creation of the
independent Regional Bell Operating Companies ("RBOCs") originally did nothing
more than reshape the existing ownership. Initially, the breakup left AT&T with
a near monopoly on long distance service. It was the requirement of "equal
access" that led to the birth of a competitive long distance market in the U.S.
As part of the settlement, the Department of Justice required that the Bell
Operating Companies (BOCs) offer their customers access to all long distance or
IXCs, not just AT&T. Under "equal access," the phone subscribers were given the
opportunity to preselect the "long line" carrier of their choice and,
<PAGE> 32
thereafter, to obtain from their BOC automatic access to that preselected IXC.
With deregulation and its concomitant "equal access" requirement, the
number of independent long distance carriers in the United States has grown from
the handful existing ten years ago to over 600 IXCs today, which control close
to one-half the market share in terms of long distance or interexchange minutes.
The bulk of the market capture was accomplished by MCI, Sprint and LDDS/WorldCom
through extensive and mass advertising campaigns and the ability to offer
service throughout the entire U.S. These three carriers have priced their
product at approximately the same price or just below that of AT&T. The smaller
carriers have captured only a small portion of this new market. Management
believes this is largely due to two factors. The first is the inability to offer
service throughout the U.S. Instead, most small carriers can only offer service
to a small geographic location and thus have a limited number of customers from
which to draw. The second reason is the lack of resources to commit to large
advertising campaigns. The smaller carriers have captured market share basically
by offering prices that are substantially below those of the largest four
carriers.
The FCC has extensive authority to regulate long distance carriers and has
the power to review requests for interstate rate changes and other aspects of a
carrier's operations. It has generally not exercised this power to review
changes in the domestic charges of the smaller carriers that compete with the
big four. The FCC has generally allowed competition to be the determinant of the
prices these small competitors charge. Moreover, except in certain
circumstances, the FCC increasingly has sought to reduce the level of regulation
on all interstate service providers, including AT&T.
In recent years, the European Commission has opened Europe's nationalized
telecommunications industry to free market competition. Much like the AT&T
breakup, the operation of basic local telephone services has been left to each
country's current national carrier, with "deregulation" focused on the more
lucrative long distance and value-added (e.g. data transmission) markets.
COMPETITION IN THE SWITCHED NETWORK MARKET
I-Link's competition in the switched network market is all other long
distance providers. Due to the number of regional and local carriers, the number
of competitors varies by geographic region. However, the principal competition
is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom and local regional
Bell companies. With these carriers controlling the vast majority of the market
share throughout the U.S., the majority of the potential customers to which I-
Link's products and services are marketed are customers of one of these
carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources.
FEDERAL REGULATION
I-Link competes in an industry that, to a large degree, continues to be
regulated by federal and state governmental agencies. At approximately the same
time as the required divestiture of the BOCs from AT&T in 1984, the FCC
announced rules that were created to foster a self-regulating interstate
telecommunications industry, relying upon competitive forces to keep rates and
services in check.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including ILC. Since 1981, the FCC has
sought to deregulate substantially the interstate activities of non-dominant
interexchange carriers such as ILC. For instance, in addition to subjecting non-
dominant carriers to streamlined regulation, on numerous occasions the FCC has
attempted to exempt non-dominant carriers from federal tariffing requirements
altogether. Most recently, the FCC sought to forebear from imposing tariffing
requirements on the domestic telecommunications offerings of non-dominant
carriers pursuant to Section 10 of the 1996 Act. The FCC's order taking this
action, however, was stayed by the United States Court of Appeals for the
District of Columbia Circuit on February 13, 1997. FCC rules, therefore,
continue to require interstate service providers to tariff their service
offerings at the FCC.
In addition to various annual filing requirements, interstate common
carriers also are required by federal law to ensure that their rates are
reasonable and do not discriminate unreasonably among and between similarly-
situated customers. Moreover, facilities-based interstate carriers are subjected
to additional reporting requirements not imposed on interstate service
resellers.
<PAGE> 33
INTERSTATE ACCESS TRANSPORT PROCEEDING
In an effort to encourage competition in the provision of interstate access
services, the FCC granted increased pricing flexibility to its local exchange
carriers for "access transport" services. Access transport refers to the
connection provided by local exchange carriers between long distance carriers'
long distance facilities and the customer's telephone. These rate structures
previously were designed such that local telephone companies assessed an equal
charge per unit of access to all long distance carriers, regardless of the
volume of local access that these long distance carriers independently
generated. Under the new FCC pricing plan, adopted in the fall of 1993, local
telephone companies were allowed to offer more cost effective access to those
long distance carriers with very high access volumes in a particular local
market. Accordingly, long distance carriers with lesser access requirements,
such as ILC, could experience increases in their overall average access cost
relative to larger competitors.
The FCC pricing plan implemented in the fall of 1993 was set to expire in
November 1995. In principle, the plan has been extended pending implementation
of the 1996 Act (discussed below). Consideration of these issues has been
delayed as the FCC has sought to meet tight statutory deadlines imposed by the
1996 Act on other matters. The FCC, however, is in the process of reconsidering
the federal access charge regime in a pending rulemaking proceeding. The Company
is unable to predict the course and effect of the FCC's actions on this issue at
this time.
RECENT LEGISLATION
In February 1996, the Telecommunications Act of 1996 (previously defined as
the "1996 Act") was signed into law. The purpose of the 1996 Act is to promote
competition in all aspects of telecommunications. The 1996 Act requires
telecommunications carriers to interconnect with other carriers and to provide
for resale, number portability, dialing parity, access to rights-of-way and
compensation for reciprocal traffic. Additionally, incumbent local exchange
companies ("ILECs") are required to provide nondiscriminatory unbundled access,
resale at wholesale rates and notice of changes that would affect
interoperability of facilities and networks.
In August 1996, the FCC adopted a national regulatory framework for
implementing the local competition provisions of the 1996 Act, including
adoption of rules delineating interconnection obligations of ILECs, unbundling
requirements for ILEC network elements, requirements for access to local rights
of way, dialing parity and telephone numbering and requirements for resale of
and nondiscriminatory access to ILEC services. In many instances, the FCC left
the task of implementing the FCC's regulatory standards to the individual
states. Numerous states and ILECs have appealed the FCC's decisions and a
judicial determination of the legality of the FCC's interconnections rules is
pending at the United States Court of Appeals of the Eighth Circuit and there is
currently a stay in place on many of the FCC's interconnection rules promulgated
under the 1996 Act. A reversal of the legality of the FCC's decisions could
affect the development of local competition in the markets in which I-Link
operates, as well as the pricing of services of interest to I-Link. It also
could affect I-Link's future plans to expand into new markets to the extent
efficient interconnection to local facilities is required for competitive market
entry.
Pursuant to Section 254 of the 1996 Act, the FCC also recently initiated a
rulemaking to establish a new federal universal service mechanism, and state
authorities are revisiting the method by which universal service is funded. The
proceeding will determine the extent to which interstate carriers will be
required to contribute to federal universal service funds, as well as their
ability to draw universal service support. Resolution of the issues raised in
this proceeding will affect the cost of providing interstate service and the way
I-Link conducts its business.
The 1996 Act also provides that RBOCs may provide long distance service
upon enactment that is out-of-region or incidental to: (1) audio/video
programming; (2) Internet for schools; (3) mobile services; (4) information or
alarm services; and (5) telecommunications signaling. In order for a BOC to
provide in-region long distance service, the 1996 Act requires the BOC to comply
with a comprehensive competitive checklist and expands the role of the U.S.
Department of Justice in the FCC's determination of whether the entry of a BOC
into the competitive long distance market is in the public interest.
Additionally, there must be a real facilities-based competitor for residential
and business local telephone service (or the failure of the potential providers
to request access) prior to a BOC providing in-region long distance service.
BOCs must provide long distance services through a separate subsidiary of at
<PAGE> 34
least three years. Until the BOCs are allowed into long distance or three years
have passed, long distance carriers with more than five (5) percent of the
nation's access lines may not jointly market BOC resold local telephone service,
and states may not require the BOCs to provide intraLATA dialing parity.
Telecommunications companies also may provide video programming and cable
operators may provide telephone service in the same service area. The 1996 Act
prohibits telecommunications carriers and cable operators from acquiring more
than ten percent of each other, except in rural and other specified areas.
The impact of the 1996 Act on I-Link is unknown because a number of
important implementation issues (such as the nature and extent of continued
subsidies for local rates) still need to be decided by state or federal
regulators. However, the 1996 Act offers opportunities as well as risks. The new
competitive environment should lead to a reduction in local access fees, the
largest single cost in providing long distance service today. For instance, as
discussed above, the FCC has initiated a rulemaking to reform its system of
interstate access charges to make the pricing of interstate access more
compatible with the pricing principles of the 1996 Act and with federal and
state actions to open local networks to competition. The FCC proceeding will
affect the current pricing relationships between interstate carriers, such as
ILC, and ILECs. Specifically, it will determine what is paid to the ILECs for
access to their facilities and how it will be paid. While it is generally
expected that access charges will decrease under the new rules, it is impossible
to predict how the proposals may affect existing pricing relationships.
Moreover, the removal of the long distance restrictions on the BOCs is not
anticipated to have an immediate significant impact on I-Link because of the
substantial preconditions that must be met before the BOCs can provide most in-
region long distance services. Nevertheless, the entry of these local telephone
companies into long distance telecommunications services could result in new
competition and there is a possibility that the local telephone companies will
be able to use local access to gain a competitive advantage over other long
distance providers such as I-Link.
STATE REGULATION
The 1996 Act bars states from applying any restrictions that have the
legal or practical effect of prohibiting the competitive provision of local or
long distance telecommunications services, and the FCC has exercised its
authority under the 1996 Act to preempt such restrictions. In most states, ILC
is required to obtain state regulatory certification prior to commencing
operations. As of August 27, 1998, ILC had received authorization to provide
telecommunications services to its customers in all of the states with the
exception of Alaska, and is in the process of applying for authorization to
provide telecommunications services to customers in Alaska . In addition, ILC is
required to maintain on file at the state regulatory commissions in those states
a tariff or schedule of its intrastate rates and charges. As I-Link expands the
geographic scope of its direct dial long distance business, ILC may be required
to obtain additional state regulatory approvals to provide intrastate long
distance services.
Various state legislatures and public utility commissions are considering a
variety of regulatory policy questions which could adversely affect I-Link. At
this time, however, it is impossible to determine what effect, if any, such
regulations, including the cost of compliance with such regulations, may have on
I-Link's operations.
MEDICAL IMAGING DIVISION
The majority of the Company's revenue in 1996 and 1995 was derived from
owning and operating outpatient diagnostic imaging facilities in Florida. This
revenue was primarily generated from two subsidiaries operating magnetic
resonance imaging ("MRI") facilities. Effective December 31, 1997, the Company
made the decision to sell its Medical Imaging Division. The Board of Directors
approved the plan of disposal on March 23, 1998. Consequently, the Medical
Imaging Division has been accounted for as a discontinued operation in the
financial statements included herein.
DESCRIPTION OF PROPERTY
In September 1996, I-Link entered into a lease for 14,000 square feet of
space for its offices and other facilities in Draper, Utah pursuant to a
commercial lease dated September 11, 1996. The term of the lease is seven years
commencing November 5, 1996, subject to the right to extend for an additional
five years. The initial base rent is approximately $11,650 per month. I-Link has
delivered $162,000 in certificates of deposit to the landlord as a security
<PAGE> 35
deposit under the lease. I-Link also leases several other spaces to house its
Communication Engines throughout the United States. Such spaces vary in size and
are rented on a month-to-month basis.
ILC currently leases and occupies approximately 3,600 square feet of office
space in Phoenix, Arizona, pursuant to a commercial lease dated March 18, 1996.
The lease term is four years and two months commencing March 18, 1996 beginning
with a base rent of $3,598 per month and escalating to $4,498 per month at the
end of the lease. ILC also currently leases and occupies approximately 5,100
square feet of office space in Salt Lake City, Utah, pursuant to a commercial
lease dated July 1, 1996. The lease term is five years commencing July 1, 1996
beginning with a base rent of $5,313 per month and escalating to $5,843 per
month at the end of the lease.
MiBridge rents 1,800 square feet of office space in Eatontown, New Jersey
under a one-year lease effective May 1, 1997 at a cost of $2,000 per month.
After the initial term of the lease, MiBridge may continue occupancy of its
space on a month-to-month basis. MiBridge may cancel such lease without penalty
upon 30 days notice to the lessor.
The Company currently occupies approximately 3,400 square feet on a month-
to-month basis for its Medical Imaging Division offices located in St.
Petersburg, Florida. The Company leases approximately 2,400 square feet for its
outpatient MRI center located in Tampa, Florida. The lease for the medical
facility expired on May 31, 1998. The Company had the option to extend the
medical facility lease an additional two years, but determined not to exercise
that option in view of the discontinuance of the Medical Imaging Division's
operations.
LEGAL PROCEEDINGS
On May 12, 1998, I-Link and MCI Telecommunications, a unit of MCI
Communications Corp., agreed to a settlement of the arbitration action filed in
November 1997 by I-Link against MCI and a related counterclaim by MCI against I-
Link. Pursuant to the terms of the settlement all claims and counterclaims
shall be dismissed, I-Link shall pay to MCI over a six-month period the sum of
$2,083,425 representing agreed actual long-distance usage (previously accrued in
the financial statements) by I-Link prior to the termination of its relationship
with MCI, and payment on the Company's existing note payable to MCI (outstanding
principal balance as of June 30, 1998 of approximately $2.39 million) will be
restructured to provide for a fixed monthly payment of $250,436 over the term of
the note, in place of the original escalating monthly payment schedule.
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.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
NAME AGE TITLE
---------------------- ---------- -------------------------------------
<S> <C> <C>
John W. Edwards 43 Chairman of the Board,
President and Chief Executive Officer
Karl S. Ryser, Jr. 43 Treasurer and Chief Financial Officer
David E. Hardy 45 Secretary
Henry Y.L. Toh 41 Director and Assistant Secretary
Thomas A. Keenan 33 Director
Joseph A. Cohen 51 Director
</TABLE>
The Company's Articles of Incorporation provide that the number of
directors of the Company shall not be less than five or more than nine.
Currently, the Board of Directors has four members; the Company is working to
identify at least one additional individual to be elected as a director. The
<PAGE> 36
Company's Articles of Incorporation provide that the Board of Directors is
divided into three classes and that each director shall serve a term of three
years. The term of office of Mr. Keenan, the sole Class I Director, will expire
at the 1998 annual meeting of shareholders. The term of office of Messrs. Toh
and Cohen, the Class II Directors, will expire at the 1999 annual meeting of
shareholders, and the term of office of Mr. Edwards, the sole Class III
Director, will expire at the annual meeting of shareholders in 2000. Mr. Cohen
serves as the designee of Commonwealth, although he is no longer affiliated with
Commonwealth. Commonwealth has the right to approve the Company's selection of
on additional outside director pursuant to the terms of a Sales Agency Agreement
between the Company and Commonwealth. Mr. Keenan serves as the designee of
Winter Harbor, and Winter Harbor has the right to designate one additional
member of the Board of Directors pursuant to the Company's financing
arrangements with Winter Harbor.
Biographical information with respect to the present executive officers,
directors, and key employees of the Company are set forth below. There are no
family relationships between any present executive officers and directors except
that John W. Edwards and Robert W. Edwards, the Company's Vice President of
Network Operations, are brothers.
John W. Edwards, Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Edwards was selected to fill a vacancy on the Board
of Directors as a Class III director in June 1996. He was elected Chairman of
the Board in August 1997. Mr. Edwards serves as the Chief Executive Officer of
I-Link and, as of September 30, 1996, serves as the President and Chief
Executive Officer of the Company. Mr. Edwards served as Acting Chief Financial
Officer of the Company from September 1996 to January 1997. Mr. Edwards served
as President and a director of Coresoft, Inc., a software company developing
object-oriented computer solutions for small businesses from September 1995 to
April 1996. During the period August 1988 through July 1995, Mr. Edwards served
in a number of executive positions with Novell, Inc., a software company
providing networking software, including Executive Vice President of Strategic
Marketing, Executive Vice President of the Appware and Desktop Systems Groups
and Vice President of Marketing of the NetWare Systems Group. Mr. Edwards was
involved in the development of the NetWare 386 product line. Until May 1996, he
was a visiting faculty member at the Marriott School of Management at Brigham
Young University. Mr. Edwards received a B.S. degree in Computer Science from
Brigham Young University and has taken graduate courses in Computer Science at
Brigham Young University. Mr. Edwards was re-elected to the Board of Directors
as a Class III Director at the 1997 Annual Meeting.
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company
and of I-Link. Mr. Ryser was elected Treasurer of the Company and Treasurer and
Chief Financial Officer of I-Link in September 1996, and Chief Financial Officer
of the Company in January 1997. Mr. Ryser was self-employed as a corporate
financial consultant from May 1995 until September 1996, when he joined I-Link
as its Treasurer. From July 1993 through April 1995, Mr. Ryser served as Vice
President of Finance and Treasurer of Megahertz Corporation, a publicly-held
manufacturer of data communication products, in which position he served until
Megahertz was acquired by U.S. Robotics Corporation. After earning his MBA, Mr.
Ryser's work experience was concentrated in the investment banking field,
working first with the Capital Markets Division of First Security Corporation
and later with Dain Bosworth, Inc. Mr. Ryser holds a B.S. degree in Finance from
the University of Utah in 1979, and an MBA from the University of San Diego in
1982.
David E. Hardy, Secretary of the Company. Mr. Hardy was appointed Secretary
of the Company in December 1996. He is a founding partner of the law firm of
Hardy & Allen, in Salt Lake City. From February 1993 to April 1995, Mr. Hardy
served as Senior Vice President and General Counsel of Megahertz Corporation, a
publicly-held manufacturer of data communication products. Prior to his
association with Megahertz Corporation, Mr. Hardy was a senior partner of the
law firm of Allen, Hardy, Rasmussen & Christensen which was founded in 1982. Mr.
Hardy holds a Bachelor of Arts degree from the University of Utah and a Juris
Doctor degree from the University of Utah School of Law.
Henry Y.L. Toh, Director of the Company. Mr. Toh was elected by the Board
of Directors as a Class II Director and as Vice Chairman of the Board of
Directors in March 1992. Mr. Toh was elected President of the Company in May
1993, Acting Chief Financial Officer in September 1995 and Chairman of the Board
in May 1996, and served as such through September 1996. He was appointed
Assistant Secretary of the Company in May 1997. Mr. Toh is a Director of Four M.
Mr. Toh served as a senior tax manager in international taxation and mergers and
acquisitions with KPMG Peat Marwick from March 1980 to February 17, 1992. He is
a graduate of Rice University.
<PAGE> 37
Thomas A. Keenan, Director of the Company. Mr. Keenan was elected by the
Board of Directors as a Class III Director on September 1, 1998, upon the
resignation of R. Huston Babcock. Mr. Keenan was elected to fill this board
seat pursuant to the right of Winter Harbor, LLC to designate up to two board
members under the Shareholder Agreement dated September 30, 1997 between Winter
Harbor and the Company. Mr. Keenan is the principal of Wolfeboro Holdings, an
investment fund based in Wellesley, Massachusetts. Mr. Keenan received a J.D.
from the University of Michigan Law School, and from September 1994 to August
1996 was employed by McKinsey & Company, an international management consulting
firm.
Joseph A. Cohen, President of an investment firm and Director of the
Company. Mr. Cohen was appointed a Class II Director of the Company in September
1996 as the designee of Commonwealth, however he no longer has an affiliation
with Commonwealth. He has been the Chairman, Chief Executive Officer and
Director of New Frontier Entertainment, Inc. ("New Frontier") since its
formation in May 1995 and held the same positions since January 1993 in New
Frontier's predecessor company, The Frondelle Company, Inc. He is also President
of Leslie Group, Inc., a diversified company with holdings primarily in the
music, film, home video and other entertainment-oriented businesses. He is also
a Founder and President of Leslie/Linton Entertainment Inc., a merchant banking
company that provides investment funds and assists in raising capital and debt
for companies. Mr. Cohen also serves as President of Pickwick Communications,
Inc., an independent music publishing company. From 1977 to 1986, Mr. Cohen
served as Executive Vice President of the National Association of Recording
Merchandisers, Inc. and Founder and Executive Vice President of Video Software
Dealers Association, Inc., trade associations representing all segments of the
recorded music and home video industries, respectively.
Each officer of the Company is chosen by the Board of Directors and holds
his or her office until his or her successor shall have been duly chosen and
qualified or until his or her death or until he or she shall resign or be
removed as provided by the Bylaws.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company or any of its subsidiaries.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning the
selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Its membership is currently comprised of Joseph A. Cohen,
(chairman), Henry Y.L. Toh and Thomas A. Keenan.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Its membership is currently comprised of Thomas A. Keenan
(chairman), Joseph Cohen and John Edwards.
Finance Committee. The Company's finance committee (the "Finance
Committee") is responsible for reviewing and evaluating financing, strategic
business development and acquisition opportunities. Its membership is currently
comprised of Joseph A. Cohen (chairman), Thomas A. Keenan and John Edwards
Committee.
The Company has no nominating committee or any committee serving a similar
function.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's five most highly compensated executive officers serving as such at the
end of the year ended December 31, 1997, whose compensation was in excess of
$100,000.
<TABLE>
<CAPTION>
<PAGE> 38
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- ---------------------- ----------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL ANNUAL STOCK OPTIONS/ LTIP COMPENSA-
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARS(#) PAYOUTS($) TION($)
- --------- ---- -------- -------- --------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. 1997 98,292 0 0 0 520,000 0 N/A
Edwards 1996 101,663(1) 0 0 0 1,250,000(2) 0 N/A
President 1995 -- -- -- -- --
and CEO
Karl S. 1997 125,000 0 0 0 550,000 0 N/A
Ryser, 1996 41,665(3) 0 0 - 250,000 -- N/A
Jr. 1995 -- -- -- -- --
Treasurer
and CFO
</TABLE>
- -----------------
(1) Mr. Edwards began his employment with I-Link in April 1996 and was
appointed President and CEO as of September 30, 1996; his annual salary was
$175,000 from April to August 21, 1996 and was voluntarily reduced to
$96,000 for the balance of 1996. Mr. Edwards' annual salary continued at
$96,000 in 1997 until August, when it was increased to an annual salary of
$150,000. In November 1997 Mr. Edwards again voluntarily reduced his annual
salary to $35,000, for the balance of 1997 and until the Company's
financial restraints are reduced. See " -Employment Agreements."
(2) Excludes warrants to purchase 25,000 shares of Common Stock at an
exercise price of $4.875 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
(3) Mr. Ryser began his employment with I-Link in September 1996; his
annual salary during the 1996 and 1997 fiscal years was $125,000. See
"Employment Agreements."
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1997)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1997, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES TOTAL OPTIONS/ EXERCISE
UNDERLYING SARS GRANTED OR BASE
OPTIONS/SARS TO EMPLOYEES PRICE EXPIRATION
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE
- ------------------ ------------ -------------- -------- ----------
<S> <C> <C> <C> <C>
John W. Edwards(1) 10,000 * $4.875 1/2/2007
10,000 * 5.375 2/6/2007
500,000 16.5% 5.188 8/29/2007
1,000,000 23.1% 7.000 4/8/2006
250,000 5.8% 4.875 8/21/2006
Karl S. Ryser, Jr. 550,000 18.2% $5.188 8/29/2007
250,000 5.8% 4.410 10/15/2006
</TABLE>
- ----------------------
* Less than 1%.
(1) Does not include warrants to purchase 25,000 shares of Common Stock at
an exercise price of $4.875 issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised during 1997 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of 1997.
<PAGE> 39
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
SHARES OPTIONS/SARS AT FY-END(#) OPTIONS/SARS AT FY-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Edwards 0 0 796,564 973,436 $ 765,292 $1,041,333
Karl S. Ryser, Jr. 0 0 528,788 271,212 $1,219,100 $ 575,000
</TABLE>
- --------------------
(1) The calculations of the value of unexercised options are based on the
difference between the closing bid price on NASDAQ of the Common Stock on
December 31, 1997, and the exercise price of each option, multiplied by the
number of shares covered by the option.
DIRECTOR COMPENSATION
During 1997, Directors of the Company then serving received options to
purchase 10,000 shares of Common Stock on the first business day of January at
an exercise price equal to the fair market value of the Common Stock on the date
of grant. Effective February 6, 1997 and the first business day of January of
each year thereafter, each Director then serving will receive options, to
purchase 10,000 shares (20,000 shares effective January 1, 1998) of Common Stock
and, for each committee on which the Director serves, options to purchase 5,000
shares of Common Stock. The exercise price of such options shall be equal to the
fair market value of the Common Stock on the date of grant. The Directors are
also eligible to receive options under the Company's stock option plans at the
discretion of the Board of Directors. In addition to the above options, Mr.
Cohen received options to purchase 64,000 shares of Common Stock upon his
appointment to the Board. On August 29, 1997 Mr. Cohen was also granted 150,000
options to purchase Common Stock, 50,000 of such options vested upon closing of
the Winter Harbor equity investment in October 1997, 50,000 will vest when the
Company reaches the break even point, and the balance will vest at such time as
the Company has attained $50 million in annual sales. Mr. Cohen also has a
consulting agreement with the Company in the amount of $4,000 per month for a
36-month period commencing September 1996. See " Consulting Agreements."
EMPLOYMENT AGREEMENTS
In February 1996, the Company entered into a two-year employment agreement
with Henry Y.L. Toh. The Employment Agreement was for an initial period ending
on December 31, 1997 and is automatically renewable for successive one-year
periods unless written notice to the contrary is given by the Company not less
than 120 days prior to expiration of the term. Pursuant to the terms of the
employment agreement, Mr. Toh is required to devote such of his time to the
business and affairs of the Company as is required to fulfill the duties and
responsibilities of his office. Mr. Toh is entitled under his employment
agreement to receive compensation at the rate of $54,000 per year. He is
entitled to an annual bonus at the discretion of the Board of Directors and may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. In the event of termination of his employment by the
Company other than for "cause" (as defined in the agreement) or by Mr. Toh upon
"good reason" (as defined in the agreement), the Company is required to pay Mr.
Toh, as liquidated damages or severance pay, monthly termination payments equal
to the base salary in effect for a period of six months after such termination.
The employment agreement contains confidentiality and non-solicitation
provisions.
I-Link entered into three-year employment agreements on February 21, 1996
with Alex Radulovic, Senior Engineer of I-Link. Under his employment agreement,
Mr. Radulovic is employed at a salary of $90,000 per annum, subject to
adjustment upon satisfaction of performance criteria. In the event of
termination by the Company not involving just cause (as defined in the
agreement), or upon a material breach by the Company which is unremedied for 30
days after written notice, Mr. Radulovic is entitled to receive, as liquidated
damages or severance pay, an amount equal to the Monthly Compensation (as
defined in the agreement) for the remaining term of the agreement and, in
addition, all options shall vest. The agreement contains non-competition and
confidentiality provisions. On July 1, 1996, the Company approved the grant of
options to purchase 500,000 shares of Common Stock at $7.00 per share for five
years, to Mr. Radulovic. To the extent vested, the options may be exercised
commencing June 30, 1997. The options vest on June 30, 2001; provided however,
that vesting will accelerate in 25% increments at such time as the average
<PAGE> 40
closing bid price of a share of Common Stock equals or exceeds $10, $15, $20 and
$25, respectively.
On April 8, 1996, I-Link entered into a three-year employment agreement
with John W. Edwards, President, Chief Executive Officer and Director of the
Company. Pursuant to the terms of the employment agreement, Mr. Edwards is
employed as the Chief Executive Officer and a Director of I-Link, and is
required to devote substantially all of his working time to the business and
affairs of I-Link. Mr. Edwards is entitled under his employment agreement to
receive compensation at the rate of $175,000 per year and is entitled to a
profitability bonus in the discretion of the I-Link Board of Directors and to
participate in fringe benefits of the Company as are generally provided to
executive officers. In addition, Mr. Edwards is entitled to receive an option to
purchase 1,000,000 shares of Common Stock of the Company at an exercise price of
$7.00 per share. Of such options, 83,333 vested immediately and 83,333 vest and
become exercisable on the first calendar day of each quarter after April 8,
1996. In the event of termination by I-Link or in the event of a violation of a
material provision of the agreement by I-Link which is unremedied for thirty
(30) days and after written notice or in the event of a "change in control" (as
defined in the agreement), Mr. Edwards is entitled to receive, as liquidated
damages or severance pay, an amount equal to the Monthly Compensation (as
defined in the agreement) for the remaining term of the agreement and all
options shall thereupon be fully vested and immediately exercisable. The
agreement contains non-competition and confidentiality provisions. Mr. Edwards
agreed to amend his contract, effective August 21, 1996, to reduce his annual
salary from $175,000 to $96,000; and in consideration of the salary reduction,
the Company has agreed to grant him options to purchase 250,000 shares of Common
Stock at an exercise price of $4.875 per share. In August 1998 his annual
salary was increased to $150,000, but was again voluntarily reduced to $35,000
for the balance of calendar 1997, given the Company's financial restraints. In
1998 his annual salary was increased to $125,000.
In October 1996, I-Link entered into three-year employment agreements with
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company, and
with William H. Flury, I-Link's Vice President, Sales and Marketing. Pursuant to
the terms of the employment agreements, each such officer is required to devote
all of his time to the business and affairs of the Company except for vacations,
illness or incapacity. Mr. Ryser is entitled under his employment agreement to
receive compensation at the rate of $125,000 per year and a bonus in the sole
discretion of the Chief Executive Officer and Mr. Flury is entitled to
compensation at the rate of $137,500 per year and a bonus commensurate with his
performance and that of I-Link. In May 1998 Mr. Flury's annual salary was
voluntarily reduced to $125,000. Each such employee may participate in fringe
benefits, deferred compensation, stock benefits and option plans of the Company.
In addition, each of Mr. Ryser and Mr. Flury is entitled to options to purchase
250,000 shares of Common Stock exercisable at an exercise price equal to the
closing bid price on the date of the employment agreement. Options issuable to
Mr. Ryser to purchase 25,000 shares vested immediately and the remaining options
were to vest in quarterly increments of 20,455 commencing January 1, 1997. On
April 29, 1997, the Company modified the original vesting schedule of the
250,000 options in the employment agreement allowing for the immediate vesting
of 100,000 of the non-vested options and the balance of the non-vested to vest
evenly over four quarters. Options issuable to Mr. Flury to purchase 41,666
shares vest six months from the date of the employment agreement and the
remaining options will vest in quarterly increments of 20,833. In the event of a
change of control or upon termination of the employment agreement by the Company
without cause all options shall thereupon be fully vested and immediately
exercisable. In the event of termination by the Company other than for "cause"
(as defined in the agreement), the Company is required to pay Mr. Ryser or Mr.
Flury, as the case may be, a lump sum severance payment equal to one year's then
current salary. Each of the employment agreements contains confidentiality and
non-competition provisions.
In August 1997 I-Link entered into a three-year employment contract with
Jon McKillip, Vice President of I-Link Worldwide LLC Pursuant to the terms of
the employment contract, Mr. McKillip is required to devote all his time to the
business and affairs of the Company except vacations, illness or incapacity. Mr.
McKillip is entitled under his employment agreement to receive compensation at
the rate of $120,000 per year and a bonus commensurate with his performance and
that of I-Link. In addition, Mr. McKillip is entitled to options to purchase
150,000 shares of Common Stock at an exercise price equal to the closing bid
price on the date of employment agreement and vesting over 12 quarters. Mr.
McKillip may participate in fringe benefits, deferred compensation, and stock
benefits and option plans of the Company.
In September 1997, the Company entered into a two-year employment agreement
with Dror Nahumi as Vice President of Emerging Technologies of the Company to
<PAGE> 41
manage the operations of MiBridge, Inc. Pursuant to the terms of the employment
agreement, Mr. Nahumi is required to devote all of his time to the business and
affairs of MiBridge, Inc. and is entitled to receive compensation at the rate of
$100,000 per year, and a bonus to the extent bonuses are declared by the
Company's Board of Directors. Mr. Nahumi may participate in fringe benefits,
deferred compensation, stock benefits and option plans of the Company. Mr.
Nahumi's employment agreement contains non-competition and confidentiality
provisions, and provides for the assignment by Mr. Nahumi to the Company of all
of his rights, title, interest and intellectual property in and to his
employment inventions (as such terms are defined in the employment agreement).
In February 1998, I-Link entered into a two year employment contract with
Rami Shmueli, General Manager of Vianet Technologies Ltd., an Israeli company
formed in 1998 and a wholly-owned subsidiary of I-Link. Pursuant to the terms of
the employment contract, he is required to devote all his time to the business
and affairs of the Company except vacations, illness or incapacity. Mr. Shmueli
is entitled under his employment agreement to receive compensation at the rate
of approximately $90,000 per year and a bonus commensurate with his performance
and that of I-Link. In addition, Mr. Shmueli is entitled to options to purchase
60,000 shares of Common Stock at an exercise price equal to the closing bid
price on the date of employment agreement and vesting over 12 quarters. Mr.
Shmueli may participate in fringe benefits, deferred compensation, stock
benefits and option plans of the Company. Mr. Shmueli is entitled to receive
customary benefits dictated by Israeli law.
CONSULTING AGREEMENTS
The Company entered into a Consulting Agreement with David E. Hardy
effective February 6, 1997 and for a term of 36 months thereafter. Pursuant to
the Agreement, Mr. Hardy shall provide legal services to the Company in exchange
for compensation at the rate of $10,417 per month for the term of the Agreement.
In addition, in the event the Company increases the salary of its senior-level
vice presidents, the consulting fee shall be equally increased and in the event
the Company shall pay any company performance-based bonuses to its senior level
vice presidents, the Company shall pay an equal amount to Mr. Hardy. In
addition, Mr. Hardy was granted options to purchase 250,000 shares of the
Company's Common Stock at an exercise price equal to the closing price of the
Company's publicly traded shares as of the effective date of the Agreement
($5.375 per share). The options vest as to 47,500 shares upon the execution of
the Agreement and options relating to 20,250 shares were to vest at the
commencement of each calendar quarter for ten quarters, with the first quarterly
vesting to occur on April 1, 1997 and the final quarterly vesting to occur July
1, 1999. On April 29, 1997, the Company modified the original vesting schedule
of the 250,000 options in the employment agreement allowing for the immediate
vesting of 100,000 of the non-vested options and the balance of the non-vested
to vest evenly over four quarters. In the event of the termination of the
Agreement prior to the expiration of the full term for any reason other than as
a result of a material, unremedied breach by Mr. Hardy which remains uncured
following 30 days written notice, Mr. Hardy is entitled to a lump sum payment
equal to the lesser of the monthly consulting fee payable through the end of the
term of the Agreement or the monthly consulting fee payable over 12 months and
all unvested options shall accelerate and immediately become fully vested and
exercisable.
The Company entered into a three-year consulting agreement with Joseph A.
Cohen (a member of the board of directors), effective September 1996, pursuant
to which he will be compensated $4,000 per month and received 64,000 options to
purchase common stock upon appointment to the Board of Directors. On August 29,
1997 Mr. Cohen was also granted 150,000 options to purchase Common Stock, 50,000
of such options vested upon closing of the Winter Harbor equity investment in
October 1997, 50,000 will vest when the Company reaches the break even point,
and the balance will vest at such time as the Company has attained $50 million
in annual sales.
DIRECTOR STOCK OPTION PLAN
The Company's Director Stock Option Plan (the "DSOP") authorizes the grant
of stock options to directors of the Company. Options granted under the DSOP are
non-qualified stock options exercisable at a price equal to the fair market
value per share of Common Stock on the date of any such grant. Options granted
under the DSOP are exercisable not less than six (6) months nor more than ten
(10) years after the date of grant.
As of August 15, 1998, options for the purchase of 8,169 shares of Common
Stock at prices ranging from $.875 to $3.875 per share were outstanding. As of
August 15, 1998, options to purchase 15,228 shares of Common Stock have been
exercised. In connection with adoption of the 1995 Director Plans (as
<PAGE> 42
hereinafter defined) the Board of Directors authorized the termination of future
grants of options under the DSOP; however, outstanding options granted under the
DSOP will continue to be governed by the terms thereof until exercise or
expiration of such options.
STOCK PURCHASE PLAN
In accordance with the Employee Qualified Stock Purchase Plan (the
"Purchase Plan"), employees may contribute up to ten percent of their base wages
toward the purchase of Common Stock. The exercise price of options granted under
the Purchase Plan is the lesser of 85% of the market value on the first business
day of the payment period (September 1) or the last business day of the payment
period (August 31). As of August 15, 1998, the Company had 34,376 shares of
Common Stock reserved for issuance on exercise of the purchase rights granted
under the Purchase Plan.
1995 DIRECTOR STOCK OPTION PLAN
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Director Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary grants of
stock options which qualify as incentive stock options (the "Incentive Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as options which do not so qualify (the "Non-Qualified Options") to be
issued to directors. In addition, stock appreciation rights (the "SARs") may be
granted in conjunction with the grant of Incentive Options and Non-Qualified
Options. No SARs have been granted to date.
The 1995 Director Plan provides for the grant of Incentive Options, Non-
Qualified Options and SARs to purchase up to 250,000 shares of Common Stock
(subject to adjustment in the event of stock dividends, stock splits and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then-unexercised portion. If any Incentive Option, Non-
Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of Common Stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employees.
The shares of Common Stock subject to the 1995 Director Plan may be made
available from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified Options
on a non-discretionary basis pursuant to the following formula: each member of
the Board of Directors then serving shall receive a Non-Qualified Option to
purchase 10,000 shares of Common Stock at an exercise price equal to the fair
market value per share of the Common Stock on that date. Pursuant to such
formula, directors received options to purchase 10,000 shares of Common Stock as
of October 17, 1995, options to purchase 10,000 shares of Common Stock on
January 2, 1996, and will receive options to purchase 10,000 shares of Common
Stock on the first business day of each January. Each option is immediately
exercisable for a period of ten years from the date of grant. The Company has
190,000 shares of Common Stock reserved for issuance under the 1995 Director
Plan. As of August 15, 1998, options exercisable to purchase 170,000 shares of
Common Stock at prices ranging from $1.00 to $1.25 per share are outstanding
under the 1995 Director Plan. As of August 15, 1998, options to purchase 60,000
shares have been exercised under the 1995 Director Plan.
1995 EMPLOYEE STOCK OPTION PLAN
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options, Non-
Qualified Options and SARs.
Directors of the Company are not eligible to participate in the 1995
Employee Plan. The 1995 Employee Plan provides for the grant of stock options
which qualify as Incentive Stock Options under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as Non-
Qualified Options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of Incentive Options
and Non-Qualified Options. No SARs have been granted to date.
The 1995 Employee Plan provides for the grant of Incentive Options, Non-
Qualified Options and SARs of up to 400,000 shares of Common Stock (subject to
<PAGE> 43
adjustment in the event of stock dividends, stock splits and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of Common Stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of Common Stock reserved for issuance under the 1995 Employee
Plan. As of August 15, 1998, options to purchase 375,000 shares of Common Stock
with exercise prices of $1.125 to $6.75 per share have been granted under the
1995 Employee Plan. As of August 15, 1998, 25,000 options have been exercised
under the 1995 Employee Plan.
1997 RECRUITMENT STOCK OPTION PLAN
In October 1997, the stockholders of the Company approved adoption of the
Company's 1997 Recruitment Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1997 Plan").
The 1997 Plan provides for automatic and discretionary grants of stock
options which qualify as incentive stock options (the "Incentive Options") under
Section 422 of the Code, as well as options which do not so qualify (the "Non-
Qualified Options") to be issued to directors. In addition, stock appreciation
rights (the "SARs") may be granted in conjunction with the grant of Incentive
Options and Non-Qualified Options. No SARs have been granted to date.
The 1997 Plan provides for the grant of Incentive Options, Non-Qualified
Options and SARs to purchase up to 4,400,000 shares of Common Stock (subject to
adjustment in the event of stock dividends, stock splits and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1997 Plan, the shares of Common Stock as to which such option or right was
not exercised will become available under the 1997 Plan for the grant of
additional options or rights to any eligible employees. The shares of Common
Stock subject to the 1997 Plan may be made available from either authorized but
unissued shares, treasury shares, or both. As of August 15, 1998, options to
purchase 1,060,000 shares of Common Stock, with exercise prices of $4.375 to
$8.625 per share have been granted under the 1997 Plan. As of August 15, 1998,
no options have been exercised under the 1997 Plan. See "Executive Compensation
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John Edwards is Chairman of the Board and an executive officer of the
Company. Thomas A. Keenan and Joseph A. Cohen are non-employee directors to the
Company See "Executive Compensation" generally, "Executive Compensation -
Employment Agreements", "Executive Compensation - Consulting Agreement" and
Executive Compensation - Director Compensation" as well as "Security Ownership
of Certain Beneficial Owners and Management".
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation" for descriptions of the terms of employment
and consulting agreements between the Company and certain officers, directors
and other related parties.
ISSUANCES OF STOCK AND OPTIONS TO CERTAIN SHAREHOLDERS, EMPLOYEES AND
CONSULTANTS
In addition to options issued in connection with employment or consulting
arrangements, the Company has approved grants as follows: The grant to Clay
Wilkes, formerly a Director of the Company, of options to purchase 1,500,000
shares of Common Stock, the vesting of which would occur on June 30, 2001;
provided that the vesting shall accelerate in increments of 25% in the event
that the average closing bid price per share of Common Stock for five (5)
consecutive trading days equals or exceeds $10, $15, $20 and $25, respectively,
upon the graduated achievement of Common Stock prices of $10, $15, $20 and $25,
and exercisable to the extent vested commencing June 30, 1997 at a price of
$7.00 per share. As of the date hereof, 25% of each of such options has vested.
The options lapse on June 30, 2002. The Company has agreed to issue options to
purchase 64,000 shares of Common Stock at an exercise price of $5.25 to Joseph
Cohen. The Company has also agreed to issue warrants to purchase 25,000 and
<PAGE> 44
5,000 shares of Common Stock at an exercise price of $4.875 and $2.50,
respectively, to Mr. John Edwards and Mr. Flury, in connection with the loan by
such persons to I-Link of $125,000 and $100,000, respectively, in August 1996.
On May 15, 1997 Mr. Flury, Mr. Ryser and Mr. Hardy were each granted options to
purchase 250,000 shares of Common Stock and John Edwards, and Robert Edwards,
Vice President of Network Operations of I-Link, were each granted options to
purchase 500,000 shares of Common Stock, each at the exercise price of $5.188;
such options vest in three annual installments. Furthermore, directors of the
Company approved the grant of options to purchase 10,000 shares of Common Stock
to each director and an additional 5,000 options per director per committee on
which he or she serves for an aggregate of options to purchase 95,000 shares.
Effective January 1, 1998, the number of options awarded for serving as director
and committee member was increased to 20,000 and 5,000, respectively, resulting
in additional 1998 aggregate awards of options to purchase 115,000 shares. On
May 15, 1997 the Company granted 300,000 options to each of Messrs. Ryser and
Hardy at an exercise price of $5.188 per share; such options were contingent
upon the closing of the investment in the Company by Winter Harbor and vested in
full upon the closing. See "Management," "Executive Compensation - Employment
Agreements," and "Recent Transactions."
TRANSACTIONS WITH WINTER HARBOR, LLC
On June 5, 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. In August 1997, the Company and Winter Harbor amended their
agreement to provide that the Company would be allowed to borrow up to an
additional $3,000,000 (thus revising the maximum amount of the Loan to
$5,000,000). The Company initially borrowed $2,000,000. On August 18, 1997, the
Company borrowed an additional $3,000,000 pursuant to such arrangement, bringing
the total principal amount due under the Note to $5,000,000,. The Company and
Winter Harbor executed a Sales Purchase Agreement, dated as of September 30,
1997, and closed on October 10, 1997, pursuant to which Winter Harbor invested
$12,100,000 to purchase 4,400 shares of a new series of the Company's
convertible preferred stock (the "Series M Preferred Stock"). A portion of such
shares were paid for by exchanging $5,000,000 of the principal amount and
$100,000 accrued interest under the Winter Harbor loans. In the first quarter
of 1998, Winter Harbor made an additional loan to the Company in an aggregate of
$5,768,000 for capital expenditures and working capital purposes. In May 1998
Winter Harbor loaned the Company an additional $2,000,000. For additional
information relating to the Winter Harbor transactions, including terms of
warrants issued, see "Recent Transactions." See also "Management's Discussion
and Analysis -- Current Position/Future Requirements" and "Security Ownership of
Certain Beneficial Owners and Management."
Winter Harbor is owned by First Media, L.P., a private media and
communications company which is a private investment principally of Richard E.
Marriott and his family. The Company's general counsel, David E. Hardy, is a
brother of Ralph W. Hardy, Jr. who is general counsel and a minority equity
holder in Winter Harbor. David E. Hardy has no ownership or association with
Winter Harbor. As a result of this relationship, as well as personal
relationships of David E. Hardy with the principals of Winter Harbor,
discussions were initiated which led to Winter Harbor's investment in the
Company.
The Company's management has been informed that Winter Harbor holds an
ownership interest in the consulting company which is developing the Company's
new internal information system. The Company's referral to the consulting firm
did not come through Winter Harbor, and Winter Harbor played no part in the
negotiation of such consulting arrangement.
MIBRIDGE ACQUISITION; SERIES D PREFERRED STOCK
On August 12, 1997 the Company entered into an agreement with MiBridge,
Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the principal
shareholder of MiBridge, pursuant to which the Company acquired all of the
issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. 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 Company will pay the
stockholders of MiBridge (the "MiBridge 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 a series of the Company's
convertible preferred stock (the "Series D Preferred Stock"). The 1,000 shares
of Series D Preferred Stock were convertible at the option of the MiBridge
<PAGE> 45
Stockholders, at any time during the nine months following the closing of the
MiBridge Acquisition, into such number of shares of Common Stock as shall equal
the sum of $6,250,000 divided by $9.25 (the "Series D Conversion Price"), which
price was the closing bid price of the Company's Common Stock on June 5, 1997
(the date that the first letter agreement relating to the transaction was
executed). As of August 19, 1998, all 1,000 shares of Series D Preferred Stock
had been converted into an aggregate of 1,092,174 shares of Common Stock, and
the balance payable in cash to MiBridge stockholders was $1,000,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Other than the Series M Preferred Stock issued on October 10, 1997, the
Common Stock constitutes the only voting securities of the Company. Each share
of Class C Preferred Stock is convertible, at the option of the holder thereof,
into 24 shares of Common Stock, and each share of Class M Preferred Stock is
convertible, at the option of the holder thereof, into 1,000 shares of Common
Stock. The table below sets forth information, to the best of the Company's
knowledge, with respect to the total number of shares of the Company's Common
Stock, Class C Preferred Stock or Class M Preferred Stock beneficially owned by
each director, the Named Executive Officers, each beneficial owner of more than
five percent of the Common Stock, and all directors and executive officers as a
group, as of August 19, 1998. On that date, there were 18,556,384 shares of
Common Stock issued and outstanding, 52,008 shares of Class C Preferred Stock
issued and outstanding, 4,400 shares of Class M Preferred Stock issued and
outstanding; and 1,000 shares of Series F Preferred Stock outstanding.
<TABLE>
CAPTION>
% of
Outstanding
Number of Shares of
Shares Common Stock
Name and Address Title of Beneficially Beneficially
of Beneficial Owner(1) Class Owned Owned(2)
- ------------------------------ ------------ -------------- --------------
<S> <S> <C> <C>
Joseph A. Cohen Common Stock 246,000(4) 1.2%
1370 Avenue of the Americas Class C 3,000
Americas Preferred
New York, NY 10019 Stock
John W. Edwards Common Stock 1,074,996(5) 5.5%
13751 S. Wadsworth Park Drive
Draper, UT 84020
David E. Hardy Common Stock 806,554(6) 4.2%
60 East South Temple
Salt Lake City, UT 84111
Thomas A. Keenan Common Stock 70,000(11) *
Winter Harbor, LLC
11400 Skipwith Lane
Potamac, MD 20854
Dror Nahumi Common Stock 926,976 5.0%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Karl S. Ryser, Jr. Common Stock 633,845(7) 3.3%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Henry Y.L. Toh Common Stock 223,501(8) 1.2%
3227 Bennet Street North
St. Petersburg, FL 33713
Clay Wilkes Common Stock 2,179,874(9) 11.5%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Winter Harbor, LLC Common Stock 29,764,727(10) 61.6%
c/o First Media, L.P. Series M 4,400
11400 Skipwith Lane Preferred
Potomac, MD 20854 Stock
<PAGE> 46
All Executive Officers Common Stock 3,054,896(12) 14.2%
and Directors as a Class C 3,000
Group (6 Persons) Preferred
Stock
</TABLE>
- ------------------
* Indicates less than one percent.
(1) Unless noted, all of such shares of Common Stock are owned of record
by each person or entity named as beneficial owner and such person or
entity has sole voting and dispositive power with respect to the shares of
Common Stock owned by each of them.
(2) As to each person or entity named as beneficial owners, such person or
entity's percentage of ownership is determined by assuming that any options
or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the date hereof have been
exercised or converted, as the case may be.
(3) [Reserved.]
(4) Includes 174,000 shares of Common Stock issuable pursuant to options
and 72,000 shares of Common Stock issuable to the Leslie Group, Inc. upon
conversion of 3,000 shares of Class C Preferred Stock held of record by
Leslie Group, Inc., of which Mr. Cohen is President.
(5) Represents 666,664 shares of Common Stock subject to the vested
portion of Mr. Edwards' option to purchase 1,000,000 shares of Common Stock
and 408,332 shares of Common Stock subject to warrants and other options.
See "Executive Compensation -- Employment Agreements" and "Certain
Relationships and Related Transactions."
(6) Includes 802,554 shares of Common Stock issuable pursuant to options
and warrants.
(7) Represents shares of Common Stock issuable pursuant to options and
warrants.
(8) Represents shares of Common Stock issuable pursuant to options. Does
not include shares held of record by Four M International, Ltd., of which
Mr. Toh is a director. Mr. Toh disclaims any beneficial ownership of such
shares.
(9) Includes 375,000 shares of Common Stock which represents the
exercisable portion of an option to purchase 1,500,000 shares of Common
Stock, and 50,000 shares of Common Stock issuable upon exercise of other
options.
(10) Includes 4,400,000 shares of Common Stock issuable upon conversion of
Series M Preferred Stock, 2,824,727 shares of Common Stock issuable upon
conversion of Series M Stock which may be issued on conversion of
promissory notes held by the named stockholder, and 17,540,000 shares of
Common Stock issuable upon exercise of warrants. In addition, the Company
includes herein 5,000,000 shares of Common Stock issuable upon exercise of
warrants which the named stockholder will be entitled to receive should it
convert its promissory notes to Common Stock.
(11) Mr. Keenan serves on the Board of Directors as the designee of Winter
Harbor; however, Mr. Keenan disclaims beneficial ownership of the
securities held by Winter Harbor. See Footnote 10.
(12) Represents 74,000 shares of Common Stock issued, 2,908,896 shares of
Common Stock which may be obtained pursuant to options and warrants
exercisable within 60 days of the date hereof and 72,000 shares of Common
Stock into which 3,000 shares of Class C Preferred Stock are convertible.
MARKET FOR THE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market
("NASDAQ") tier of the NASDAQ Stock Market under the symbol "ILNK." Prior to
March 8, 1996, the Common Stock was traded on NASDAQ under the symbol "MDCR."
Although the Common Stock is currently listed for quotation on NASDAQ, there can
be no assurance given that the Company will be able to continue to satisfy the
requirements for maintaining quotation of such securities on NASDAQ or that such
quotation will otherwise continue. The Company has no current plans to apply
for listing of any of the shares of Class B Preferred Stock, Class C Preferred
Stock, the Commonwealth Warrants or any of its other securities for quotation on
NASDAQ. See "Risk Factors -- Continued NASDAQ Listing."
The range of high and low bid information for the Common Stock for each
full quarterly period during 1997 and within the two prior fiscal years is as
follows:
<PAGE> 47
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
March 31, 1996 $ 7.63 $ 1.00
June 30, 1996 9.75 6.13
September 30, 1996 7.50 4.06
December 31, 1996 6.00 4.00
March 31, 1997 $ 7.50 $ 3.63
June 30, 1997 15.50 4.00
September 30, 1997 10.56 4.00
December 31, 1997 8.44 4.94
March 31, 1998 $ 8.94 $ 5.25
June 30, 1998 8.44 4.90
</TABLE>
These quotations reflect interdealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
As of August 19, 1998, there were approximately 420 holders of record of
Common Stock and approximately 7,100 beneficial owners. On August 31, 1998, the
closing bid price for a share of Common Stock was $3.438.
RECENT TRANSACTIONS
On June 5, 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 500,000 shares of 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; however, the Loan Agreement
anticipated an equity investment in the Company by Winter Harbor (the
"Investment"). Upon closing of the Investment, all principal and accrued
interest then due under the Note may, at the option of Winter Harbor, be
credited toward payment of Winter Harbor's purchase price for the Investment and
the Note shall be canceled. The loan from Winter Harbor has an interest rate
of prime plus 2%. In addition to the stated interest rate, the Company will
recognize debt issuance cost (non-cash) over the life of the loan (maturity date
is October 15, 1998) of approximately $3,800,000 which reflects the approximate
fair value of the warrants issued in connection with the debt. The Company
expended significant time and effort pursuing various financing alternatives and
determined that the Winter Harbor proposal was the best alternative available to
the Company.
In August 1997, the Company and Winter Harbor amended their agreement to
provide that the Company would be allowed to borrow up to an additional
$3,000,000 (thus revising the maximum amount of the Loan to $5,000,000). In the
event the Company borrows against such additional credit, it has agreed to issue
to Winter Harbor warrants to purchase 100,000 shares of Common Stock for each
$1,000,000 in additional borrowing. The exercise price for such additional
warrants shall equal the closing bid price of the Common Stock on the date each
such $1,000,000 increment is borrowed by the Company. On August 18, 1997, the
Company borrowed an additional $3,000,000 pursuant to such arrangement, bringing
the total principal amount due under the Note to $5,000,000, and issued an
additional 300,000 warrants to Winter Harbor in connection therewith.
Winter Harbor is owned by First Media, L.P., a private media and
communications company which is a private investment principally of Richard E.
Marriott and his family. The Company's general counsel, David E. Hardy, is a
brother of Ralph W. Hardy, Jr. who is general counsel and a minority equity
holder in Winter Harbor. David E. Hardy has no ownership or association with
Winter Harbor. As a result of this relationship, as well as personal
relationships of David E. Hardy with the principals of Winter Harbor,
discussions were initiated which led to Winter Harbor's investment in the
Company.
The Company and Winter Harbor executed a Sales Purchase Agreement, dated as
of September 30, 1997, and closed on October 10, 1997, pursuant to which Winter
Harbor invested $12,100,000 in a new series of the Company's convertible
<PAGE> 48
preferred stock (the "Series M Preferred Stock"). Winter Harbor purchased
approximately 2,545 shares of Series M Preferred Stock (convertible into
2,545,000 shares of Common Stock) for an aggregate cash consideration of
approximately $7,000,000 (equivalent to $2.75 per share of Common Stock). The
agreement with Winter Harbor provided for purchase of approximately 1,855
additional shares of Series M Preferred Stock (convertible into 1,855,000 shares
of Common Stock). Such additional shares of Series M Preferred Stock were paid
for by exchanging the $5,000,000 outstanding principal balance plus
approximately $100,000 accrued interest due under the Note. As additional
consideration for its equity financing commitments, Winter Harbor was issued
additional warrants by the Company to acquire (a) 2,500,000 shares of Common
Stock at an exercise price of $2.75 per share (the "Series A Warrants"), (b)
2,500,000 shares of Common Stock at an exercise price of $4.00 per share (the
"Series B Warrants") and (c) 5,000,000 share of Common Stock at an exercise
price of $4.69 per share (the "Series C Warrants"). The respective exercise
prices for the Series A Warrants, the Series B Warrants and the Series C
Warrants (collectively, the "Investment Warrants"), shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) have demand registration rights
and anti-dilution rights and (ii) contain cashless exercise provisions. See
"Security Ownership of Certain Beneficial Owners and Management."
The Series M Preferred Stock is entitled to receive cumulative dividends in
the amount of 10% per annum before any other class of preferred or common stock
receives any dividends. Thereafter, the Series M Preferred Stock will
participate with the Common Stock in the issuance of any dividends on a per
share basis. Moreover, the Series M Preferred Stock will have the right to veto
the payment of dividends on any other class of stock. The Series M Preferred
Stock shall be convertible at any time prior to the fifth anniversary of its
issuance, at the sole option of Winter Harbor, into shares of Common Stock on a
one thousand-for-one basis; provided, however, that the Series M Preferred Stock
shall be automatically converted to Common Stock on the fifth anniversary of its
issuance at no cost to Winter Harbor. The conversion price shall be, in the
case of discretionary conversion, $2.75 per share of Common Stock, or, in the
case of automatic conversion, the lesser of $2.75 per share or 50% of the
average closing bid price of the Common Stock for the ten trading days
immediately preceding the fifth anniversary of issuance. The basis for
discretionary conversion, or the conversion price for automatic conversion,
shall be adjusted upon the occurrence of certain events, including without
limitation, issuance of stock dividends, recapitalization of the Company, or the
issuance of stock by the Company at less than the fair market value thereof.
Upon completion of the Winter Harbor Investment, the Company recognized a
(non-cash) preferred stock dividend in the approximate amount of $89,000,000 at
the date of the investment. This amount is calculated as the difference between
the exercise or conversion price per common share per the agreement as compared
to the market price of the Common Stock on the date of the closing, plus the
value of the warrants issuable in connection with the Investment.
During the first and second quarters of 1998 the Company obtained an
aggregate of $7.768 million in new interim debt financing from Winter Harbor,
LLC As consideration for Winter Harbor's commitment to make the loan, the
Company agreed to issue 6,740,000 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 were advanced. The
warrants have exercise periods of 7.5 years from issuance. 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. Pursuant to the terms of the
loan agreement with Winter Harbor, the initial borrowings of $5,768,000 were
payable upon demand by Winter Harbor no earlier than May 15, 1998, and were
collateralized by essentially all of the assets of the Company's subsidiaries.
Because the loan was not repaid by May 15, 1998, the total loan, including
additional borrowings of $2,000,000 obtained in the second quarter, continues on
a demand basis with interest accruing at prime plus four percent. Additionally,
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 6,740,000 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.
On August 12, 1997 the Company entered into an agreement with MiBridge,
Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the principal
shareholder of MiBridge, pursuant to which the Company acquired all of the
issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
<PAGE> 49
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 Company will pay the
stockholders of MiBridge (the "MiBridge 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 a series of the Company's
convertible preferred stock to be created (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock are convertible at the option of the
MiBridge Stockholders, at any time during the nine months following the closing
of the MiBridge Acquisition, into such number of shares of Common Stock as shall
equal the sum of $6,250,000 divided by $9.25 (the "Series D Conversion Price"),
which price was the closing bid price of the Company's Common Stock on June 5,
1997 (the date that the first letter agreement relating to the transaction was
executed). As of August 19, 1998, all shares of Series D Preferred Stock had
been converted to an aggregate of 1,092,174 shares of Common Stock.
On July 9, 1998, the Company entered into an agreement with JNC, by which
it obtained a $10,000,000 equity investment which resulted in net proceeds to
the Company of $9,470,000. The terms of the equity investment were amended on
July 28, 1998. Under the original terms of the equity investment, JNC purchased
shares of the Company's newly created 5% Series E Convertible Preferred Stock
(the "Series E Preferred Stock"), which were convertible into the Company's
common shares at a conversion price of the lesser of 110% of the market price of
the Company's publicly traded common shares as of the date of closing, and 90%
of the market price at the time of conversion. In addition, JNC obtained a
warrant to purchase 250,000 shares of the Company's common stock at an exercise
price equal to 120% of the market price of the Company's publicly traded common
shares as of the date of closing. On July 28, 1998, the terms of the equity
investment were amended to provide a floor to the conversion price, and to
effect such amendment the Company created the 5% Series F Convertible Preferred
Stock (the "Series F Preferred Stock") with which the Series E Preferred Shares
originally issued to JNC were exchanged. Pursuant to the amendment, the Series
F Preferred Shares are convertible into common shares at a conversion price of
the lesser of $4.00 per common share or 87% of the market price of the Company's
common shares at the time of conversion, subject to a $2.50 floor. In the event
the market price remains below $2.50 for five consecutive trading days, the
floor will be re-set to the lower rate, provided, however, that the floor shall
not be less than $1.25. JNC also received an additional warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $4.00 per
common share. The Series F Preferred shares may be converted at any time, are
automatically converted at the end of three years, and are subject to specific
provisions that would prevent any issuance of I-Link common stock at a discount
if and to the extent that such shares would equal or exceed in the aggregate 20%
percent of the number of common shares outstanding prior to the recent
$10,000,000 placement absent shareholder approval as contemplated by the NASDAQ
Stock Market Non-Quantitative Designation Criteria. In addition, the Company is
required to use the net proceeds from the sale of the Series F Preferred Stock
for working capital purposes, except for up to $4 million which can be used in
part to retire indebtedness owed to Winter Harbor LLC and to satisfy the
Company's arbitration settlement with MCI Communications, Inc.
The Company also issued warrants to purchase an aggregate of 75,000
shares of the Company's common stock at a price of $4.89 per share to two
companies as a brokerage fee in connection with the JNC equity investment.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is currently authorized to issue 75,000,000 shares of Common
Stock, having a par value of $.007 per share. As of August 19, 1998, there are
18,556,384 shares of Common Stock issued and outstanding and approximately 420
holders of record of the Common Stock, and approximately 7,100 beneficial
owners. Each share of Common Stock entitles the holder thereof to one vote on
each matter submitted to the stockholders of the Company for a vote thereon. The
holders of Common Stock: (i) have equal ratable rights to dividends from funds
legally available therefor when, as and if declared by the Board of Directors;
(ii) are entitled to share ratably in all of the assets of the Company available
for distribution to holders of Common Stock upon liquidation, dissolution or
winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights, or redemption or sinking fund provisions
applicable thereto; and (iv) as noted above, are entitled to one non-cumulative
vote per share on all matters submitted to stockholders for a vote at any
meeting of stockholders. Prior to any payment of dividends to the holders of
Common Stock, all accrued and unpaid dividends on any outstanding shares of
Preferred Stock must be paid. Other than as set forth herein, the Company
anticipates that, for the foreseeable future, it will retain earnings, if any,
<PAGE> 50
to finance the operations of its businesses. The payment of dividends in the
future will depend upon, among other things, the capital requirements and the
operating and financial conditions of the Company.
ANTI-TAKEOVER MEASURES
The Articles of Incorporation and Bylaws contain provisions that could
discourage potential takeover attempts and prevent shareholders from changing
the Company's management. The Articles of Incorporation provide for a
classified Board of Directors and that vacancies on the Board of Directors shall
be filled only by a majority of the remaining directors then in office.
In addition, the Bylaws provide, among other things, that no proposal by a
stockholder shall be presented for vote at a special or annual meeting of
stockholders unless such stockholder shall, not later than the close of business
on the fifth day following the date on which notice of the meeting is first
given to stockholders, provide the Board of Directors or the Secretary of the
Company with written notice of intention to present a proposal for action at the
forthcoming meeting of stockholders, which notice shall include the name and
address of such stockholder, the number of voting securities he or she holds of
record and which he or she holds beneficially, the text of the proposal to be
presented at the meeting and a statement in support of the proposal. Any
stockholder may make any other proposal at an annual meeting or special meeting
of stockholders and the same may be discussed and considered, but unless stated
in writing and filed with the Board of Directors or the Secretary prior to the
date set forth above, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the stockholders taking place sixty
days or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business proposed by
a stockholder (acting in such capacity) shall be acted upon at such annual
meeting unless stated and filed as described above.
TRANSFER AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York is the
Registrar and Transfer Agent for the Company's Class C Preferred Stock and
Common Stock.
PLAN OF DISTRIBUTION
The Securities subject hereto are being distributed by the Company as
payment of dividends payable and to become payable upon Class C Preferred Stock.
Consequently, the holders of such Securities will receive the proceeds from any
resale of such securities pursuant to this Prospectus. The Securities may be
sold from time to time by the holders thereof or by pledgees, transferees, or
other successors in interest, on NASDAQ (or such other exchange on which the
securities are listed at the time of sale) at prices and terms then prevailing
or related to the then current market price, delivered in satisfaction of
previously incurred indebtedness or other contractual obligations, or sold
directly to purchasers in privately negotiated transactions by and subject to
the discretion of the holders of Dividend Shares. They may from time to time
offer their respective securities for sale through underwriters, dealers or
agents, who may receive compensation in the form of underwriting discounts,
concessions or commissions from the holders of Dividend Shares and/or the
purchasers of such securities for whom they may act as agents.
In order to comply with the applicable securities laws, if any, of certain
states, the Securities will be offered or sold in such states through registered
or licensed brokers or dealers in those states. In addition, in certain states,
such securities may not be offered or sold unless they have been registered or
qualified for sale in such states or an exemption from such registration or
qualification requirement is available and is complied with.
The Company has paid all of the expenses incident to the registration of
the foregoing securities (including registration pursuant to the securities laws
of certain states) other than commissions, expenses, reimbursements and
discounts of underwriters, dealers or agents, if any.
LEGAL MATTERS
Certain legal matters in connection with the registration of the securities
offered hereby will be passed upon for the Company by De Martino Finkelstein
Rosen & Virga, Washington, D.C.
<PAGE> 51
EXPERTS
The consolidated balance sheets of I-Link Incorporated as of December 31,
1997 and 1996, and the consolidated statements of operations and cash flows for
each of the three years in the period ended December 31, 1997 included in this
prospectus have been included herein in reliance on the reports of
PricewaterhouseCoopers L.L.P. (formerly Coopers & Lybrand, L.L.P.), independent
accountants, given the authority of that firm as experts in accounting and
auditing.
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
I-LINK INCORPORATED AND SUBSIDIARIES
Report of Independent Accountants. . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . .F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . .F-4
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . .F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-9
Consolidated Balance Sheet (unaudited) as of June 30, 1997 . . . . . .F-29
Consolidated Statements of Operations (unaudited) for the
Six Month and Three Month Periods Ended June 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-30
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Six Months Ended June 30, 1998 . . . . . . . . .F-31
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1998 and 1997. . . . . . . . . . . . . . .F-32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-33
<PAGE> F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
I-Link Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of I-Link
Incorporated and Subsidiaries ("the Company") as of December 31, 1997
and 1996, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of I-Link Incorporated and Subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Salt Lake City, Utah
April 9, 1998
<PAGE> F-2
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,643,805 $ 4,407,465
Accounts receivable, less allowance for
doubtful accounts of $1,385,000 and
$0 as of December 31, 1997 and 1996, 3,233,207 7,812
respectively
Certificates of deposit 1,628,500 208,500
Other current assets 321,488 11,411
---------- ----------
Total current assets 6,827,000 4,635,188
Furniture, fixtures and equipment, net 3,551,917 1,575,769
Other assets:
Intangible assets, net 12,314,080 7,320
Certificates of deposit restricted 259,000 1,761,312
Other assets 705,502 216,884
Net assets of discontinued operations 595,377 1,668,223
---------- ----------
Total assets $24,252,876 $ 9,864,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,833,452 $ 1,086,103
Accrued liabilities 2,770,997 1,339,224
Current portion of long-term debt 2,008,416 717,000
Current portion of obligations under
capital leases 169,315 187,047
---------- ----------
Total current liabilities 9,782,180 3,329,374
Long-term debt 1,854,341 -
Obligations under capital leases 67,159 236,705
---------- ----------
Total liabilities 11,703,680 3,566,079
---------- ----------
Commitments and contingencies (notes 8, 11 and 15)
Stockholders' equity:
Preferred stock, $10 par value, authorized
10,000,000 shares, issued and outstanding
119,926 and 247,500 at December 31, 1997 and
1996, respectively, liquidation preference of
$23,903,456 at December 31, 1997 1,199,260 2,475,000
Common stock, $.007 par value, authorized
75,000,000 shares, issued and outstanding
16,036,085 and 10,607,597 at December 31, 1997
and 1996, respectively 112,251 74,253
Additional paid-in capital 70,511,697 30,874,910
Deferred compensation ( 2,289,765) -
Accumulated deficit (56,984,247) (27,125,546)
---------- ----------
Total stockholders' equity 12,549,196 6,298,617
---------- ----------
Total liabilities and stockholders' equity $24,252,876 $ 9,864,696
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-3
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES:
TELECOMMUNICATION SERVICES $ 11,081,007 $ - $ -
MARKETING SERVICES, NET 2,637,331 - -
TECHNOLOGY LICENSING AND DEVELOPMENT 346,875 - -
OTHER - 170,532 -
---------- ---------- ----------
TOTAL REVENUES 14,065,213 170,532 -
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
TELECOMMUNICATION NETWORK EXPENSES 14,634,999 1,120,779 -
MARKETING SERVICES COSTS 4,294,014 - -
SELLING, GENERAL AND ADMINISTRATIVE COSTS 11,948,568 2,903,728 -
PROVISION FOR DOUBTFUL ACCOUNTS 1,385,000 15,996 -
DEPRECIATION AND AMORTIZATION 2,549,282 690,920 -
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 4,235,830 14,577,942 -
RESEARCH AND DEVELOPMENT 878,582 347,504 -
---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 39,926,275 19,656,869 -
---------- ---------- ----------
OPERATING LOSS (25,861,062) (19,486,337) -
---------- ---------- ----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE ( 3,022,619) ( 2,012,342) -
INTEREST AND OTHER INCOME 215,989 155,702 -
ACCRUED LITIGATION SETTLEMENT - ( 821,000) -
---------- ---------- ----------
TOTAL OTHER EXPENSE ( 2,806,630) ( 2,677,640) -
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (28,667,692) (22,163,977) -
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS (LESS APPLICABLE
INCOME TAX PROVISION OF $0 IN 1997, 1996 AND 1995) ( 183,556) ( 900,263) (551,909)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
INCLUDING PROVISION OF $222,000 FOR OPERATING
LOSSES DURING PHASE-OUT PERIOD (LESS APPLICABLE
INCOME TAX PROVISION OF $0 IN 1997) ( 1,007,453) - -
---------- ---------- ----------
LOSS FROM DISCONTINUED OPERATIONS ( 1,191,009) ( 900,263) ( 551,909)
---------- ---------- ----------
NET LOSS $(29,858,701) $(23,064,240) $( 551,909)
========== ========== ==========
NET LOSS PER COMMON SHARE
LOSS FROM CONTINUING OPERATIONS $( 10.07) $( 6.40) $( 0.07)
LOSS FROM DISCONTINUED OPERATIONS ( 0.10) ( 0.13) ( 0.32)
---------- ---------- ----------
NET LOSS PER COMMON SHARE $( 10.17) $( 6.53) $( 0.39)
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-4
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- DEFERRED PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION CAPITAL DEFICIT
--------- ------------ ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 216,805 $ 2,168,050 1,525,378 $ 10,665 $ - $ 3,270,047 $(3,509,401)
CONVERSION OF
PREFERRED STOCK
INTO COMMON STOCK ( 9,305) ( 93,050) 227,714 1,594 - 91,456 -
COMMON STOCK ISSUED
FOR SERVICES - - 50,000 350 - 62,150 -
SERVICES
CONVERSION OF
CONVERTIBLE
PROMISSORY NOTES
INTO COMMON STOCK - - - 13 - 5,201 -
NET LOSS - - - - - - ( 551,909)
------- --------- ---------- ------- ---------- ---------- ---------
BALANCE AT
DECEMBER 31, 1995 207,500 2,075,000 1,803,092 12,622 - 3,428,854 (4,061,310)
CONVERSION OF
PREFERRED STOCK
INTO COMMON STOCK (200,000) (2,000,000) 4,894,461 34,261 - 1,965,739 -
EXERCISE OF
STOCK OPTIONS - - 189,637 1,327 - 354,686 -
COMMON STOCK ISSUED
FOR THE ACQUISITION
OF I-LINK WORLDWIDE, - - 3,000,000 21,000 - 12,579,000 -
INC.
SALE OF CLASS C
PREFERRED STOCK FOR
CASH, NET OF
OFFERING COSTS OF
$2,110,000 240,000 2,400,000 - - - 9,890,000 -
COMMON STOCK ISSUED
FOR CANCELLATION
OF NOTES PAYABLE - - 720,407 5,043 - 699,756 -
ISSUANCE OF STOCK
WARRANTS BELOW MARKET
VALUE OF COMMON STOCK - - - - - 11,875 -
INTEREST EXPENSE
ASSOCIATED WITH
ISSUANCE OF
CONVERTIBLE NOTES - - - - - 1,945,000 -
FOREIGN CURRENCY - - - - - - 4
TRANSLATION ADJUSTMENT
NET LOSS - - - - - - (23,064,240)
------- --------- ---------- ------- ---------- ---------- ---------
BALANCE AT DECEMBER
31, 1996 247,500 2,475,000 10,607,597 74,253 - 30,874,910 (27,125,546)
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-5
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- DEFERRED PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION CAPITAL DEFICIT
--------- ------------ ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1996 247,500 2,475,000 10,607,597 74,253 - 30,874,910 (27,125,546)
CONVERSION OF
PREFERRED STOCK
INTO COMMON STOCK (144,924) (1,449,240) 3,948,565 27,639 - 1,421,601 -
CONVERSION OF
CONVERTIBLE
PROMISSORY NOTES
INTO CLASS C
PREFERRED STOCK 11,950 119,500 - - - 597,500 -
INTEREST EXPENSE
ASSOCIATED WITH
ISSUANCE OF
CONVERTIBLE NOTES - - - - - 320,000 -
STOCK OPTIONS
ISSUED FOR SERVICES - - - - (4,757,134) 4,757,134 -
AMORTIZATION OF
DEFERRED COMPENSATION
ON STOCK OPTIONS
ISSUED FOR SERVICES - - - - 2,467,369 - -
EXERCISE OF STOCK
OPTIONS - - 79,923 559 - 137,374 -
COMMON STOCK ISSUED
FOR THE ACQUISITION
OF FAMILY - - 400,000 2,800 - 2,411,783 -
TELECOMMUNICATIONS, INC.
CLASS D PREFERRED
STOCK ISSUED FOR THE
ACQUISITION OF
MIBRIDGE, INC. 1,000 10,000 - - - 6,240,000 -
COMMON STOCK ISSUED
FOR THE ACQUISITION
OF I-LINK WORLDWIDE,
INC. - - 1,000,000 7,000 - 8,868,000 -
STOCK WARRANTS
ISSUED TO PAYOFF
ACCRUED LITIGATION
SETTLEMENT - - - - - 821,000 -
WARRANTS ISSUED IN
CONNECTION WITH
CERTAIN NOTES - - - - - 2,371,575 -
PAYABLE
ISSUANCE OF CLASS M
PREFERRED STOCK,
NET OF ISSUANCE
COSTS OF $365,180 4,400 44,000 - - - 11,690,820 -
NET LOSS - - - - - - (29,858,701)
------- --------- ---------- ------- ---------- ---------- ---------
BALANCE AT DECEMBER
31, 1997 119,926 $1,199,260 16,036,085 $112,251 $( 2,289,765) $70,511,697 $(56,984,247)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-6
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(29,858,701) $(23,064,240) $( 551,909)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 2,549,282 690,920 -
PROVISION FOR DOUBTFUL ACCOUNTS 1,385,000 - -
ACCRUED LITIGATION SETTLEMENT - 821,000 -
AMORTIZATION OF DISCOUNT ON NOTES PAYABLE 2,371,575 - -
AMORTIZATION OF DEFERRED COMPENSATION ON STOCK
OPTIONS ISSUED FOR SERVICES 2,467,369 - -
INTEREST EXPENSE ASSOCIATED WITH ISSUANCE OF
CONVERTIBLE NOTES 320,000 1,945,000 -
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 4,235,830 14,577,942 -
WRITE-OFF OF INTANGIBLE ASSETS 860,305 - -
LOSS ON DISPOSAL OF ASSETS 351,288 - -
OTHER - 14,155 -
INCREASE (DECREASE) FROM CHANGES IN OPERATING
ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS:
ACCOUNTS RECEIVABLE ( 2,932,347) 19,490 -
OTHER ASSETS ( 718,096) ( 294,067) -
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 5,769,611 ( 432,375) -
DISCONTINUED OPERATIONS - NONCASH CHARGES
AND WORKING CAPITAL CHANGES 1,190,358 881,890 871,271
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (12,008,526) ( 4,840,285) 319,362
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF FURNITURE, FIXTURES AND EQUIPMENT ( 1,948,857) ( 669,970) -
CASH RECEIVED FROM THE PURCHASE OF MIBRIDGE 79,574 - -
CASH RECEIVED FROM THE PURCHASE OF
FAMILY TELECOMMUNICATIONS, INC. 435,312 - -
PURCHASE OF CERTIFICATES OF DEPOSIT - RESTRICTED - ( 1,962,601) -
PROCEEDS FROM MATURITY OF CERTIFICATE OF
DEPOSIT - RESTRICTED 53,500 60,000 -
INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS ( 7,055) ( 915) 4,283
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 1,387,526) ( 2,573,486) 4,283
---------- ---------- ----------
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-7
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT 5,000,000 2,502,333 -
REPAYMENT OF LONG-TERM DEBT ( 892,307) ( 2,860,086) -
PAYMENT OF CAPITAL LEASE OBLIGATIONS ( 187,278) ( 130,299) -
PROCEEDS FROM ISSUANCE OF PREFERRED STOCK, NET
OF OFFERING COSTS 6,618,888 12,290,0OO -
PROCEEDS FROM EXERCISE OF COMMON STOCK WARRANTS
AND OPTIONS 137,933 - -
FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS ( 53,556) 32,733 ( 603,252)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,623,680 11,834,681 ( 603,252)
---------- ---------- ----------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH FLOWS
OF DISCONTINUED OPERATIONS - 1 ( 2,234)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 2,772,372) 4,420,911 ( 281,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,500,227 79,316 361,157
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR:
CONTINUING OPERATIONS 1,643,805 4,407,465 -
DISCONTINUED OPERATIONS 84,050 92,762 79,316
---------- ---------- ----------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,727,855 $ 4,500,227 $ 79,316
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
PREFERRED STOCK AND NOTE PAYABLE ISSUED IN
CONNECTION WITH THE ACQUISITION OF MIBRIDGE, INC. $ 8,250,000 $ - $ -
COMMON STOCK ISSUED IN CONNECTION WITH THE
ACQUISITION OF FAMILY TELECOMMUNICATIONS, INC. 2,414,583 - -
STOCK OPTIONS ISSUED FOR SERVICES 4,757,134 - -
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK 1,449,240 2,000,000 93,050
COMMON STOCK ISSUED IN CONNECTION WITH THE
ACQUISITION OF I-LINK WORLDWIDE, INC. 8,875,000 12,600,000 -
PREFERRED STOCK ISSUED IN EXCHANGE OF NOTES PAYABLE
AND ACCRUED INTEREST 5,115,932 - -
CONVERSION OF CONVERTIBLE PROMISSORY
NOTES INTO PREFERRED STOCK 717,000 704,799 5,201
FIXED ASSETS ACQUIRED UNDER CAPITAL LEASE OBLIGATIONS - 605,609 -
STOCK WARRANTS ISSUED IN CONNECTION WITH
WITH LITIGATION SETTLEMENT 821,000 - -
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID $ 286,935 $ - $ -
INTEREST PAID 93,625 189,107 129,859
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-8
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 (formerly Medcross, Inc.) and its subsidiaries (the "Company").
Effective October 7, 1997, the Company's shareholders approved the change of the
Company's name from Medcross, Inc. to "I-Link Incorporated". In addition, the
names of several of its wholly-owned subsidiaries were changed as discussed
below. The name changes are consistent with the Company's change in business
focus from providing healthcare facilities, diagnostic and clinical services to
providing worldwide telecommunication services. 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. The Company's
telecommunication services operations began primarily with the first quarter of
1997 acquisition of I-Link Communications, Inc. (formerly Family
Telecommunications, Inc), an FCC licensed long-distance carrier (see Note 9).
During the second quarter of 1997, the Company formed a new wholly-owned
subsidiary, I-Link Worldwide, LLC, through which it launched a network marketing
channel to market its telecommunications services. Previously, all marketing of
telecommunications services was provided by third-party wholesale distributors
through the Company's wholly-owned subsidiary I-Link Systems, Incorporated
(formerly I-Link Worldwide, Inc.).
Through its wholly owned subsidiary, MiBridge, Inc. (MiBridge), the Company
develops and licenses communications software that supports multimedia
communications (voice, fax and audio) over the public switched network, local
area networks and the Internet. MiBridge was acquired during the third quarter
of 1997 (see Note 9).
Diagnostic and clinical service, consisting primarily of magnetic resonance
imaging (MRI) and ultrasounds, is provided through the Company's wholly-owned
subsidiaries Urological Ultrasound Services of Tampa Bay, Inc., Medcross Asia,
Ltd., and Waters Edge Scanning Associates, Inc. and partially owned subsidiaries
Medcross Imaging, Ltd. (81.75%) and Shenyang Medcross Huamei Medical Equipment
Company, Ltd. (51%). On March 23, 1998, the Company's Board of Directors
approved a plan to discontinue these operations (see Note 3).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company incurred a net loss from continuing operations of $28,667,692 for
the year ended December 31, 1997, and as of December 31, 1997 had an accumulated
deficit of $56,984,247 and negative working capital of $2,955,180. 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 subsequent to year end (see Note 16). In the first
quarter of 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 of up to $20,000,000 with a private
investor group. It is anticipated that proceeds from the credit facility will
be used to pay off the Winter Harbor term loan agreement.
Note 2 - Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company maintains its cash and
cash equivalents with financial institutions in Utah, Arizona, New Jersey and
Florida, and at times, may exceed federally insured limits. The Company has not
experienced any losses on such accounts.
<PAGE> F-9
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 2 - Summary of Significant Accounting Policies, continued
Furniture, fixtures and equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is
calculated using the declining balance method for medical equipment and the
straight-line method for all other assets over the following estimated useful
lives:
Telecommunications network equipment 4-6 years
Furniture, fixtures and office equipment 3-6 years
Medical equipment 6-10 years
Betterments and renewals that extend the life of the assets are capitalized;
other repairs and maintenance charges are expensed as incurred. The cost and
related accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in income.
Intangible assets
The Company regularly evaluates whether events or circumstances have occurred
that indicate the carrying value of the intangible assets may not be
recoverable. When factors indicate the asset may not be recoverable, the
Company compares the related undiscounted future net cash flows to the carrying
value of the asset to determine if an impairment exists. If the expected future
net cash flows are less than carrying value, impairment is recognized based on
the fair value of the asset. During 1997, the Company wrote off $860,305 in
unrecoverable intangible assets (see Note 16). The write off is included in
selling, general and administrative expense. There were no such write offs for
1996 and 1995. Amortization of intangible assets is calculated using the
straight-line method over the following periods:
Acquired technology 3 years
Excess acquisition cost over fair value of net assets acquired 5-10 years
Other intangible assets 3-5 years
Reserve for returns
Certain marketing materials sold to independent representatives through the
Company's network marketing channel may be returned for credit, subject to
restrictions relating to passage of time and return of purchased materials. The
Company has recognized a reserve for returns based on management's estimate of
future refunds on expected product returns.
Revenue recognition
Long-distance and enhanced service revenue is recognized as service is provided
to subscribers.
During the second quarter of 1997 the Company launched a network marketing
channel to market its telecommunication services. Marketing services revenues
from the network marketing channel primarily include revenues recognized from
independent representatives ("IRs") for training, promotional and presentation
materials. Marketing services revenues are presented net of estimated refunds
on returns of network marketing training materials.
Technology licensing and development 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 costs related to the contract.
The Company recognizes revenue from health care services (discontinued
operations) at the time services are performed, net of contractual allowances
based on agreements with third party payers.
Computer software costs
The Company recognizes as a current expense the costs associated with developing
computer software for internal use. Purchased computer software for internal
use is capitalized and amortized over the expected useful life, usually three
years.
<PAGE> F-10
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 2 - Summary of Significant Accounting Policies, continued
Concentrations of Credit Risk
The Company's telecommunications subscribers are primarily residential
subscribers and are not concentrated in any specific geographic region of the
United States. As of December 31, 1997, approximately $3.1 million of the
Company's gross accounts receivable are from subscribers signed up by one
third-party wholesale agent (see Note 16).
Income taxes
The Company records deferred taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
statement requires recognition of deferred tax assets and liabilities for the
temporary differences between the tax bases of assets and liabilities and the
amounts at which they are carried in the financial statements based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Net loss per share
The Company has adopted SFAS No. 128, "Earnings per Share" for 1997, 1996 and
1995. 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 1997, 1996 and
1995, basic and diluted loss per share are the same.
Basic and diluted loss per common share for 1997, 1996 and 1995 were calculated
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Loss from continuing operations $( 28,667,692) $(22,163,977) $ -
Cumulative preferred stock dividends not paid in
current year ( 1,159,589) ( 343,629) ( 128,669)
Deemed preferred stock dividend on Class M
convertible cumulative redeemable preferred stock ( 88,533,450) - -
Deemed preferred stock dividend on Class C
convertible cumulative redeemable preferred stock - (20,880,000) -
----------- ---------- ----------
Loss from continuing operations applicable
to common stock $(118,360,731) $(43,387,606) $( 128,669)
=========== ========== ==========
Loss from discontinued operations $( 1,191,009) $( 900,263) $( 551,909)
=========== ========== ==========
Weighted average shares outstanding 11,756,249 6,780,352 1,756,540
=========== ========== ==========
Loss from continuing operations $( 10.07) $( 6.40) $( 0.07)
Loss from discontinued operations ( 0.10) ( 0.13) ( 0.32)
----------- ---------- ----------
Net loss per common share $( 10.17) $( 6.53) $( 0.39)
=========== ========== ==========
</TABLE>
The deemed preferred stock dividend on Class C convertible cumulative redeemable
preferred stock is calculated as the difference between the conversion price per
common share per the private offering memorandum and the market price for the
common stock on the date the preferred shares were sold. The deemed preferred
stock dividend on Class M convertible cumulative redeemable preferred stock is
calculated as the difference between the conversion price per common share per
the agreement and the market price of the common stock as of the date the
agreement was finalized, plus the fair value of the warrants issuable in
connection with the preferred stock investment. The deemed dividends are implied
only and do not represent obligations to pay a dividend.
<PAGE> F-11
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 2 - Summary of Significant Accounting Policies, continued
Potential common shares that were not included in the computation of diluted EPS
because they would have been anti-dilutive are as follows as of December 31,
1997:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Assumed conversion of Class A preferred stock - - 4,894,463
Assumed conversion of Class B preferred stock - 183,542 411,257
Assumed conversion of Class C preferred stock 2,759,016 5,760,000 -
Assumed conversion of Class D preferred stock 383,108 - -
Assumed conversion of Class M preferred stock 4,400,000 - -
Assumed exercise of options and warrants to purchase
shares of common stock 20,998,872 5,761,295 850,169
---------- ---------- ---------
28,540,996 11,704,837 6,155,889
========== ========== =========
</TABLE>
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently issued financial accounting standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires the prominent display of comprehensive income and its
components. The Company is required to comply with SFAS No. 130 for the year
ended December 31, 1998. Also in June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") 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. The Company is required to comply with
SFAS No. 131 for the year ended December 31, 1998. The Company is currently
evaluating the effect, if any, that these new accounting standards may have on
its financial statements.
Reclassifications
Certain balances in the December 31, 1996 and 1995 financial statements 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
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 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.
<PAGE> F-12
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 3 - Discontinued operations, continued
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:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 84,050 $ 92,762
Accounts receivable 933,376 773,095
Inventory 362,243 557,036
Other 24,951 47,472
--------- ---------
Total current assets 1,404,620 1,470,365
Furniture, fixtures and equipment, net 858,153 1,280,867
Other non-current assets 8,706 486,125
--------- ---------
Total assets 2,271,479 3,237,357
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 996,088 775,124
Notes payable 412,126 421,554
--------- ---------
Total current liabilities 1,408,214 1,196,678
Notes payable - 44,128
Other liabilities 267,888 328,328
--------- ---------
Total liabilities 1,676,102 1,569,134
--------- ---------
Net assets - discontinued operations $ 595,377 $1,668,223
========= =========
</TABLE>
The net furniture, fixtures and equipment, other assets, accounts receivable,
and inventory are presented in the table above net of the expected loss on the
sale of the discontinued operations.
Revenues of the discontinued operations were $2,309,099, $2,212,544 and
$3,122,953 for 1997, 1996 and 1995, respectively.
Note 4 - Certificates of deposit - restricted
During 1996, the Company entered into a 24 month, $3.5 million operating lease.
As a condition of that lease, the Company obtained a $1.575 million letter of
credit. To collateralize the letter of credit the Company purchased a restricted
certificate of deposit (CD) in the same amount. The Company also has a
restricted CD totaling $132,000 used to collateralize letters of credit in
connection with certain capital leases, restricted CDs totaling $160,500 used
for a security deposit on the facilities which the Company occupied in early
1997, and $20,000 in restricted CDs used as collateral for the Company's
corporate credit cards. The CDs are held in escrow and bear interest which is
paid to the Company. Of the CDs held in escrow, $1,628,500 will be released to
the Company during 1998.
<PAGE> F-13
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 5 - Furniture, fixtures and equipment
Continuing operations
Furniture, fixtures and equipment relating to continuing operations consisted of
the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Telecommunications network equipment $ 2,628,422 $ 787,600
Furniture, fixtures and office equipment 1,988,146 1,323,396
--------- ---------
4,616,568 2,110,996
Less accumulated depreciation (1,064,651) ( 535,227)
--------- ---------
$ 3,551,917 $ 1,575,769
========= =========
</TABLE>
Discontinued operations
Furniture, fixtures and equipment relating to discontinued operations consisted
of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Medical services equipment $ 2,982,756 $ 2,975,701
Furniture, fixtures and office equipment 388,191 388,191
--------- ---------
3,370,947 3,363,892
Less accumulated depreciation (2,512,794) (2,083,025)
--------- ---------
$ 858,153 $ 1,280,867
========= =========
</TABLE>
Note 6 - Intangible Assets
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Acquired technology $ 1,450,000 $ -
Excess acquisition cost over fair value of
net assets acquired 11,072,138 -
Other intangible assets 1,203,200 7,320
---------- ---------
13,725,338 7,320
Less accumulated amortization ( 1,411,258) -
---------- ---------
$ 12,314,080 $ 7,320
========== =========
</TABLE>
<PAGE> F-14
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 7 - Long-term debt
Continuing operations
Long-term debt relating to continuing operations, the carrying value of which
approximates market, consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Note payable to a vendor, interest at 7.0%,
payable in graduated monthly installments
of $50,000 (through March 1998), $75,000
(through September 1998) and $150,000
(through February 1999), remaining
principal due March 1999 $ 2,358,757 $ -
Notes payable to prior owners of MiBridge,
interest at 8.0%, payable in quarterly
installments of $250,000, collateralized
by common stock of MiBridge 1,500,000 -
Convertible promissory notes, interest at
8%, payable quarterly - 717,000
Other 4,000 -
--------- ---------
3,862,757 717,000
Less current portion (2,008,416) -
--------- ---------
Long-term debt, less current portion $ 1,854,341 $ 717,000
========= =========
Annual maturities of long-term debt are as follows:
1998 $2,008,416
1999 1,854,341
---------
$3,862,757
=========
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 and $1,000,000 related to these promissory notes
for the three months ended March 31, 1997 and for the year ending December 31,
1996, respectively. The interest expense was 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.
On June 6, 1997, the Company entered into a term loan agreement (Loan
Agreement) and promissory note (Note) with Winter Harbor , LLC (Winter Harbor),
a shareholder of the Company, pursuant to which Winter Harbor agreed to loan to
the Company the principal sum of $2,000,000 (the Loan) for capital expenditure
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 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 was 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 had 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 additional borrowings. All other
provisions of the additional borrowings are the same as the Note discussed
above.
<PAGE> F-15
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 7 - Long-term debt, continued
The entire amount of these loans was exchanged for Series M Preferred Stock on
October 10, 1997 (see Note 12). A portion of the proceeds received was
allocated based upon the relative fair value of the warrants issued in
connection with these loans and reflected as a debt discount of $2,371,575 which
was amortized to expense in 1997.
Discontinued operations
Long-term debt relating to discontinued operations, the carrying value of which
approximates market, consists of the following at December 31:
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Note payable to a related party, interest
at 10.5%, payable on demand $ 175,682 $ 175,682
Note payable to a bank, interest payable
at 3/4 % above prime rate (8.5 % at
December 31, 1997), principal balance due
June 30, 1996, collateralized by accounts
receivable and general assets of the Company 236,444 290,000
--------- ---------
412,126 465,682
Less current portion ( 412,126) ( 421,554)
--------- ---------
Long-term debt, less current portion $ - $ 44,128
========= =========
</TABLE>
Subsequent to December 31, 1997, the Company refinanced its $236,444 note
payable to a bank. The new note bears interest at 12% and requires monthly
interest payments. The outstanding principal balance is due August 11, 1998.
The loan requires mandatory prepayment from net sales proceeds if the assets of
the medical division are sold before that date.
Note 8 - Commitments under long-term leases
The Company leases a variety of assets, fiber optics and facilities used in its
operations. The majority of these lease agreements are with one creditor.
Payments to this creditor are collateralized by letters of credit totaling
$1.707 million (see Note 4).
As of December 31, 1997 and 1996, the Company had $264,007 and $466,832,
respectively (net of accumulated amortization of $341,602 and $138,777,
respectively) of equipment acquired through capital leases.
Agreements classified as operating leases have terms ranging from one to six
years. The Company's rental expense for operating leases was approximately
$2,848,000, $1,316,000 and $41,000 for 1997, 1996 and 1995, respectively.
<PAGE> F-16
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 8 - Commitments under long-term leases, continued
Future minimum rental payments required under non-cancelable capital and
operating leases with initial or remaining terms in excess of one year consist
of the following at December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
Year ending December 31:
1998 $ 188,000 $2,713,000
1999 70,000 932,000
2000 - 903,000
2001 - 256,000
2002 - 219,000
Thereafter - 125,000
------- ---------
Total minimum payments 258,000 $5,148,000
Less amount representing interest ( 21,526) =========
-------
Present value of net minimum lease payments 236,474
Less current portion ( 169,315)
-------
Long-term obligations under capital leases $ 67,159
=======
</TABLE>
Note 9 - Acquisition of subsidiaries
I-Link Worldwide, Inc.
In February 1996, the Company closed its acquisition of all of the issued and
outstanding common stock of I-Link Worldwide Inc., a Utah corporation from
ILINK, Ltd., a Utah limited partnership, in exchange for the issuance of an
aggregate of 4,000,000 shares of common stock of the Company. The acquisition
was accounted for using the purchase method of accounting. The results of
operations of the acquired enterprise are included in the consolidated financial
statements beginning February 13, 1996. Pursuant to the terms of the stock
purchase agreement, 1,400,000 shares of the common stock were issued at the time
of acquisition. In August 1996, 1,600,000 shares of Common Stock were released
from escrow upon the receipt of proceeds from the completion of the Company's
offering of Class C Preferred Stock.
The acquisition cost relating to the first 3,000,000 shares issued of
$12,600,000 and the assumed net liabilities of $2,003,000 was allocated to
acquired in-process research and development and software costs acquired. These
were expensed as technological feasibility of the in-process technology had not
yet been established and the technology had no alternative future use.
The remaining 1,000,000 shares of common stock were released from escrow in the
second quarter of 1997 as the Company's annual revenues exceeded $1,000,000.
The value of the common stock issued was $8,875,000 (based on the closing market
price of the Company's common stock on June 30, 1997) and has been recorded in
the financial statements as an intangible asset representing the excess cost
over fair value of net assets acquired which is being amortized using the
straight-line method over five years.
Family Telecommunications Incorporated
On January 13, 1997, pursuant to the terms of a Share Exchange Agreement the
Company acquired 100% of the outstanding stock of Family Telecommunications
Incorporated (FTI), a Utah corporation, from the stockholders of FTI, namely
Robert W. Edwards, Jr. and Jerald L. Nelson. 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. The consideration
($2,415,000) for the transaction consisted of an aggregate of 400,000 shares of
the Company's common
<PAGE> F-17
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 9 - Acquisition of subsidiaries, continued
stock. The acquisition has been accounted for using the purchase method of
accounting. FTI is a FCC licensed long-distance carrier and provider of
telecommunications services. FTI has been renamed "I-Link Communications, Inc."
The acquisition 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
Tangible long-term assets 1,166,000
Intangible long-term assets 2,550,000
Current liabilities (1,330,000)
Long-term liabilities (1,711,000)
---------
Net purchase price $ 2,415,000
=========
MiBridge, Inc.
In the third quarter of 1997 the Company completed its acquisition of 100% of
the 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 and
patent-pending audio-conferencing technology.
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, based on their estimated fair
values, to tangible net assets ($552,760) 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 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 fair value of assets acquired in
conjunction with this acquisition were 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 I-Link Worldwide during 1996 and FTI
and MiBridge during 1997. The acquisitions were accounted for using the
purchase method of accounting. The consolidated financial statements as
presented include the operating results of I-Link Worldwide, FTI and MiBridge
from the dates of acquisition. The following pro forma information presents a
summary of consolidated results of operations of the Company, I-Link Worldwide,
FTI and MiBridge as if the acquisitions had occurred at the beginning of 1996
(relative to I-Link Worldwide, Inc.), 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
<PAGE> F-18
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 9 - Acquisition of subsidiaries, continued
process research and development costs.
<TABLE>
<CAPTION>
Years ended December 31: 1997 1996
------------- -------------
<S> <C> <C>
Operating revenue from continuing operations $ 14,687,012 $ 4,870,189
Net loss from continuing operations $(29,380,782) $(28,535,182)
Net loss per common share from continuing
operations $( 9.80) $( 6.93)
</TABLE>
Note 10 - Income taxes
The Company recognized no income tax benefit from its losses in 1997, 1996 and
1995.
The reported benefit from income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to loss before
taxes for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Expected federal statutory tax benefit $(10,151,960) $( 7,841,842) $( 187,649)
Increase (reduction) in taxes resulting from:
State income taxes ( 1,017,678) ( 673,059) ( 30,355)
Non-deductible litigation settlement expense - 279,140 -
Non-deductible interest on certain notes 915,136 661,300 -
Change in valuation allowance 10,242,303 7,559,551 108,484
Other 12,199 14,910 109,520
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========
</TABLE>
At December 31, 1997 the Company had net operating loss carryforwards for both
federal and state income tax purposes of approximately $25,247,000. The net
operating loss carryforwards will expire between 2006 and 2012 if not used to
reduce future taxable income.
<PAGE> F-19
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 10 - Income taxes, continued
The components of the deferred tax assets and liability as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforwards $ 9,424,087 $ 2,759,930
Excess book amortization and depreciation 727,643 61,706
Acquired in-process research and development 6,539,624 5,257,333
Amortization of deferred compensation on
stock options 920,329 -
Reserve for loss on disposal of
discontinued operations 375,780 -
Reserve for inventory valuation 96,992 -
Allowance for doubtful accounts 267,147 -
Other 71,267 117,953
Valuation allowance (18,058,069) ( 7,944,647)
---------- ----------
Total deferred tax asset 364,800 252,275
---------- ----------
Deferred tax liability:
Excess tax depreciation and amortization ( 364,800) -
Other - ( 252,275)
---------- ----------
Total deferred tax liability ( 364,800) ( 252,275)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
The valuation allowance at December 31, 1997 and 1996 has been provided to
reduce the total deferred tax assets to the amount which is considered more
likely than not to be realized, primarily because the Company has not generated
net income from its business communications services. The change in the
valuation allowance is due primarily to the increase in net operating loss
carryforwards and acquired in-process research and development costs which were
expensed for books and capitalized for tax purposes. It is at least reasonably
possible that a change in the valuation allowance may occur in the near term.
Note 11 - Legal proceedings
A complaint was filed on April 12, 1996 by JW Charles Financial Services, Inc.
(JWC) against the Company in which JWC alleged that the Company breached the
terms of a warrant to purchase 331,000 shares of the Company's common stock (JWC
Warrant) by failing to prepare and file with the Securities and Exchange
Commission (SEC) a registration statement covering the common stock underlying
the JWC Warrant. JWC was seeking specific performance, i.e. registering the
shares with the SEC, and monetary damages. On April 11, 1997 the Company
reached an agreement in principle relating to the settlement of the lawsuit.
The lawsuit was dismissed in the second quarter of 1997 upon payment of $600,000
to JWC in consideration for the JWC Warrant. The JWC Warrant was purchased by
an investor group led by the Company's general counsel and its treasurer and
chief financial officer. The Company's funds were not utilized. In connection
with the purchase of the JWC Warrant, the Company granted certain additional
consideration to the investor group, including new warrants to purchase 175,000
shares of common stock at an exercise price of $2.50 per share. The new
warrants have registration rights and anti-dilution provisions. The Company
recorded the settlement in 1996 as a charge against earnings in the amount of
$821,000, representing the fair value of the new warrants.
On November 14, 1997, the Company filed a Notice of Claim commencing an
arbitration proceeding against MCI Telecommunications, Inc. ("MCI"). In the
past, the Company purchased 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 resided in geographic areas not yet
serviced by the Company's dedicated telecommunications network ("off-net"
traffic). The arbitration proceeding was commenced by the Company pursuant to
the provisions of the Carrier Agreement between the Company and MCI, and
<PAGE> F-20
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 11 - Legal proceedings, continued
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 the early termination
payment provided for under the Carrier Agreement, and (3) to recover damages
from MCI in an as yet undetermined amount. MCI has submitted a counterclaim
against the Company in the arbitration proceeding seeking $4,431,290 for claimed
services rendered and under-usage penalties, and has reserved the right to amend
its counterclaim to potentially include claims for early termination penalties
and claimed services rendered in November and December 1997. Management
believes the Company has valid defenses against MCI's counterclaim, and will
vigorously contest all such claims. Subsequent to the Company's commencement of
the MCI arbitration proceeding, the Company made arrangements with an
alternative national provider of long-distance telecommunications capacity to
replace all of the capacity provided by MCI. At the present time Management
cannot determine the impact, if any, this arbitration proceeding may have on the
Company's financial statements.
Note 12 - Stockholders' equity
Preferred stock
In 1992, the Board of Directors approved and filed with the state of Florida an
Amendment to the Articles of Incorporation designating 200,000 shares of
preferred stock as Class A Variable Rate Cumulative Convertible Preferred Stock
("Class A Preferred Stock") and 22,500 shares of preferred stock as Class B
Variable Rate Cumulative Convertible Preferred Stock ("Class B Preferred
Stock"). The Class A Preferred Stock and Class B Preferred Stock both have a
par value of $10 per share and are entitled to receive cumulative dividends at a
rate equal to 2% above the 30 day certificate of deposit rate in effect on the
first day of each month at the Texas Commerce Bank. Shares of Class A and Class
B Preferred Stock may be converted into such number of whole shares of common
stock as is determined by multiplying the number of shares of Class A Preferred
Stock by a fraction, the numerator of which is $10 and the denominator is the
conversion price ($.408625). In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Company, the holders of the Class
A Preferred Stock shall be entitled to distribution before any payments shall be
made in respect to the Class B Preferred Stock or common stock in amounts equal
to the par value per share plus all accrued and unpaid dividends and the holders
of Class B Preferred Stock shall be entitled to distribution before any payments
shall be made in the respect to common stock in an amount equal to the par value
per share plus all accrued and unpaid dividends. As of December 31, 1997, all
issued shares of Class A and Class B Preferred Stock had been converted into
Common Shares.
In August 1996, the Company filed with the State of Florida an Amendment to the
Articles of Incorporation amending the designation of 240,000 shares of
preferred stock as Class C Convertible Cumulative Preferred Stock (the "Class C
Preferred Stock"). The Class C Preferred Stock has a par value of $10 per share
and holders are entitled to receive cumulative preferential dividends equal to
8% per annum of the liquidation preference per share of $60.00. Unless
previously redeemed, the Class C Preferred Stock is convertible into shares of
the Company's Common Stock ("Conversion Shares"), at any time commencing
November 21, 1996, at the option of the holder, into such number of shares of
the Company's Common Stock as shall equal $60 divided by the lower of (i) $2.50,
or (ii) the closing bid price for any five consecutive trading days during the
period commencing on September 6, 1996 and ending on March 5, 1998 (subject to
certain anti-dilution adjustments). The Class C Preferred Stock is redeemable at
any time prior to September 6, 2000, at the option of the Company at a
redemption price equal to $60 per share plus accrued and unpaid dividends,
provided (i) the Conversion Shares are covered by an effective registration
statement; and (ii) during the immediately preceding thirty (30) consecutive
trading days ending within fifteen (15) days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$8.00 per share. The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the Company at a redemption price equal to
$90 plus accrued and unpaid dividends, provided the Conversion Shares are
covered by an effective registration statement or the Conversion Shares are
otherwise exempt from registration. During the years ending December 31, 1997
<PAGE> F-21
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 12 - Stockholders' equity - continued
and 1996, 136,991 and 0 shares, respectively, of Class C Preferred Stock had
been converted into common shares. At December 31, 1997 and 1996, 114,959 and
240,000 Class C Preferred Shares were outstanding.
In August 1997, the Company completed its acquisition of MiBridge. As partial
consideration for 100 percent of the outstanding stock of MiBridge, the Company
agreed to issue 1,000 shares of Series D Preferred Stock to the prior owners of
MiBridge. The Series D Preferred shares were issued in October 1997 after the
October 7, 1997 annual meeting where the shareholders approved and adopted an
amendment to the Company's articles of incorporation increasing the number of
authorized shares of Preferred Stock from 500,000 to 10,000,000 and the number
of authorized shares of Common Stock from 20,000,000 to 75,000,000. The
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. On the nine-month anniversary of the
closing of the MiBridge acquisition, any unconverted share of Series D Preferred
Stock shall automatically convert to Common Stock. The Series D Preferred
shares are not entitled to dividends. As of December 31, 1997, 567 shares of
Class D Preferred Stock remained unconverted and outstanding.
On October 10, 1997, the Company closed an agreement with Winter Harbor pursuant
to which Winter Harbor invested $12,100,000 in a new series of the Company's
convertible preferred stock (the "Series M Preferred Stock"). Winter Harbor
purchased approximately 2,545 shares of Series M Preferred Stock, convertible
into approximately 2,545,000 shares of Common Stock, for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provided for the purchase
of approximately 1,855 additional shares of Series M Preferred Stock,
convertible into approximately 1,855,000 share of Common Stock. Such additional
shares of Series M Preferred Stock were paid for by Winter Harbor exchanging
$5,000,000 in outstanding notes payable and accrued interest of approximately
$100,000. As additional consideration for its equity investment in Series M
Preferred Stock, Winter Harbor was issued additional warrants by the Company to
acquire (a) 2,500,000 shares of Common Stock at an exercise price of $2.75 per
share (exercise period of 30 months), (b) 2,500,000 shares of Common Stock at an
exercise price of $4.00 per share (exercise period of 60 months), and (c)
5,000,000 shares of Common Stock at an exercise price of $4.69 per share
(exercise period of 60 months). All of the warrants have demand registration
rights and anti-dilution rights and contain cashless exercise provisions.
The Series M Preferred Stock is entitled to receive cumulative dividends in the
amount of 10% per annum before any other class of preferred or common stock
receives any dividends. Thereafter, the Series M Preferred Stock participates
with the Common Stock in the issuance of any dividends on a per share basis.
The Series M Preferred Stock will have the right to veto the payment of
dividends on any other class of stock. The Series M Preferred stock is
convertible at any time prior to the fifth anniversary of its issuance, at the
sole option of Winter Harbor, and automatically converts at that date if not
converted previously. If automatically converted on the fifth anniversary, the
conversion price will be the lower of $2.75 per share or 50% of the average
closing bid price of the Common Stock for the ten trading days immediately
preceding the conversion date. The basis for discretionary conversion, or the
conversion price for automatic conversion, shall be adjusted upon the occurrence
of certain events, including without limitation, issuance of stock dividends,
recapitalization of the Company or the issuance of stock by the Company at less
than the fair market value thereof. The Series M Preferred Stock will vote with
the Common Stock on an as-converted basis on all matters which are submitted to
a vote of the stockholders, except as may otherwise be provided by law or by the
Company's Articles of Incorporation or By-Laws; provided, however, that the
Series M Preferred Stock will have the right to appoint two members of the
Company's board of directors. Furthermore, the Series M Preferred stock shall
have the right to be redeemed at fair market value in the event of a change of
control of the Company, shall have preemptive rights to purchase securities sold
by the Company, and shall have the right to preclude the Company from engaging
in a variety of business matters without the concurrence of Winter Harbor,
including without limitation: mergers, acquisitions and disposition of
corporate assets and businesses, hiring or discharging key employees and
auditors, transactions with affiliates, commitments in excess of $500,000, the
adoption or settlement of employee benefit plans and filing for protection from
<PAGE> F-22
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 12 - Stockholders' equity, continued
creditors. As of December 31, 1997, all 4,400 shares of the Company's Class M
Preferred Stock remain issued and outstanding.
At December 31, 1997, 9,512,650 of the 10,000,000 shares of preferred stock
authorized remain undesignated and unissued. Dividends in arrears at December
31, 1997 were $1,144,698 and $217,468 for Class C and M Preferred Stock,
respectively.
Note 13 - Stock-based compensation plans
At December 31, 1997 the Company has several stock based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the method
outlined by Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss as reported $(29,858,701) $(23,064,240) $( 551,909)
========== ========== ==========
Net loss pro-forma $(37,753,358) (25,563,988) ( 587,001)
========== ========== ==========
Basic and diluted loss per share as reported $( 10.17) $( 6.53) $( 0.39)
========== ========== ==========
Basic and diluted loss per share pro-forma $( 10.84) $( 6.90) ( 0.41)
========== ========== ==========
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 100%, 103% and 103% in 1997, 1996, and 1995,
respectively, risk free rates ranging from 6.02% to 6.88%, 5.70% to 6.85%, and
5.08% to 6.96% in 1997, 1996, and 1995, respectively, expected lives of 3 years
for each year, and dividend yield of zero for each year.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
and Exercise and Exercise and Exercise
Warrants Price Warrants Price Warrants Price
------------ ----- ----------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,761,295 $5.14 850,169 $1.78 615,381 $3.19
Granted 15,526,000 4.45 5,322,000 5.45 331,526 1.87
Exercised ( 79,923) 1.73 ( 188,724) 2.02 - 0.00
Expired ( 14,584) 6.75
Forfeited ( 193,916) 5.68 ( 222,150) 2.82 ( 96,738) 2.75
---------- ---- --------- ---- ------- ----
Outstanding at end of year 20,998,872 $4.68 5,761,295 $5.14 850,169 $1.78
========== ==== ========= ==== ======= ====
Options exercisable at year end 14,873,577 2,153,294 588,495
========== ========= =======
Weighted-average fair value of
options and warrants granted
during the year $5.78 $5.45 $1.87
==== ==== ====
</TABLE>
<PAGE> F-23
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 13 - Stock-based compensation plans, continued
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options and Weighted Weighted Weighted
Warrants Average Average Number Average
Outstanding at Remaining Exercise Exercisable Exercise
Exercise Price 12/31/97 Life Price at 12/31/97 Price
------------------------------ -------------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.875 to $2.500 4,007,038 5.74 $2.34 4,007,038 $2.34
$3.875 to $4.970 9,362,334 7.16 4.50 8,979,453 4.50
$5.000 to $6.500 4,187,000 9.28 5.32 1,252,835 5.49
$6.625 to $8.625 3,442,500 6.98 7.09 634,251 7.13
---------- ---- ---- ---------- ----
20,998,872 7.28 $4.68 14,873,577 $4.12
========== ==== ==== ========== ====
</TABLE>
1997 Recruitment stock option plan
In October of 1997, the shareholders of the Company approved the adoption of the
1997 Recruitment Stock Option Plan which provides for the issuance of incentive
stock options, non-qualified stock options and stock appreciation rights (SARs)
up to an aggregate of 4,400,000 shares of Common Stock (subject to adjustment in
the event of stock dividends, stock splits, and other similar events). The
price at which shares of Common Stock covered by the option can be purchased is
determined by the Company's Board of Directors; however, in all instances the
exercise price is never less than the fair market value of the Company's Common
Stock on the date the option is granted.
As of December 31, 1997, there were incentive stock options to purchase 950,500
shares of the Company's Common Stock outstanding. The outstanding options vest
over three years at exercise prices of $4.375 to $8.625 per share. Options
issued under the plan must be exercised within ten years of grant and can only
be exercised while the option holder is an employee of the Company. The Company
has not awarded any SARs or non-qualified stock options under the plan.
Director stock option plan
The Company's Director Stock Option Plan authorizes the grant of stock options
to directors of the Company. Options granted under the Plan are non-qualified
stock options exercisable at a price equal to the fair market value per share of
common stock on the date of any such grant. Options granted under the Plan are
exercisable not less than six months or more than ten years after the date of
grant.
As of December 31, 1997, options for the purchase of 8,169 shares of common
stock at prices ranging from $0.875 to $3.875 per share were outstanding, all of
which are exercisable. In connection with the adoption of the 1995 Director
Plan the Board of Directors authorized the termination of future grants of
options under the plan; however, outstanding options granted under the plan will
continue to be governed by the terms thereof until exercise or expiration of
such options.
Stock purchase plan
In accordance with the Employee Qualified Stock Purchase Plan adopted in June
1990, employees may contribute up to 10 percent of their base wages towards the
purchase of the Company's common stock. The option price is the lesser of 85%
of the market value on the first business day of the Payment Period (September
1) or the last business day of the Payment Period (August 31). As of December
31, 1997 the Company had 34,376 shares of common stock reserved for issuance on
exercise of the purchase rights. On August 31, 1997, 770 shares of common stock
were issued at a price of $4.375 per share.
1995 Director stock option plan
The 1995 Director Stock Option and Appreciation Rights Plan provides for the
issuance of incentive options, non-qualified options and stock appreciation
rights (the "1995 Director Plan") to directors of the Company. The 1995
Director Plan provides for the grant of incentive options, non-qualified
<PAGE> F-24
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 13 - Stock-based compensation plans, continued
options, and SARs to purchase up to 250,000 shares of common stock (subject to
adjustment in the event of stock dividends, stock splits, and other similar
events).
The 1995 Director Plan also provides for the grant of non-qualified options on a
discretionary basis to each member of the Board of Directors then serving to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value per share of the common stock on that date. The number of shares
granted to each Board member was increased to 20,000 in 1998. In addition, the
Board member will receive 5,000 options for each committee membership. Each
option is immediately exercisable for a period of ten years from the date of
grant. The Company has 190,000 shares of common stock reserved for issuance
under the 1995 Director Plan. The Company granted 105,000 options to purchase
common shares under this plan in 1997. As of December 31, 1997, options to
purchase 170,000 shares of common stock at prices ranging from $1.00 to $1.25
per share are outstanding and exercisable. There were 20,000 options exercised
under this plan during 1997 and 40,000 options exercised during 1996.
1995 Employee stock option plan
The 1995 Employee Stock Option and Appreciation Rights Plan (the "1995 Employee
Plan") provides for the issuance of incentive options, non-qualified options,
and SARs.
Directors of the Company are not eligible to participate in the 1995 Employee
Plan. The 1995 Employee Plan provides for the grant of stock options which
qualify as incentive stock options under Section 422 of the Code, to be issued
to officers who are employees and other employees, as well as non-qualified
options to be issued to officers, employees, and consultants. In addition, SARs
may be granted in conjunction with the grant of incentive options and
non-qualified options.
The 1995 Employee Plan provides for the grant of incentive options,
non-qualified options, and SARs of up to 400,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an incentive option or non-qualified option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any incentive option, non-qualified
option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company
has 400,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1997, options to purchase 375,000 shares of common
stock with exercise prices ranging from $1.125 to $6.75 are outstanding under
the 1995 Employee Plan. During 1997, options to purchase 25,000 shares of
common stock were exercised.
Other warrants and options
Pursuant to the terms of a Financial Consulting Agreement dated as of November
3, 1994 between the Company and JW Charles Financial Services, Inc., the Company
issued a common stock purchase warrant (the "JWC Warrant") covering 250,000
(331,126 as adjusted) shares of common stock to JW Charles Financial Services as
partial consideration for its rendering financial consulting services to the
Company. The warrant is exercisable at a price of $1.51 per share and expires
on November 3, 1999.
The JWC Warrant contains anti-dilution provisions providing for adjustments in
the exercise price. The JWC Warrant also contains anti-dilution provisions
providing for adjustments in the number of shares covered by the JWC Warrant.
The holder of the JWC Warrant has no voting, dividend, or other stockholder
rights or privileges unless and until the JWC Warrants have been exercised. The
holder of the JWC Warrant has been granted "piggy back" registration rights
under the Securities Act of 1933 with respect to the JWC Warrants and the
underlying shares of common stock.
<PAGE> F-25
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 13 - Stock-based compensation plans, continued
Pursuant to the issuance of a $200,000 promissory note by I-Link to Scott Cook
in 1996, the Company issued a common stock purchase option covering 100,000
shares of the Company's common stock. The option is exercisable at a price of
$1.00 and expires on December 31, 1999.
In April 1996 the Company approved the issuance of 1,000,000 options to John
Edwards at an option price of $7.00 per share as part of his employment
agreement. The options vest over a three year period and expire in 2006.
On July 1, 1996 the Company approved the issuance of options to purchase
1,500,000 and 500,000 shares of common stock to Clay Wilkes and Alex Radulovic
respectively as part of their employment agreements. Each option has an
exercise price of $7.00 per share, vesting in 25% increments in the event that
the average closing bid price of a share of the Company's common stock for five
consecutive trading days exceeds $10, $15, $20 and $25, respectively. Each
option becomes exercisable (to the extent vested) on June 30, 1997, vests in its
entirety on June 30, 2001 and lapses on June 30, 2002.
In August 1996, Commonwealth Associates, the Placement Agent for the Company's
offering of Class C Preferred Stock and 8% Convertible Notes, designated Joseph
Cohen as its nominee for election to the Board of Directors. Commonwealth
Associates was also granted, in connection with such offering, the right to
approve the Company's selection of a second outside director to be nominated for
election at the next annual or special meeting of stockholders. Mr. Cohen
serves as a Class II Director of the Company and a member of the Finance,
Compensation and Audit Committees of the Board of Directors. The Company issued
options to purchase 64,000 shares of Common Stock to Mr. Cohen, exercisable at
the fair market value of the common stock on September 30, 1996 of $5.25. Of
such options, 24,000 vested and became exercisable immediately upon grant,
20,000 vested and became exercisable on the first anniversary of the grant, and
20,000 shall vest and become exercisable on the second anniversary of the grant.
In August 1996, William Flury, Vice President of Sales & Marketing of I-Link
loaned I-Link the sum of $100,000. The loan plus a loan origination fee of
$5,000 was repaid in September 1996. In connection with such loan, the Company
agreed to issue Mr. Flury a warrant to purchase 5,000 shares of Common Stock at
$2.50 per share, which expires in August of 1998.
In August 1996, John Edwards, President and Chief Executive Officer of I-Link
loaned I-Link the sum of $131,250 (including a $6,250 original issue discount),
which was repaid in August 1996. In connection with such loan, the Company
agreed to issue Mr. Edwards a warrant to purchase 25,000 shares of Common Stock
at $4.875 per share, which expires in August 1998.
In September 1996, the Company closed a private placement offering of Class C
Preferred Stock. As a result of this transaction, the Company issued a warrant
to purchase 750,000 shares of its Common Stock at an exercise price of $2.50 per
share as compensation to the Placement Agent. These warrants expire on August
20, 2001. During 1997, warrants to purchase 34,923 shares of common stock were
exercised.
John Edwards agreed to amend his employment contract on August 21, 1996, which
reduced his salary. In consideration of the salary reduction, the Company
granted to him options, which vested immediately, to purchase 250,000 shares of
common stock for 10 years at an exercise price of $4.875 per share which was
based on the closing price of the stock at grant date.
In October 1996 the Company agreed to issue 250,000 shares of common stock each
to William Flury and Karl Ryser Jr. pursuant to their employment agreements.
The options were issued at $4.41 based on the closing price of the stock at
grant date. The options vest quarterly over a three-year period and expire in
2000.
During 1996, the Company issued 343,000 options to employees at a price equal to
the closing stock price on the grant date. The options vest quarterly over a
three-year period and expire in 10 years.
During 1996, the Company issued 120,000 warrants to non-employees at $4.00 per
share. The warrants expire in 1999.
<PAGE> F-26
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 13 - Stock-based compensation plans, continued
During 1997, the Company issued options to purchase 1,210,000 shares of common
stock to non-employees at exercise prices ranging from $4.875 to $8.438, which
was based on the closing price of the stock at the grant date. The fair value
of the warrants issued was recorded as deferred compensation of $4,757,134 to be
amortized over the expected period the services were to be provided. During
1997, $2,467,369 of the deferred compensation was amortized to expense. The
options must be exercised within ten years of the grant date.
During 1997, the Company issued non-qualified options to purchase 2,200,000
shares of common stock to certain executive employees at exercise prices ranging
from $4.875 to $5.188, which was based on the closing price of the stock at the
grant date. The options must be exercised within ten years of the grant date.
Note 14 - Segment of Business Reporting
The continuing operations of the Company are divided into the following business
segments for financial reporting purposes: telecommunications services and
technology licensing and development. Financial information by business
segment is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Telecommunications services $ 13,718,338 $ 170,532 $ -
Technology licensing and development 346,875 - -
Operating loss:
Telecommunications services (24,076,626) (22,163,977) -
Technology licensing and development ( 4,591,066) - -
Identifiable assets:
Telecommunications services 20,185,005 8,196,473 -
Technology licensing and development 3,472,494 - -
</TABLE>
Note 15 - Commitments
Employment and consulting agreements
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 December 31, 1997, if the contracts were to
be terminated by the Company, the Company's liability for salary continuation
would be approximately $1,980,000.
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.
<PAGE> F-27
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Note 16 - Subsequent Events
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, LLC 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. After May 15, 1998, if the loan has not been repaid
by the Company, Winter Harbor may elect (a) to continue the loan on a demand
basis with interest accruing at prime plus four, or (b) 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 the following paragraph. In
1998 the Company will recognize interest expense on this loan comprised of the
interest paid and (non-cash) interest associated with the new warrants issued
and the change of the exercise period on prior warrants issued.
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 the 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 the 30 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.
Termination of Marketing Agreement
Subsequent to year-end, 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 56 percent of total telecommunications revenues for 1997. With
the growth in sales through the network marketing channel, management does not
anticipate that the loss of subscribers signed up by this wholesale agent will
have a significant impact on the revenues and cash flows of the Company.
As a result of the loss of customers from this wholesale agent, the Company
determined that the portion of the FTI purchase price allocated to the wholesale
agent customer lists and the related purchase price in excess of fair market
value of assets acquired should be written off. This resulted in an expense to
the Company of $860,305 for the year ending December 31, 1997.
<PAGE> F-28
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 930,176 $ 1,643,805
Accounts receivable, less allowance for
doubtful accounts of $883,000 and
$1,385,000 as of June 30, 1998 and
December 31, 1997, respectively 4,083,391 3,233,207
Certificates of deposit 1,136,661 1,628,500
Other current assets 201,689 321,488
Net assets of discontinued operations 487,371 -
---------- ----------
Total current assets 6,839,288 6,827,000
Furniture, fixtures and equipment, net 4,855,601 3,551,917
Other assets:
Intangible assets, net 10,867,230 12,314,080
Certificates of deposit 217,624 259,000
Other assets 1,035,484 705,502
Net assets of discontinued operations - 595,377
---------- ----------
Total assets $ 23,815,227 $ 24,252,876
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,044,381 $ 4,833,452
Accrued liabilities 3,859,395 2,770,997
Current portion of long-term debt 10,921,141 2,008,416
Current portion of obligations under 137,742 169,315
capital leases
---------- ----------
Total current liabilities 20,962,659 9,782,180
Long-term debt - 1,854,341
Obligations under capital leases - 67,159
---------- ----------
Total liabilities 20,962,659 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
83,215 and 119926 at June 30, 1998 and
December 31, 1997, respectively, liquidation
preference of $19,357,000 at June 30, 1998 832,150 1,199,260
Common stock, $.007 par value, authorized
75,000,000 shares, issued and outstanding
17,918,016 and 16,036,085 at June 30, 1998
and December 31, 1997, respectively 125,425 112,251
Additional paid-in capital 78,550,981 70,511,697
Deferred compensation ( 1,492,143) ( 2,289,765)
Accumulated deficit (75,163,845) (56,984,247)
---------- ----------
Total stockholders' equity 2,852,568 12,549,196
---------- ----------
Total liabilities and stockholders' equity $ 23,815,227 $ 24,252,876
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-29
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
TELECOMMUNICATION SERVICES $ 4,134,967 $ 2,267,609 $ 8,915,944 $ 4,414,825
MARKETING SERVICES, NET 963,962 720,490 2,305,209 720,490
TECHNOLOGY LICENSING AND DEVELOPMENT 374,660 - 580,610 -
---------- ---------- ---------- ----------
TOTAL REVENUES 5,473,589 2,988,099 11,801,763 5,135,315
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
TELECOMMUNICATION NETWORK EXPENSE 4,612,334 4,014,708 9,510,550 7,065,790
MARKETING SERVICES 1,343,072 640,739 3,210,957 640,739
SELLING, GENERAL AND ADMINISTRATIVE 2,520,506 2,239,431 4,932,092 4,351,917
PROVISION FOR DOUBTFUL ACCOUNTS 675,000 270,000 1,448,662 345,000
DEPRECIATION AND AMORTIZATION 1,039,099 515,050 2,049,826 813,151
RESEARCH AND DEVELOPMENT 576,060 74,246 1,144,155 345,334
---------- ---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 10,766,071 7,754,174 22,296,242 13,561,931
---------- ---------- ---------- ----------
OPERATING LOSS ( 5,292,482) ( 4,766,077) (10,494,479) ( 8,426,616)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE ( 5,459,535) ( 37,679) ( 7,640,577) ( 373,271)
INTEREST AND OTHER INCOME 18,172 56,416 63,464 140,724
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) ( 5,441,363) 18,737 ( 7,577,113) ( 232,547)
LOSS FROM CONTINUING OPERATIONS (10,733,845) ( 4,747,338) (18,071,592) ( 8,659,163)
LOSS FROM DISCONTINUED OPERATIONS
(LESS APPLICABLE INCOME TAX PROVISION
OF $0 FOR THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1998 ( 100,564) ( 95,561) ( 108,006) ( 90,477)
---------- ---------- ---------- ----------
NET LOSS $(10,834,409) $( 4,842,899) $(18,179,598) $( 8,749,640)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE
LOSS FROM CONTINUING $( 0.66) $( 0.47) $( 1.14) $( 0.87)
LOSS FROM DISCONTINUED ( 0.01) ( 0.01) ( 0.01) ( 0.01)
---------- ---------- ---------- ----------
NET LOSS PER COMMON SHARE $( 0.67) $( 0.48) $( 1.15) $( 0.88)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-30
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- DEFERRED PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION CAPITAL DEFICIT
--------- ------------ ----------- ---------- ------------ ------------ ------------
<S> <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 ( 36,711) ( 367,110) 1,482,391 10,377 - 356,733 -
AMORTIZATION OF
DEFERRED
COMPENSATION ON
STOCK OPTIONS
ISSUED FOR SERVICES - - - - 524,027 - -
FORFEITURE OF STOCK
OPTIONS ISSUED FOR
SERVICES - - - - 273,595 ( 273,595) -
EXERCISE OF STOCK
OPTIONS - - 399,540 2,797 - 682,146 -
WARRANTS ISSUED IN
CONNECTION WITH
CERTAIN CONVERTIBLE
NOTES PAYABLE - - - - - 7,274,000 -
NET LOSS - - - - - - (18,179,598)
------- --------- ---------- ------- --------- ---------- ----------
BALANCE AT
JUNE 30, 1998 83,215 $ 832,150 $17,918,016 $125,425 $(1,492,143) $78,550,981 $(75,163,845)
======= ========= ========== ======= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-31
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(18,179,598) $( 8,749,640)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 2,049,826 813,431
PROVISION FOR DOUBTFUL ACCOUNTS 1,448,662 345,000
PROVISION FOR ASSET VALUATION - 213,944
AMORTIZATION OF DISCOUNT ON NOTES PAYABLE 7,274,000 -
AMORTIZATION OF DEFERRED COMPENSATION ON
STOCK OPTIONS ISSUED FOR SERVICES 524,027 200,000
INTEREST EXPENSE ASSOCIATED WITH ISSUANCE
OF CONVERTIBLE NOTES - 320,000
INCREASE (DECREASE) FROM CHANGES IN OPERATING
ASSETS AND LIABILITIES, NET OF EFFECTS OF
ACQUISITIONS AND DISPOSITIONS:
ACCOUNTS RECEIVABLE ( 2,298,846) ( 2,249,589)
OTHER ASSETS ( 210,184) ( 214,747)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2,299,326 4,142,186
DISCONTINUED OPERATIONS - NONCASH CHARGES
AND WORKING CAPITAL CHANGES ( 16,847) 138,687
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ( 7,109,634) ( 5,040,728)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF FURNITURE, FIXTURES AND EQUIPMENT ( 1,906,659) ( 483,992)
CASH RECEIVED FROM THE PURCHASE OF I-LINK
COMMUNICATIONS, INC. - 435,312
MATURITY OF RESTRICTED CERTIFICATES OF DEPOSIT 533,215 -
INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS 310,000 -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ( 1,063,444) ( 48,680)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF NOTES
PAYABLE AND WARRANTS 7,768,000 2,000,000
PAYMENT OF LONG-TERM DEBT ( 709,616) ( 96,293)
PAYMENT OF CAPITAL LEASE OBLIGATIONS ( 98,732) ( 89,431)
PROCEEDS FROM EXERCISE OF COMMON STOCK
WARRANTS AND OPTIONS 684,943 22,499
FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS( 170,465) ( 71,208)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,474,130 1,765,567
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS ( 698,948) ( 3,323,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,727,855 4,500,227
---------- ----------
TOTAL CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,028,907 $ 1,176,386
========== ==========
CASH AND CASH EQUIVALENTS AT END OF PERIOD:
CONTINUING OPERATIONS $ 930,176 $ 1,106,622
DISCONTINUED OPERATIONS 98,731 69,764
---------- ----------
TOTAL CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,028,907 $ 1,176,386
========== ==========
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
COMMON STOCK ISSUED IN CONNECTION WITH THE
ACQUISITION OF I-LINK WORLDWIDE, INC. - 8,875,000
STOCK WARRANTS ISSUED IN CONNECTION WITH
LITIGATION SETTLEMENT - 821,000
STOCK OPTIONS ISSUED FOR SERVICES - 4,400,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> F-32
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
developed by its wholly-owned subsidiaries I-Link Systems, Inc. (formerly I-Link
Worldwide, Inc.), MiBridge, Inc. and Vianet Technologies, 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 and six-month periods ended June
30, 1998 and 1997, (b) the financial position at June 30, 1998, and (c) cash
flows for the six-month periods ended June 30, 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 and its quarterly
report on Form 10-Q for the three months ended March 31, 1998.
The results of operations for the three-month and six-month periods ended June
30, 1998 are not necessarily indicative of those to be expected for the entire
year.
The Company incurred a net loss from continuing operations of $18,071,592 and
$10,733,845 for the six and three-month periods ended June 30, 1998, and as of
June 30, 1998 had an accumulated deficit of $75,163,845 and negative working
capital of $14,123,371. 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. To provide a portion of
the required capital, 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. During the
second quarter of 1998, Winter Harbor increased its loan to the Company by an
additional $2.0 million. On July 9, 1998 the Company obtained a $10 million
equity investment from JNC Opportunity Fund Ltd. ("JNC"). The Company
anticipates that additional funds will be necessary from public or private
financing markets to fund continued operations and to successfully integrate and
finance the planned expansion of the business communications services and to
discharge the financial obligations of the Company.
<PAGE> F-33
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 six-month and
three-month periods ended June 30, 1998 and 1997, basic and diluted loss per
share are the same.
Basic and diluted loss per common share were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loss from continuing operations $(10,733,845) $( 4,747,338) $(18,071,592) $( 8,659,163)
Cumulative preferred stock
dividends not paid in the
current period ( 540,460) ( 288,776) ( 902,224) ( 577,923)
---------- ---------- ---------- ----------
Loss from continuing operations
applicable to common stock $(11,274,305) $( 5,036,114) $(18,973,816) $( 9,237,086)
========== ========== ========== ==========
Loss from discontinued operations $( 100,564) $( 95,561) $( 108,006) $( 90,477)
========== ========== ========== ==========
Weighted average shares outstanding 17,102,887 10,627,597 16,616,545 10,617,597
========== ========== ========== ==========
Loss from continuing operations $( 0.66) $( 0.47) $( 1.14) $( 0.87)
Loss from discontinued operations ( 0.01) ( 0.01) ( 0.01) ( 0.01)
---------- ---------- ---------- ----------
Net loss per common share $( 0.67) $( 0.48) $( 1.15) $( 0.88)
========== ========== ========== ==========
</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 for the
year ended December 31, 1998 the Company will adopt 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 SFAS No. 131
will 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.
Reclassifications
Certain balances in the June 30, 1997 financial statements 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.
<PAGE> F-34
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
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 June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
(Unaudited)
-------------- --------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 98,731 $ 84,050
Accounts receivable 1,126,786 1,033,376
Inventory 555,291 555,939
Other 26,882 24,951
--------- ---------
Total current assets 1,807,690 1,698,316
Furniture, fixtures and equipment, net 415,496 958,153
Intangible assets 391,757 391,757
Other non-current assets 7,996 8,706
--------- ---------
Total assets 2,622,939 3,056,932
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,681,886 1,781,541
Notes payable 241,661 412,126
--------- ---------
Total current liabilities 1,923,547 2,193,667
Other liabilities 212,021 267,888
--------- ---------
Total liabilities 2,135,568 2,461,555
--------- ---------
Net assets - discontinued operations $ 487,371 $ 595,377
========= =========
</TABLE>
Revenues of the discontinued operations were $375,063 and $962,928 and $582,298
and $1,179,555 for the three-month and six-month periods ending June 30, 1998
and 1997, respectively.
Note 4 - Capital Financing
During the first and second quarters of 1998 the Company obtained an aggregate
of $7.768 million in new interim debt financing from Winter Harbor, LLC As
consideration for Winter Harbor's commitment to make the loan, the Company
agreed to issue 6,740,000 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 were advanced. The warrants have
exercise periods of 7.5 years from issuance. 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. Pursuant to the terms of the loan
agreement with Winter Harbor, the initial borrowings of $5,768,000 were payable
upon demand by Winter Harbor no earlier than May 15, 1998, and were
collateralized by essentially all of the assets of the Company's subsidiaries.
Because the loan was not repaid by May 15, 1998, the total loan, including
additional borrowings of $2,000,000 obtained in the second quarter, continues on
a demand basis with interest accruing at prime plus four percent. Additionally,
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 6,740,000 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.
<PAGE> F-35
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 4 - Capital Financing, continued
During the six-month period ended June 30, 1998, the Company recorded $7,274,000
as a discount against the new debt representing the relative fair value
attributed to the new warrants, the change of the exercise period on prior
warrants and the equity instruments associated with the assumed conversion of
the debt into equity. The debt discount was amortized over the original terms
of the respective borrowings. Amortization of debt discount was $7,274,000 and
$5,213,000 for the six-month and three-month periods ended June 30, 1998.
In March 1998 the Company entered into a written agreement with a private
investor under which the investor agreed to provide to the Company a credit
facility of $10 million to $20 million. Subsequently, the investor defaulted on
its obligations to make the loans to the Company in the time-frames provided for
in the agreement. Despite continued representations from the investor that it
intends to provide the funding to the Company, the investor remains in default.
The Company has declared the investor in breach of the written agreement.
On July 9, 1998 the Company obtained a $10 million equity investment, net of
$530,000 in closing costs, from JNC Opportunity Fund Ltd. ("JNC"). The terms of
the equity investment were amended on July 28, 1998. Under the original terms
of the equity investment, JNC purchased shares of the Company's newly created 5%
Series E Convertible Preferred Stock (the "Series E Preferred Stock"), which
were convertible into the Company's common shares at a conversion price of the
lesser of 110% of the market price of the Company's publicly traded common
shares as of the date of closing, and 90% of the market price at the time of
conversion. In addition, JNC obtained a warrant to purchase 275,000 shares of
the Company's common stock at an exercise price equal to 120% of the market
price of the Company's publicly traded common shares as of the date of closing.
On July 28, 1998, the terms of the equity investment were amended to provide a
floor to the conversion price, and to effect the amendment the Company created a
5% Series F Convertible Preferred Stock (the "Series F Preferred Stock") with
which the Series E Preferred Shares originally issued to JNC were exchanged.
Pursuant to the amendment, the Series F Preferred Shares are convertible into
common shares at a conversion price of the lesser of $4.00 per common share or
87% of the market price of the Company's common shares at the time of
conversion, subject to a $2.50 floor. In the event the market price remains
below $2.50 for five consecutive trading days, the floor will be re-set to the
lower rate, provided, however, that the floor shall not be less than $1.25. JNC
also received an additional warrant to purchase 100,000 shares of the Company's
common stock at an exercise price of $4.00 per common share. The Series F
Preferred shares may be converted at any time, are automatically converted at
the end of three years, and are subject to specific provisions that would
prevent any issuance of I-Link common stock at a discount if and to the extent
that such shares would equal or exceed in the aggregate 20% percent of the
number of common shares outstanding prior to the July 9, 1998 $10 million
placement absent shareholder approval as contemplated by the NASDAQ Stock Market
Non-Quantitative Designation Criteria. In addition, the Company is required to
use the net proceeds from the sale of the Series F Preferred Stock for working
capital purposes, except for up to $4 million which can be used in part to
retire indebtedness owed to Winter Harbor LLC and to satisfy the Company's
arbitration settlement with MCI Communications, Inc.
In addition, the Company issued warrants to purchase 75,000 shares of the
Company's common stock at a price of $4.89 per share to two individuals as a
brokerage fee in connection with the JNC equity investment.
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.
Note 6 - Legal Proceedings
On May 12, 1998, I-Link and MCI Telecommunications, a unit of MCI Communications
Corp., agreed to a settlement of the arbitration action filed in November 1997
by I-Link against MCI and a related counterclaim by MCI against I-Link.
Pursuant to the terms of the settlement all claims and counterclaims shall be
dismissed, I-Link shall pay to MCI over a six-month period the sum of $2,083,425
<PAGE> F-36
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
Note 6 - Legal Proceedings, continued
representing agreed actual long-distance usage (previously accrued in the
financial statements) by I-Link prior to the termination of its relationship
with MCI, and payment on the Company's existing note payable to MCI (outstanding
principal balance as of June 30, 1998 of approximately $2.39 million) will be
restructured to provide for a fixed monthly payment of $250,436 over the term of
the note, in place of the original escalating monthly payment schedule.
Note 7 - Commitments
Employment and consulting agreements
The Company has entered into employment and consulting agreements with two
consultants and eleven 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 June 30, 1998, if the contracts were to be
terminated by the Company, the Company's liability for salary continuation would
be approximately $1,700,000.
Purchase commitments
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 escalating minimum monthly commitments range from between $750,000 and
$1,200,000 over the term of the agreement which expires in December 1999. If
the agreement were terminated prior to December 1999, the Company would be
obligated to pay 50% of the remaining monthly minimum usage amounts.
Note 8 - Termination of Marketing Agreement
During the second quarter of 1998, the Company terminated its telecommunications
marketing agreement with its principal reseller account as the Company decided
to concentrate its resources on lines of business which produce higher profit
margins. Revenues from subscribers signed up by this reseller account
represented approximately 21 percent of total telecommunication services
revenues for the quarter ended March 31, 1998. While revenues (and related
expenses) from this reseller account ended in the second quarter of 1998, it is
anticipated that future growth in the Network Marketing Channel will exceed the
lost revenues such that total revenues will continue to grow.
<PAGE> F-37
NO DEALER, SALESMAN OR ANY
OTHER PERSON HAS BEEN AUTHORIZED 439,315 SHARES OF COMMON STOCK
IN CONNECTION WITH THIS OFFERING ISSUABLE AS DIVIDENDS
TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS
PROSPECTUS. THE PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR A
SOLICITATION IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE I-LINK INCORPORATED
CIRCUMSTANCES OF THE COMPANY OR
THE FACTS HEREIN SET FORTH SINCE
THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION 2
PROSPECTUS SUMMARY 2
RISK FACTORS 5 ______________
THE COMPANY 14
USE OF PROCEEDS 15 PROSPECTUS
CAPITALIZATION 15 ______________
DIVIDEND POLICY 16
MANAGEMENT'S DISCUSSION AND
ANALYSIS 16
BUSINESS OF THE COMPANY 24
DESCRIPTION OF PROPERTY 35
LEGAL PROCEEDINGS 36
MANAGEMENT 36
EXECUTIVE COMPENSATION 38
CERTAIN RELATIONSHIPS AND September[__], 1998
RELATED TRANSACTIONS 44
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT 46
MARKET FOR THE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS 47
RECENT TRANSACTIONS 48
DESCRIPTION OF SECURITIES 50
PLAN OF DISTRIBUTION 51
LEGAL MATTERS 51
EXPERTS 52
INDEX TO FINANCIAL STATEMENTS F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred by the Company in connection with the
registration of the securities subject of this registration statement, other
than underwriting discounts and commissions, are estimated as follows:
SEC Registration Fee $ 446
Printing and Engraving Expenses 2,000
Registrant's Counsel Fees and Expenses 20,000
Accountant's Fees and Expenses 10,000
Miscellaneous Expenses 2,000
------
Estimated Total $34,446
======
Item 14. Indemnification of Directors and Officers.
Section 607.0850 of the Florida Business Corporation Act empowers a corporation
to indemnify any person who was or is a party to a proceeding by reason of the
fact that he was or is an officer, director, employee or agent of the
corporation against liability incurred in connection with such proceeding. Such
person must have acted in good faith and in a manner reasonably believed to be
in or not opposed to, the best interests of the corporation. With respect to
any criminal proceeding, such person must have had no reasonable cause to
believe his conduct was unlawful. Any such indemnification may only be made
upon a determination by the corporation that such indemnification is proper
because the person met the applicable standard of conduct.
The Florida Business Corporation Act provides further that the indemnification
permitted thereunder is not exclusive; provided, however, indemnification is not
permitted to be made on behalf of any such person if a judgment or final
adjudication establishes (i) a violation of the criminal law unless such person
had reasonable cause to believe his conduct was lawful or no reasonable cause to
believe his conduct was unlawful; (ii) such person derived an improper personal
benefit from the transaction; (iii) as to any director such proceeding arose
from an unlawful distribution under Section 607.0834; or (iv) willful misconduct
or a conscious disregard for the best interests of the corporation in a
proceeding by the corporation or a shareholder.
The Company's Bylaws provide that the Company shall indemnify any such person to
the fullest extent provided by law and empowers the Company to purchase and
maintain insurance on behalf of any such person.
The Company previously entered into indemnification agreements in 1988 with
certain officers and directors of the Company for indemnification against
expenses (including attorneys' fees, through all proceedings, trials, and
appeals), judgments, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending, or contemplated action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
arising from any actual or alleged breach of duty, neglect, effort, or other
action taken or omitted, solely in the capacity as an officer and/or a director
of the Company; provided that no indemnification will be made in respect of any
acts or omissions (a) involving gross negligence or willful misconduct, (b)
involving libel or slander, or (c) based upon or attributable to gaining,
directly or indirectly, any profit or advantage to which he was not legally
entitled.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT MAY
BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY PURSUANT
TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE.
Other Arrangements
The Company maintains a "claims made" officers and directors liability insurance
policy with coverage limits of $3,000,000 and a maximum $100,000 deductible
amount for each claim.
<PAGE> II-1
Item 15. Recent Sales of Unregistered Securities.
The Registrant has issued the following unregistered securities during the
past three years:
Pursuant to the issuance of a $200,000 promissory note by I-Link to Scott
Cook in 1996, the Company issued a common stock purchase option covering 100,000
shares of the Company's common stock. The option is exercisable at a price of
$1.00 and expires on December 31, 1999.
In February 1996, in connection with the purchase of all of the issued and
outstanding shares of I-Link Worldwide Inc., the Company issued an aggregate of
4,000,000 shares of Common Stock to the owners of I-Link Worldwide Inc.
In February 1996, in connection with loans, the Company issued a Series II
Non-Negotiable 10% Convertible Promissory Note in the principal amount of
$50,000 to Joseph Wong and a Series III Non-Negotiable 10% Convertible
Promissory Note in the principal amount of $50,000 to Trident I, LLC Each of
the holders of the notes converted $5,000 of the principal amount of the notes
to 70,000 shares of Common Stock in June 1996.
In February 1996, the Company completed a private placement of $1,000,000
in aggregate principal amount of convertible promissory notes (the "10% Notes").
Up to $1,250 of each $50,000 in principal amount of the 10% Note was convertible
at any time at the option of the holder, into an aggregate of 350,000 shares of
Common Stock at the rate of approximately $.0714 per share, subject to certain
anti-dilution adjustments; and such principal amount was converted to Common
Stock in August 1996. Commonwealth served as the placement agent for the
offering.
In April 1996 the Company approved the issuance of 1,000,000 options to
John Edwards at an option price of $7.00 per share as part of his employment
agreement. The options vest over a three year period and expire in 2006.
In June 1996, the Company completed a private placement of $375,000 in
principal amount of Non-Negotiable 8% Promissory Notes and Common Stock Purchase
Warrants to purchase 120,000 shares of Common Stock at an exercise price of
$4.00 per share. Commonwealth served as the placement agent for the offering.
On July 1, 1996 the Company approved the issuance of options to purchase
1,500,000 and 500,000 shares of common stock to Clay Wilkes and Alex Radulovic
respectively as part of their employment agreements. Each option has an
exercise price of $7.00 per share, vesting in 25% increments in the event that
the average closing bid price of a share of the Company's common stock for five
consecutive trading days exceeds $10, $15, $20 and $25, respectively. Each
option becomes exercisable (to the extent vested) on June 30, 1997, vests in its
entirety on June 30, 2001 and lapses on June 30, 2002.
In August 1996, Commonwealth Associates, the Placement Agent for the
Company's offering of Class C Preferred Stock and 8% Convertible Notes,
designated Joseph Cohen as its nominee for election to the Board of Directors.
Commonwealth Associates was also granted, in connection with such offering, the
right to approve the Company's selection of a second outside director to be
nominated for election at the next annual or special meeting of stockholders.
Mr. Cohen serves as a Class II Director of the Company and a member of the
Finance, Compensation and Audit Committees of the Board of Directors. The
Company issued options to purchase 64,000 shares of Common Stock to Mr. Cohen,
exercisable at the fair market value of the common stock on September 30, 1996
of $5.25. Of such options, 24,000 vested and became exercisable immediately
upon grant, 20,000 vested and became exercisable on the first anniversary of the
grant, and 20,000 shall vest and become exercisable on the second anniversary of
the grant.
In August 1996, William Flury, Vice President of Sales & Marketing of
I-Link loaned I-Link the sum of $100,000. The loan plus a loan origination fee
of $5,000 was repaid in September 1996. In connection with such loan, the
Company agreed to issue Mr. Flury a warrant to purchase 5,000 shares of Common
Stock at $2.50 per share, which expires in August of 1998.
In August 1996, John Edwards, President and Chief Executive Officer of
I-Link loaned I-Link the sum of $131,250 (including a $6,250 original issue
discount), which was repaid in August 1996. In connection with such loan, the
Company agreed to issue Mr. Edwards a warrant to purchase 25,000 shares of
Common Stock at $4.875 per share, which expires in August 1998.
John Edwards agreed to amend his employment contract on August 21, 1996,
<PAGE> II-2
which reduced his salary. In consideration of the salary reduction, the Company
granted to him options, which vested immediately, to purchase 250,000 shares of
common stock for 10 years at an exercise price of $4.875 per share which was
based on the closing price of the stock at grant date.
On September 6, 1996, the Company closed a private placement of 240,000
shares of Class C Preferred Stock, $10 par value per share. In addition, the
Company issued $717,000 of principal amount of Convertible Promissory Notes
payable on April 1, 1997 (the "Maturity Date") and bearing interest at 8% per
annum (previously defined as the "Convertible Notes"). The unpaid principal
amount of a Convertible Note will be automatically converted into shares of
Class C Preferred Stock at any time prior to the close of business on the
Maturity Date at the rate of $60 per share of Class C Preferred Stock upon
certain conditions being met. Commonwealth acted as the placement agent for the
Class C Offering.
In September 1996, the Company closed a private placement offering of Class
C Preferred Stock. As a result of this transaction, the Company issued a
warrant to purchase 750,000 shares of its Common Stock at an exercise price of
$2.50 per share as compensation to the Placement Agent. These warrants expire
on August 20, 2001.
In October 1996 the Company agreed to issue 250,000 shares of common stock
each to William Flury and Karl Ryser Jr. pursuant to their employment
agreements. The options were issued at $4.41 based on the closing price of the
stock at grant date. The options vest quarterly over a three-year period and
expire in 2000.
During 1996, the Company issued 343,000 options to employees at a price
equal to the closing stock price on the grant date. The options vest quarterly
over a three-year period and expire in 10 years.
During 1996, the Company issued 120,000 warrants to non-employees at $4.00
per share. The warrants expire in 1999.
In January 1997, the Company entered into a Share Exchange Agreement with
Family Telecommunications Incorporated (subsequently renamed I-Link
Communications, Inc. and referred to herein as "ILC") pursuant to which the
Company acquired the outstanding stock of ILC in exchange for 400,000 shares of
Common Stock of the Company subject to the satisfaction of certain conditions.
During 1997, the Company issued options to purchase 1,210,000 shares of
common stock to non-employees at exercise prices ranging from $4.875 to $8.438,
which was based on the closing price of the stock at the grant date. The
options must be exercised within ten years of the grant date.
During 1997, the Company issued non-qualified options to purchase 2,200,000
shares of common stock to certain executive employees at exercise prices ranging
from $4.875 to $5.188, which was based on the closing price of the stock at the
grant date. The options must be exercised within ten years of the grant date.
In April 1997, the Company agreed to issue to the Hardy Group warrants to
purchase an aggregate of 175,000 shares of Common Stock, in connection with the
Settlement Agreement between JW Charles and the Company.
In June 1997, the Company agreed to issue to Winter Harbor, LLC ("Winter
Harbor") warrants (the "WH Loan Warrants") to purchase up to 500,000 shares of
Common Stock in connection with a loan by Winter Harbor to the Company.
In August 1997, the Company amended its loan arrangements with Winter
Harbor such that the total amount of indebtedness was increased thereunder. In
connection with such amendment, the Company issued an additional 300,000
warrants to purchase Common Stock to Winter Harbor.
In August 1997, the Company executed an agreement with MiBridge, Inc.
pursuant to which the Company agreed to acquire MiBridge. The closing of the
MiBridge Acquisition occurred on September 2, 1997. The Company agreed it would
issue to the shareholders of MiBridge, as consideration for the purchase of
all outstanding MiBridge equity securities, (i) an aggregate $2,000,000 in cash,
payable in quarterly installments for two years, and (ii) an aggregate 1,000
shares of convertible Series D Preferred Stock. As of August 19, 1998, all
1,000 shares of Series D Preferred Stock had been converted into an aggregate of
1,092,174 shares of Common Stock.
The Company and Winter Harbor executed a Securities Purchase Agreement,
dated as of September 30, 1997 and providing for a closing on October 10, 1997,
pursuant to which Winter Harbor invested $12,100,000 in a new series of the
<PAGE> II-3
Company's convertible preferred stock (the "Series M Preferred Stock"). Winter
Harbor purchased approximately 2,545 shares of Series M Preferred Stock
(convertible into 2,545,000 shares of Common Stock) for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provided for purchase of
approximately 1,855 additional shares of Series M Preferred Stock (convertible
into 1,855,000 shares of Common Stock). Such additional shares of Series M
Preferred Stock were paid for by converting the $5,000,000 outstanding principal
balance plus approximately $100,000 accrued interest due under the Note. As
additional consideration for its equity financing commitments, Winter Harbor was
issued additional warrants by the Company to acquire (a) 2,500,000 shares of
Common Stock at an exercise price of $2.75 per share (the "Series A Warrants"),
(b) 2,500,000 shares of Common Stock at an exercise price of $4.00 per share
(the "Series B Warrants") and (c) 5,000,000 share of Common Stock at an exercise
price of $4.69 (the "Series C Warrants"). The respective exercise prices for
the Series A Warrants, the Series B Warrants and the Series C Warrants
(collectively, the "Investment Warrants") shall be subject to adjustment. The
Series A Warrants will be exercisable at any time for thirty months from the
date of issuance, and the Series B Warrants and Series C Warrants will be
exercisable at any time for sixty months from the date of issuance. All of the
Investment Warrants (i) will have demand registration rights and anti-dilution
rights and (ii) will contain cashless exercise provisions.
During the first and second quarters of 1998 the Company obtained an
aggregate of $7.768 million in new interim debt financing from Winter Harbor. As
consideration for Winter Harbor's commitment to make the loan, the Company
agreed to issue 6,740,000 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 were advanced. The warrants have
exercise periods of 7.5 years from issuance. 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. Additionally, 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 6,740,000 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.
On June 30, 1998, the Company entered into an agreement with JNC
Opportunity Fund Ltd. ("JNC") by which it obtained a $10,000,000 equity
investment which resulted in net proceeds to the Company of $9,470,000. The
terms of the equity investment were amended on July 28, 1998. Under the
original terms of the equity investment, JNC purchased shares of the Company's
newly created 5% Series E Convertible Preferred Stock (the "Series E Preferred
Stock"), which were convertible into the Company's common shares at a conversion
price of the lesser of 110% of the market price of the Company's publicly traded
common shares as of the date of closing, and 90% of the market price at the time
of conversion. In addition, JNC obtained a warrant to purchase 250,000 shares
of the Company's common stock at an exercise price equal to 120% of the market
price of the Company's publicly traded common shares as of the date of closing.
On July 28, 1998, the terms of the equity investment were amended to provide a
floor to the conversion price, and to effect such amendment the Company created
the 5% Series F Convertible Preferred Stock (the "Series F Preferred Stock")
with which the Series E Preferred Shares originally issued to JNC were
exchanged. Pursuant to the amendment, the Series F Preferred Shares are
convertible into common shares at a conversion price of the lesser of $4.00 per
common share or 87% of the market price of the Company's common shares at the
time of conversion, subject to a $2.50 floor. In the event the market price
remains below $2.50 for five consecutive trading days, the floor will be re-set
to the lower rate, provided, however, that the floor shall not be less than
$1.25. JNC also received an additional warrant to purchase 100,000 shares of
the Company's common stock at an exercise price of $4.00 per common share. The
Series F Preferred shares may be converted at any time, are automatically
converted at the end of three years, and are subject to specific provisions that
would prevent any issuance of I-Link common stock at a discount if and to the
extent that such shares would equal or exceed in the aggregate 20% percent of
the number of common shares outstanding prior to the recent $10,000,000
placement absent shareholder approval as contemplated by the NASDAQ Stock Market
Non-Quantitative Designation Criteria. In addition, the Company is required to
use the net proceeds from the sale of the Series F Preferred Stock for working
capital purposes, except for up to $4 million which can be used in part to
retire indebtedness owed to Winter Harbor, LLC and to satisfy the Company's
arbitration settlement with MCI Communications, Inc.
In addition, the Company issued warrants to purchase 75,000 shares of the
Company's common stock at a price of $4.89 per share to two companies as a
brokerage fee in connection with the JNC equity investment.
<PAGE> II-4
The Company believes that the transactions set forth above were exempt from
registration with the Commission pursuant to Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering. The February,
June and September 1996 placements were made in reliance upon a claim of
exemption pursuant to Rule 506 of Regulation D. Additionally, all of the
participants in the February, June and September 1996 private placements were
accredited investors. Except as disclosed above, no broker-dealer or
underwriter was involved in the foregoing transactions. All certificates
representing such securities have been or will be appropriately legended.
Item 16. Exhibits.
The following exhibits are filed as part of this Registration Statement:
NUMBER TITLE OF EXHIBIT
2.1(5) Joint Venture Interest Purchase Agreement, effective October 1, 1994
between Medcross, Inc. and Urology Ultrasound, Inc.
2.2(7) Stock Purchase Agreement, dated February 13, 1996, by
and among Medcross, Inc, I-Link, Ltd., and GNet
Enterprises, Inc.
2.3(11) Share Exchange Agreement for the Acquisition of Family
Telecommunications Incorporated by Medcross, Inc.,
effective as of January 1, 1997.
3.1(10) Amended and Restated Articles of Incorporation of the
Company, as further amended.
3.2(3) Bylaws of the Company, as amended.
3.3(8) Articles of Incorporation of I-Link Worldwide Inc.
3.4(8) Bylaws of I-Link Worldwide Inc.
3.5(12) Articles of Incorporation of Family Telecommunications
Incorporated and Articles of Amendment to the Articles
of Incorporation.
3.6(12) Bylaws of Family Telecommunications Incorporated.
3.7(19) Articles of Amendment to the Amended and Restated
Articles of Incorporation of the Company.
4.1(1) Specimen Common Stock Certificate.
4.2(6) Common Stock Purchase Option to Purchase Common Shares
of Medcross, Inc., issued to Jason H. Pollak, dated
October 18, 1995.
4.3(8) Common Stock Purchase Option to Purchase Common Shares
of Medcross, Inc., issued to Scott Cook, dated October 18, 1995.
4.4(12) Placement Agent's Common Stock Warrant Agreement and Certificate.
4.5(12) Consultant's Common Stock Warrant Agreement and Certificate.
4.7(13) Option to purchase 160,000 shares of Class A Convertible
Preferred Stock of Medcross, Inc., granted by Four M
International, Ltd. to Commonwealth, dated February 21, 1996.
4.8(17) Form of Hardy Group Warrant to purchase 175,000 shares
of Common Stock.
4.9(16) Securities Purchase Agreement by and between the Company
and Winter Harbor, LLC, dated as of September 30, 1997.
4.10(16) Form of Registration Rights Agreement by and between the
Company and Winter Harbor, LLC, which constitutes
Exhibit C to the Purchase Agreement.
4.11(16) Form of Shareholders Agreement by and among the Company and Winter
Harbor, LLC and certain holders of the Company's securities, which
constitutes Exhibit D to the Purchase Agreement.
4.12(16) Form of Warrant Agreement by and between Medcross, Inc.
and Winter Harbor, LLC, which constitutes Exhibit F
to the Purchase Agreement.
4.13(14) Warrant Agreement dated as of June 6, 1997, by and between the
Company and Winter Harbor, LLC; and related Warrant Certificate.
5.1 Opinion of De Martino Finkelstein Rosen & Virga, to be filed by
amendment
10.1(4)* Director Stock Option Plan.
10.2(2)* Executive Stock Option Plan.
10.3(8)* Employment Agreement, dated February 4, 1996, between
Medcross, Inc. and Henry Y.L. Toh.
10.4(8)* Employment Agreement, dated January 1, 1996, between
Medcross, Inc. and Dorothy L. Michon.
10.6(8)* Employment Agreement, dated February 14, 1996, between
I-Link Worldwide Inc. and Alex Radulovic.
10.7(8)* Employment Agreement, dated January 1, 1996, between
Medcross, Inc. and Stephanie E. Giallourakis.
10.8(8)* 1995 Director Stock Option and Appreciation Rights Plan.
10.9(8)* 1995 Employee Stock Option and Appreciation Rights Plan.
10.10(8)* Employment Agreement, dated April 8, 1996, between
I-Link Worldwide Inc. and John W. Edwards.
<PAGE> II-5
10.11(9) Consulting Agreement, effective January 1, 1996, by and
between Windy City, Inc. and the Company.
10.12(10) Agreement for Terminal Facility Collocation Space, dated June 21,
1996, by and between I-Link Worldwide Inc. and MFS Telecom, Inc.
10.13(12) Consulting Agreement dated August 21, 1996 between the
Company and Commonwealth Associates.
10.14(12) Sales Agency Agreement dated July 1, 1996 between the
Company and Commonwealth Associates and Amendment No. 1 thereto.
10.15(12) Commercial Lease dated May 21, 1996 between I-Link Worldwide Inc. and
Draper Land Partnership II and First Amendment dated July 22, 1996.
10.16(17) Commercial Lease dated September 11, 1996 between I-Link
Worldwide Inc. and Draper Land Partnership II.
10.17(17)*Employment Agreement dated October 15, 1996,
between I-Link Worldwide Inc. and Karl S. Ryser, Jr.
10.18(12) Term Lease Master Agreement dated May 19, 1996 by and
between IBM Credit Corporation and I-Link Worldwide Inc.
10.19(12)*1997 Recruitment Stock Option Plan.
10.20(12) Lease Agreement dated July 1, 1996 between Broadway
Associates and ILC Communications.
10.21(12 )Lease Between Phoenix City Square Partnership and Robert
W. Edwards and Denise A. Edwards dated March 18, 1996.
10.22(12) Carrier Agreement between MCI Telecommunications
Corporation and ILC, Inc. dated August 26, 1996.
10.23(12) Strategic Member Reseller Agreement between I-Link
Worldwide Inc. and WealthNet Incorporated dated January 31, 1997.
10.24(12) Settlement Agreement between WealthNet Incorporated and
Family Telecommunications Incorporated dated January 29, 1997.
10.25(17)*Employment Agreement, dated as of September 2,
1997, between Medcross, Inc. and Dror Nahumi.
10.26(17) Plan and Agreement of Merger of MiBridge, Inc. with and into I-Link
Mergerco, Inc., a wholly-owned subsidiary of Medcross, Inc., dated as
of August 12, 1997, by and among Medcross, Inc., I-Link Mergerco,
Inc., MiBridge, Inc. and the stockholders of MiBridge, Inc.
10.27(18)*Employment Agreement dated August 29, 1997,
between I-Link Worldwide, LLC and Jon McKillip.
10.28(19) Agreement dated April 14, 1998, by and between the
Company and Winter Harbor, LLC ("Winter Harbor").
10.29(19) Pledge Agreement dated April 14, 1998, by and between
the Company and Winter Harbor.
10.30(19) Security Agreement dated April 14, 1998, by and among
certain of the Company's subsidiaries and Winter Harbor.
10.31(19) Form of Promissory Notes issued to Winter Harbor.
10.32+ Amended Form of Convertible Preferred Stock Purchase Agreement dated
June 30, 1998 by and between the Company and JNC Opportunity Fund
Ltd. ("JNC").
10.33(19) Registration Rights Agreement dated June 30, 1998 by and
between the Company and JNC.
10.34(19) Warrant to purchase 250,000 shares of Common Stock of
the Company, dated June 30, 1998, issued to JNC.
10.35(19) Exchange Agreement dated July 28, 1998 by and between
the Company and JNC.
10.36(19) Warrant to purchase 100,000 shares of Common Stock of
the Company, dated July 28, 1998, issued to JNC.
21 + Subsidiaries of the Registrant.
23.1+ Consent of PricewaterhouseCoopers L.L.P.
23.2 Consent of De Martino Finkelstein Rosen & Virga, to be filed by
Amendment
- ----------------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed.
+ Filed herewith
(1) Incorporated by reference to the Company's Registration
Statement on Form S-18 file number 33-27978-A.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990, file number 0-17973.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, file number 0-17973.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, file number 0-17973.
(5) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994, file number 0-17973.
(6) Incorporated by reference to the Company's Registration
Statement filed on Form S-8, file number 333-01525.
(7) Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1995, file number 0-17973.
(8) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, file number 0-17973.
<PAGE> II-6
(9) Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1996, file number 0-17973.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996, file number 0-17973.
(11) Incorporated by reference to the Company's Current Report on
Form 8-K, dated January 13, 1997, file number 0-17973.
(12) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, file number 0-17973.
(13) Incorporated by reference to the Company's Registration
Statement on Form SB-2, file number 333-17861.
(14) Incorporated by reference to the Company's Current Report on
Form 8-K, dated June 5, 1997, file number 0-17973.
(15) Incorporated by reference to the Company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, file number 333-17861.
(16) Incorporated by reference to the Company's Current Report on
Form 8-K, dated September 30, 1997, file number 0-17973.
(17) Incorporated by reference to the Company's Pre-Effective Amendment
No. 3 to Registration Statement on Form SB-2, file number 333-17861.
(18) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, file number 0-17973.
(19) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998, file number 0-17973.
Item 17. Undertakings
(a) Rule 415 Offering. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts of events arising after the
effective date of the registration statement ( or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii)to include any material information with respect to the plan of
Distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement of the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain
unsold at the termination of the offering.
(h) Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
<PAGE> II-7
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the securities act and will be governed by the final
adjudication of such issue.
<PAGE> II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Draper, State of Utah, on
September 2, 1998.
I-LINK INCORPORATED
BY: /s/ John W. Edward
John W. Edwards, Chairman of the
Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ John W. Edwards Chairman of the Board, September 2, 1998
John W. Edwards President and Chief
Executive Officer
/s/ Karl S. Ryser, Jr. Treasurer, Chief Financial September 2, 1998
Karl S. Ryser, Jr. and Chief Accounting Officer
/s/ David E. Hardy Secretary September 2, 1998
David E. Hardy
/s/ Henry Y.L. Toh Director September 2, 1998
Henry Y.L. Toh
/s/ Thomas A. Keenan Director September 2, 1998
Thomas A. Keenan
/s/ Joseph A. Cohen Director September 2, 1998
Joseph A. Cohen
<PAGE> II-9
INDEX TO EXHIBITS
NUMBER ITEM
10.32 Amended Form of Convertible Preferred Stock Purchase Agreement Dated
June 30, 1998 by and between the Company and JNC Opportunity Fund Ltd.
("JNC")
21 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers L.L.P.
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of
June 30, 1998, between I-Link Incorporated, a Florida corporation (the
"Company"), and JNC Opportunity Fund Ltd., a Cayman Islands corporation (the
"Purchaser").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchaser and the Purchaser
desires to purchase from the Company, shares of the Company's 5% Series E
Convertible Preferred Stock, par value $10 per share (the "Preferred Stock"),
which are convertible into shares of the Company's common stock, par value
$.007 per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement, and
for other good and valuable consideration the receipt and adequacy are hereby
acknowledged, the Company and Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
1.1 The Closing .
(a) The Closing . (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchaser and the
Purchaser shall purchase 1,000 shares of Preferred Stock (the "Shares") for an
aggregate purchase price of $10,000,000. The closing of the purchase and sale
of the Shares (the "Closing") shall take place at the offices of Robinson
Silverman Pearce Aronsohn & Berman LLP (the "Escrow Agent"), 1290 Avenue of the
Americas, New York, New York 10104, immediately following the execution hereof
or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "Closing Date."
(ii) Prior to the Closing, the parties shall deliver or shall
cause to be delivered to the Escrow Agent such items as are required to be
delivered by them in accordance with and subject to the terms and conditions of
the Escrow Agreement, dated as of the date hereof, by and among the Company,
the Purchaser and the Escrow Agent, in the form of Exhibit E (the "Escrow
Agreement"), including the following: (A) the Company shall deliver (1) stock
certificates representing the Shares, registered in the name of the Purchaser,
(2) a Common Stock purchase warrant, in the form of Exhibit D, registered in
the name of the Purchaser, pursuant to which the Purchaser shall have the right
at any time and from time to time thereafter through the fifth anniversary of
the Closing Date to acquire 250,000 shares of Common Stock at an exercise price
per share (subject to adjustment as provided therein) of $5.8725(1) (the
"Warrant"), (3) the legal opinion of Hardy & Allen, outside counsel to the
Company, substantially in the form of Exhibit C, and (4) all other documents,
instruments and writings required to have been delivered at or prior to the
Closing Date by the Company pursuant to this Agreement, including an executed
Registration Rights Agreement, dated the date hereof, between the Company and
the Purchaser, in the form of Exhibit B (the "Registration Rights Agreement"),
and the Irrevocable Transfer Agent Instructions, in the form of Exhibit F,
delivered to and acknowledged by the Company's transfer agent (the "Transfer
Agent Instructions"); and (B) the Purchaser shall deliver (1) $10,000,000 in
United States dollars in immediately available funds by wire transfer to an
account designated in writing by the Company for such purpose, and (2) all
documents, instruments and writings required to have been delivered at or prior
to the Closing Date by the Purchaser pursuant to this Agreement, including,
without limitation, an executed Registration Rights Agreement.
1.2 Form of Preferred Stock. The Preferred Stock shall have the
rights preferences and privileges set forth in Exhibit A, and shall be
incorporated into a Certificate of Designation ("Certificate of Designation"),
in form and substance mutually agreed to by the parties.
For purposes of this Agreement, "Conversion Price," "Original Issue
Date," "Conversion Date" and "Trading Day" shall have the meanings set forth in
Exhibit A; "Business Day" shall mean any day except Saturday, Sunday and any
- ---------
(1) 120% of the average of the Per Share Market Values for the five (5) Trading
Days Immediately preceding the Original Issue Date.
<PAGE> 1
day which shall be a federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or
other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company . The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) Organization and Qualification. The Company is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
State of Florida, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in Schedule
2.1(a) (collectively the "Subsidiaries"). Each of the Subsidiaries is an
entity, duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the full power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Securities (as
defined below) or any of this Agreement, the Certificate of Designation, the
Registration Rights Agreement, the Warrant or the Escrow Agreement
(collectively, the "Transaction Documents"), (y) have or result in a material
adverse effect on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
or (z) adversely impair the Company's ability to perform fully on a timely
basis its obligations under any of the Transaction Documents (any of (x), (y)
or (z), a "Material Adverse Effect").
(b) Authorization; Enforcement . The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents, and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company. Each of the Transaction Documents has been duly executed by the
Company and, when delivered (or filed, as the case may be) in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms. Neither
the Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, by-laws or other charter documents.
(c) Capitalization . The number of authorized, issued and
outstanding capital stock of the Company is set forth in Schedule 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Shares and the Warrant, securities, rights or
obligations convertible into or exchangeable for, or giving any Person any
right to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock. To the knowledge of the Company, except as specifically disclosed in
the SEC Documents (as defined below) or Schedule 2.1(c), no Person or group of
related Persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) or has the right to acquire by agreement with or by obligation
binding upon the Company beneficial ownership of in excess of 5% of the Common
Stock. A "Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
(d) Issuance of the Shares and the Warrant . The Shares and the
<PAGE> 2
Warrant are duly authorized, and, when issued and paid for in accordance with
the terms hereof, shall have been validly issued, fully paid and nonassessable,
free and clear of all liens, encumbrances and rights of first refusal of any
kind (collectively, "Liens"). The Company has on the date hereof and will, at
all times while the Shares and the Warrant are outstanding, maintain an
adequate reserve of duly authorized shares of Common Stock, reserved for
issuance to the holders of the Shares, to enable it to perform its conversion,
exercise and other obligations under this Agreement, the Certificate of
Designation and the Warrant. Such number of reserved and available shares of
Common Stock is not less than the sum of (i) 175% of the number of shares of
Common Stock which would be issuable upon conversion in full of the Shares,
assuming such conversion occurred on the Original Issue Date or the Filing Date
(as defined in the Registration Rights Agreement), whichever yields a lower
Conversion Price, (ii) the number of shares of Common Stock issuable upon
exercise of the Warrant, and (iii) the number of shares Common Stock which
would be issuable upon payment of dividends on the Shares, assuming each Share
is outstanding for three years and all dividends are paid in shares of Common
Stock (such number of shares, the "Initial Minimum"). All such authorized
shares of Common Stock shall be duly reserved for issuance to the holders of
such Shares and Warrant. The shares of Common Stock issuable upon conversion
of the Shares, as payment of dividends thereon and upon exercise of the Warrant
are collectively referred to herein as the "Underlying Shares." The Shares,
the Warrant and the Underlying Shares are collectively, the "Securities." When
issued in accordance with the Certificate of Designation and the Warrant, in
accordance with their respective terms, the Underlying Shares shall have been
duly authorized, validly issued, fully paid and nonassessable, free and clear
of all Liens.
(e) No Conflicts . The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument
(evidencing a Company debt or otherwise) to which the Company or any Subsidiary
is a party or by which any property or asset of the Company or any Subsidiary
is bound or affected, or (iii) result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
court or governmental authority to which the Company is subject (including
Federal and state securities laws and regulations), or by which any property or
asset of the Company is bound or affected, except in the case of each of
clauses (ii) and (iii), as could not, individually or in the aggregate, have or
result in a Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
authority, except for violations which, individually or in the aggregate, could
not have or result in a Material Adverse Effect.
(f) Consents and Approvals . Neither the Company nor any Subsidiary
is required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other Federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filing of the Certificate of Designation with the
Secretary of State of Florida, (ii) the filings required pursuant to Section
3.12, (iii) the filing of the Underlying Securities Registration Statement with
the Securities and Exchange Commission (the "Commission") meeting the
requirements set forth in the Registration Rights Agreement and covering the
resale of the Underlying Shares by the Purchaser, (iv) the application(s) to
the Nasdaq SmallCap Market (the "NASDAQ") for the listing of the Underlying
Shares with the NASDAQ (and with any other national securities exchange or
market on which the Common Stock is then listed), (v) applicable Blue Sky
filings and, and (vi) in all other cases where the failure to obtain such
consent, waiver, authorization or order, or to give such notice or make such
filing or registration could not have or result in, individually or in the
aggregate, a Material Adverse Effect (the consents, waivers, authorizations,
orders, notices and filings referred to in (i)-(vi) of this Section are,
collectively, the "Required Approvals").
(g) Litigation; Proceedings . Except as specifically disclosed in
Schedule 2.1(g) and in the SEC Documents, there is no action, suit, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries
or any of their respective properties before or by any court, governmental or
<PAGE> 3
administrative agency or regulatory authority (Federal, state, county, local or
foreign) which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, individually or in the aggregate, have or result in a Material Adverse
Effect.
(h) No Default or Violation . Neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has
occurred which has not been waived which, with notice or lapse of time or both,
would result in a default by the Company or any Subsidiary under), nor has the
Company or any Subsidiary received notice of a claim that it is in default
under or that it is in violation of, any indenture, loan or credit agreement or
any other agreement or instrument to which it is a party or by which it or any
of its properties is bound, (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is in violation of any statute, rule
or regulation of any governmental authority, except as could not individually
or in the aggregate, have or result in a Material Adverse Effect.
(i) Private Offering . Assuming the accuracy of the representations
and warranties of the Purchaser set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchaser as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on
its behalf has taken any action could subject the offering, issuance or sale of
the Securities to the registration requirements of the Securities Act.
(j) SEC Documents; Financial Statements . The Company has filed all
reports required to be filed by it under the Exchange Act, including pursuant
to Section 13(a) or 15(d) thereof, for the three years preceding the date
hereof (or such shorter period as the Company was required by law to file such
material) (the foregoing materials being collectively referred to herein as the
"SEC Documents" and, together with the Schedules to this Agreement the
"Disclosure Materials") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Documents prior to the
expiration of any such extension. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. All material agreements to which the Company is a party or to
which the property or assets of the Company are subject have been filed as
exhibits to the SEC Documents as required. The financial statements of the
Company included in the SEC Documents comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting ("GAAP") principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. Since December 31, 1997, except as specifically
disclosed in Schedule 2.1(j) and in the SEC Documents, (a) there has been no
event, occurrence or development that has had or that could have or result in a
Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) liabilities not
required to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (c) the
Company has not altered its method of accounting or the identity of its
auditors and (d) the Company has not declared or made any payment or
distribution of cash or other property to its stockholders or officers or
directors (other than in compliance with existing Company stock option plans)
with respect to its capital stock, or purchased, redeemed (or made any
agreements to purchase or redeem) any shares of its capital stock. The Company
last filed audited financial statements with the Commission on [April 15,
1998], and has not received any comments from the Commission in respect
thereof.
(k) Investment Company . The Company is not, and is not an
Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees . Except for certain fees payable by the Company
<PAGE> 4
to Wharton Capital Partners, Ltd. and Alpine Capital Partners, Inc., no fees or
commissions will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, or bank with respect to
the transactions contemplated by this Agreement. The Purchaser shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by this Agreement.
The Company shall indemnify and hold harmless the Purchaser, its employees,
officers, directors, agents, and partners, and their respective Affiliates,
from and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any such
claimed or existing fees, as such fees and expenses are incurred.
(m) Solicitation Materials . Neither the Company nor any Person
acting on the Company's behalf has (i) distributed any offering materials in
connection with the offering and sale of the Securities, or (ii) solicited any
offer to buy or sell the Securities by means of any form of general
solicitation or advertising.
(n) Form S-3 Eligibility . The Company is eligible to register
securities for resale with the Commission under Form S-3 promulgated under the
Securities Act.
(o) Exclusivity . The Company shall not issue and sell the Shares
to any Person other than the Purchaser other than with the specific prior
written consent of the Purchaser.
(p) Seniority . No class of equity securities of the Company is
senior to the Shares in right of payment, whether upon liquidation or
dissolution, or otherwise.
(q) Listing and Maintenance Requirements Compliance . The Company
has not, in the two years preceding the date hereof, received notice (written
or oral) from the NASDAQ or any other stock exchange, market or trading
facility on which the Common Stock is or has been listed (or on which it has
been quoted) to the effect that the Company is not in compliance with the
listing or maintenance requirements of such exchange or market. The Company is
in compliance with all such maintenance requirements.
(r) Patents and Trademarks . The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights (collectively, the
"Intellectual Property Rights") which are necessary or material for use in
connection with its business, and which the failure to so have would have a
Material Adverse Effect. To the best knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.
(s) Registration Rights; Rights of Participation. Except as set
forth on Schedule 6(b) to the Registration Rights Agreement, (i) the Company
has not granted or agreed to grant to any Person any rights (including "piggy-
back" registration rights) to have any securities of the Company registered
with the Commission or any other governmental authority which has not been
satisfied and (ii) no Person, has any right of first refusal, preemptive right,
right of participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) Regulatory Permits . The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits could not, individually or in the aggregate, have or
result in a Material Adverse Effect ("Material Permits"), and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any Material Permit.
(u) Title . Except as disclosed on Schedule 2.1(u), the Company and
the Subsidiaries have good and marketable title in fee simple to all real
property and personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all Liens,
except for liens, claims or encumbrances as do not materially affect the value
of such property and do not interfere with the use made and proposed to be made
of such property by the Company and its Subsidiaries. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as are
not material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its Subsidiaries.
<PAGE> 5
(v) Disclosure. The Company confirms that it has not provided the
Purchaser or its agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company. All disclosure provided
to the Purchaser regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by
or on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 Representations and Warranties of the Purchaser . The Purchaser
hereby represents and warrants to the Company as follows:
(a) Organization; Authority . The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder.
The purchase by the Purchaser of the Securities hereunder has been duly
authorized by all necessary action on the part of the Purchaser. Each of this
Agreement, the Registration Rights Agreement and the Escrow Agreement has been
duly executed and delivered by the Purchaser and constitutes the valid and
legally binding obligation of the Purchaser, enforceable against it in
accordance with its terms.
(b) Investment Intent . The Purchaser is acquiring the Securities
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to the Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all
times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act and in
compliance with applicable state securities laws or under an exemption from
such registration.
(c) Purchaser Status . At the time the Purchaser was offered the
Shares and the Warrant, it was, and at the date hereof it is, and at each
exercise date under the Warrant, it will be, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) Experience of the Purchaser . The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has
so evaluated the merits and risks of such investment.
(e) Ability of the Purchaser to Bear Risk of Investment . The
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) Access to Information . The Purchaser acknowledges receipt of
the Disclosure Materials and further acknowledges that it has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management
and prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses
or can acquire without unreasonable effort or expense that is necessary to make
an informed investment decision with respect to the investment and to verify
the accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser's right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company's representations and
warranties contained in the Transaction Documents.
(g) General Solicitation. The Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice
or other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar.
<PAGE> 6
(h) Reliance . The Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truth-
fulness of, the foregoing representations and the Purchaser hereby consents to
such reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act. In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Notwithstanding the foregoing, the Company hereby consents to
and agrees to register on the books of the Company and with any transfer agent
for the securities of the Company any transfer of Securities by the Purchaser
to an Affiliate of the Purchaser or to funds under common management with the
Purchaser, and any transfer among any such Affiliates or funds, provided that
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes. Any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
a Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor
any other legend if the conversion of Shares, the payment of dividends thereon,
and exercise of the Warrant or other issuances of Underlying Shares as
contemplated hereby, by the Certificate of Designation or the Warrant occurs at
any time while an Underlying Securities Registration Statement is effective
under the Securities Act or, in the event there is not an effective Underlying
Securities Registration Statement at such time, if in the opinion of counsel to
the Company such legend is not required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
the staff of the Commission). The Company shall cause its counsel to issue the
legal opinion included in the Transfer Agent Instructions to the Company's
transfer agent on the day that the Underlying Securities Registration Statement
is declared effective by the Commission. The Company agrees that it will
provide the Purchaser, upon request, with a certificate or certificates
representing Underlying Shares, free from such legend at such time as such
legend is no longer required hereunder. The Company may not make any notation
on its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in this Section.
3.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Shares and payment
of dividends thereon in accordance with the terms of the Certificate of
Designation, and (ii) exercise of the Warrant in accordance with its terms, may
result in dilution of the outstanding shares of Common Stock, which dilution
may be substantial under certain market conditions. The Company further
acknowledges that its obligation to issue Underlying Shares upon (x) conversion
of the Shares and payment of dividends thereon in accordance with the terms of
<PAGE> 7
the Certificate of Designation, and (y) exercise of the Warrant in accordance
with its terms, is unconditional and absolute, subject to the limitations set
forth herein in the Certificate of Designation or pursuant to the Warrant,
regardless of the effect of any such dilution.
3.3 Furnishing of Information . As long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as the Purchaser owns Securities,
if the Company is not required to file reports pursuant to such sections, it
will prepare and furnish to the Purchaser and make publicly available in
accordance with Rule 144(c) promulgated under the Securities Act annual and
quarterly financial statements, together with a discussion and analysis of such
financial statements in form and substance substantially similar to those that
would otherwise be required to be included in reports required by Section 13(a)
or 15(d) of the Exchange Act, as well as any other information required
thereby, in the time period that such filings would have been required to have
been made under the Exchange Act. The Company further covenants that it will
take such further action as any holder of Securities may reasonably request,
all to the extent required from time to time to enable such Person to sell
Underlying Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including the legal opinion referenced above in this Section.
Upon the request of any such Person, the Company shall deliver to such Person a
written certification of a duly authorized officer as to whether it has
complied with such requirements.
3.4 Blue Sky Laws . In accordance with the Registration Rights
Agreement, the Company shall qualify or exempt the issuance and sale of the
Underlying Shares under the securities or Blue Sky laws of such jurisdictions
as the Purchaser may reasonably request and shall continue such qualification
or exemption at all times until the Purchaser notifies the Company in writing
that it no longer owns Securities; provided, however, that neither the Company
nor its Subsidiaries shall be required in connection therewith to qualify as a
foreign corporation where they are not now so qualified or to take any action
that would subject the Company to taxation or general service of process in any
such jurisdiction where it is not then subject.
3.5 Integration . The Company shall not, and shall use its best efforts
to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchaser.
3.6 Increase in Authorized Shares. At such times as the Company would
be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) issuing 175% of the number of
Underlying Shares as would then be issuable upon a conversion in full of the
Shares and as payment of any accrued and unpaid dividends in respect thereof in
shares of Common Stock, or (b) honoring the exercise in full of the Warrant, in
either case, due to the unavailability of a sufficient number of shares of
authorized but unissued or reserved Common Stock, the Board of Directors of the
Company shall promptly (and in any case, within 30 Business Days from such
date) prepare and mail to the stockholders of the Company proxy materials
requesting authorization to amend the Company's Certificate of Incorporation to
increase the number of shares of Common Stock which the Company is authorized
to issue to at least such number of shares as reasonably requested by the
Purchaser in order to provide for such number of authorized and unissued shares
of Common Stock to enable the Company to comply with its conversion exercise
and reservation of shares obligations as set forth in this Agreement, the
Certificate of Designation and the Warrant (the sum of (x) the number of shares
of Common Stock then authorized, (y) the number of shares of Common Stock then
outstanding plus all shares of Common Stock issuable upon exercise of all
outstanding options, warrants and convertible instruments, and (z) the sum of
(i) 175% of the number of Underlying Shares as are then issuable upon a
conversion in full of all Shares and as payment of dividends thereon, and (ii)
the number of Underlying Shares as are issuable upon exercise in full of the
Warrant, shall be a reasonable number). In connection therewith, the Board of
Directors shall (a) adopt proper resolutions authorizing such increase, (b)
recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder approval to carry out such resolutions (and hold a special meeting
of the stockholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (c) within five (5) Business Days of
obtaining such stockholder authorization, file an appropriate amendment to the
Company's Certificate of Incorporation to evidence such increase.
<PAGE> 8
3.7 Listing and Reservation of Underlying Shares. (a)The Company shall
(i) not later than the fifth Business Day following the Closing Date prepare
and file with the NASDAQ (or such other national securities exchange or market
or trading or quotation facility on which the Common Stock is then listed) an
additional shares listing application covering a number of shares of Common
Stock which is at least equal to the number of shares required to be reserved
pursuant to Section 2.1(d), (ii) take all steps necessary to cause such shares
to be approved for listing in the NASDAQ (as well as on any such other national
securities exchange or market or trading or quotation facility on which the
Common Stock is then listed) as soon as possible thereafter, and (iii) provide
to the Purchaser evidence of such listing, and the Company shall maintain the
listing of its Common Stock thereon. If the number of Underlying Shares as are
issuable upon conversion in full of the then outstanding Shares, as payment of
dividends thereon, and upon exercise of the then unexercised portion of the
Warrant exceeds 85% of the number of Underlying Shares previously listed on
account thereof with NASDAQ (and such other required exchanges), the Company
shall take the necessary actions to immediately list a number of Underlying
Shares as equals the sum of (x) 175% of the number of Underlying Shares then
issuable upon conversion of the Shares and as payment of dividends thereon and
(y) the number of Underlying Shares as are then issuable upon exercise of the
Warrant.
(b) The Company shall maintain a reserve of Common Stock for
issuance upon conversion of the Shares and for payment of dividends thereupon
in shares of Common Stock pursuant to the terms of the Certificate of
Designation and upon exercise of the Warrant in accordance with its terms, in
such amount as may be required to fulfill obligations in full under the
Transaction Documents, which reserve shall include a number of shares of Common
Stock equal to no less than the Initial Minimum.
3.8 Conversion Procedures. The Transfer Agent Instructions, Conversion
Notice (as defined in Exhibit A) and Notice of Exercise under the Warrant set
forth the totality of the procedures with respect to the conversion of the
Shares and exercise of the Warrant, including the form of legal opinion, if
necessary, that shall be rendered to the Company's transfer agent and such
other information and instructions as may be reasonably necessary to enable the
Purchaser to convert its Shares and exercise the Warrant as contemplated in the
Certificate of Designation and the Warrant (as applicable).
3.9 Notice of Breaches. (a)Each of the Company and the Purchaser shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
(b) Notwithstanding the generality of Section 3.9(a), the Company shall
promptly notify the Purchaser of any notice or claim (written or oral) that it
receives from any lender of the Company to the effect that the consummation of
the transactions contemplated by the Transaction Documents violates or would
violate any written agreement or understanding between such lender and the
Company, and the Company shall promptly furnish by facsimile to the holders of
the Securities a copy of any written statement in support of or relating to
such claim or notice.
3.10 Conversion and Exercise Obligations of the Company . The Company
shall honor conversions of the Shares and exercises of the Warrant and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the respective Certificate of Designation and the
Warrant.
3.11 Right of First Refusal; Subsequent Registrations. (a)The Company
shall not, directly or indirectly, without the prior written consent of the
Purchaser, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or a transaction intended to be exempt or not subject to
registration under the Securities Act (a "Subsequent Placement") for a period
of 180 days after the Closing Date, except (i) the granting of options or
warrants to employees, officers and directors, and the issuance of shares upon
exercise of options granted, under any stock option plan heretofore or
hereinafter duly adopted by the Company, (ii) shares of Common Stock issued
upon exercise of any currently outstanding warrants and upon conversion of any
<PAGE> 9
currently outstanding convertible securities of the Company, in each case
disclosed in Schedule 2.1(c), and (iii) shares of Common Stock issued upon
conversion of Preferred Stock and as payment of dividends thereon and upon
exercise of the Warrant in accordance with the Certificate of Designation or
the Warrant, respectively, unless (A) the Company delivers to the Purchaser a
written notice (the "Subsequent Placement Notice") of its intention effect such
Subsequent Placement, which Subsequent Placement Notice shall describe in
reasonable detail the proposed terms of such Subsequent Placement, the amount
of proceeds intended to be raised thereunder, the Person with whom such
Subsequent Placement shall be effected, and attached to which shall be a term
sheet or similar document relating thereto and (B) the Purchaser shall not have
notified the Company by 5:00 p.m. (New York City time) on the tenth (10th)
Trading Day after its receipt of the Subsequent Placement Notice of its
willingness to cause the Purchaser to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation, financing
to the Company on substantially the terms set forth in the Subsequent Placement
Notice. If the Purchaser shall fail to notify the Company of its intention to
enter into such negotiations within such time period, the Company may effect
the Subsequent Placement substantially upon the terms and to the Persons (or
Affiliates of such Persons) set forth in the Subsequent Placement Notice;
provided, that the Company shall provide the Purchaser with a second
Subsequent Placement Notice, and the Purchaser shall again have the right of
first refusal set forth above in this paragraph (a), if the Subsequent
Placement subject to the initial Subsequent Placement Notice shall not have
been consummated for any reason on the terms set forth in such Subsequent
Placement Notice within thirty (30) Trading Days after the date of the
initial Subsequent Placement Notice with the Person (or an Affiliate of
such Person) identified in the Subsequent Placement Notice.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to
be registered, and securities of the Company permitted pursuant to Schedule
6(b) of the Registrations Rights Agreement to be registered in the Underlying
Securities Registration in accordance with the Registration Rights Agreement,
and (z) Common Stock to be registered for resale in connection with financings
permitted pursuant to paragraph (a)(i) and (iii) of Section 3.11(a), the
Company shall not, without the prior written consent of the Purchaser (i) issue
or sell any of its or any of its Affiliates' equity or equity-equivalent
securities pursuant to Regulation S promulgated under the Securities Act, or
(ii) register for resale any securities of the Company for a period of not less
than 90 Trading Days after the date that the Underlying Securities Registration
Statement is declared effective by the Commission. Any days that a Purchaser
is unable to sell Underlying Securities under the Underlying Securities
Registration Statement shall be added to such 90 Trading Day period for the
purposes of (i) and (ii) above.
3.12 Certain Securities Laws Disclosures; Publicity. The Company shall:
(i) issue a press release acceptable to the Purchaser disclosing the
transactions contemplated hereby on the Closing Date, (ii) file with the
Commission a Report on Form 8-K disclosing the transactions contemplated hereby
within ten (10) Business Days after the Closing Date, and (iii) timely file
with the Commission a Form D promulgated under the Securities Act as required
under Regulation D promulgated under the Securities Act and provide a copy
thereof to the Purchaser promptly after the filing thereof. The Company shall,
no less than two (2) Business Days prior to the filing of any disclosure
required by clauses (ii) and (iii) above, provide a copy thereof to Encore
Capital Management, L.L.C. ("Encore"). No such filing or disclosure may be
made that mentions the Purchaser or Encore by name without the prior consent of
Encore.
3.13 Use of Proceeds . The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of Company debt or to redeem any Company equity or
equity-equivalent securities. Notwithstanding the foregoing, the Company may
utilize up to $4 million of the net proceeds from the sale of the Securities
here under to retire indebtedness owed to Winter Harbor, LLC and to satisfy its
existing arbitration settlement with MCI Communications, Inc. Pending
application of the proceeds of this placement in the manner permitted hereby,
the Company will invest such proceeds in interest bearing accounts and/or
short-term, investment grade interest bearing securities.
3.14 Transfer of Intellectual Property Rights . Except in connection with
the sale of all or substantially all of the assets of the Company, the Company
shall not transfer, sell or otherwise dispose of any Intellectual Property
Rights, or allow any of the Intellectual Property Rights to become subject to
any Liens, or fail to renew such Intellectual Property Rights (if renewable and
it would otherwise lapse if not renewed), without the prior written consent of
<PAGE> 10
the Purchaser.
3.15 Reimbursement . If the Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse the Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which the Purchaser is a named party, the Company
will pay the Purchaser the charges, as reasonably determined by the Purchaser,
for the time of any officers or employees of the Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchaser who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchaser and any such Affiliate and any
such Person. The Company also agrees that neither the Purchaser nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any person asserting claims on behalf of
or in right of the Company in connection with or as a result of the
consummation of the Transaction Documents except to the extent that any losses,
claims, damages, liabilities or expenses incurred by the Company result from
the gross negligence or willful misconduct of the Purchaser or entity in
connection with the transactions contemplated by this Agreement.
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses . At the Closing the Company shall (i) pay
$20,000 to the Escrow Agent in connection with the preparation and negotiation
of the Transaction Documents, and (ii) pay to $10,000 to Encore for its due
diligence expenses and disbursements in connection with the transactions
contemplated hereby. Other than the amounts contemplated in the immediately
preceding sentence, and except as otherwise set forth in the Registration
Rights Agreement, each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.2 Entire Agreement; Amendments . This Agreement, together with
the Exhibits and Schedules hereto, the Registration Rights Agreement, the
Certificate of Designation, the Transfer Agent Instructions, the Warrant and
the Escrow Agreement contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.
4.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 8:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the Business Day following the date of mailing,
if sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: I-Link Incorporated
13751 S. Wadsworth Park Drive, Suite 200
Draper, Utah 84020
Facsimile No.: (810) 576-5025
Attn: Chief Financial Officer
<PAGE> 11
With copies to: Hardy & Allen
60 East South Temple
Suite 2200
Salt Lake City, Utah 84111
Facsimile No.: (801) 364-6664
Attn: David Hardy
If to the
Purchaser: JNC Opportunity Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Managing Member
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers . No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser; or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver
of any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchaser.
Except as set forth in Section 3.1(a), the Purchaser may not assign this
Agreement or any of the rights or obligations hereunder (other than to an
Affiliate of the Purchaser) without the consent of the Company, except that the
Purchaser may assign its rights hereunder and under the Transaction Documents
without the consent of the Company as long as such assignee demonstrates to the
reasonable satisfaction of the Company its satisfaction of the representations
and warranties set forth in Section 2.2. This provision shall not limit the
Purchaser's right to transfer securities or transfer or assign rights hereunder
or under the Registration Rights Agreement.
4.7 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective successors and permitted
assigns and, other with respect to Encore who is an intended beneficiary of,
and entitled to enforce, Sections 3.12, 4.1 and 4.11, is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
4.8 Governing Law . This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court, that such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
<PAGE> 12
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address in effect for notices to it under this Agreement and
agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law.
4.9 Survival . The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Shares and the Warrant.
4.10 Execution . This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature page were an original thereof.
4.11 Publicity. The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory
agency or stock market or trading facility with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement, filings or other communications
without the prior written consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement, filing or other communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of the Purchaser or Encore, or
include the name of the Purchaser or Encore in any filing with the Commission,
or any regulatory agency, trading facility or stock market without the prior
written consent of Encore, except to the extent such disclosure (but not any
disclosure as to the controlling Persons thereof) is required by law, in which
case the Company shall provide the Purchaser and Encore with prior notice of
such disclosure.
4.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement
shall not in any way be affecting or impaired thereby and the parties will
attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
4.13 Remedies . In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, the
Purchaser will be entitled to specific performance of the obligations of the
Company under the Transaction Documents. Each of the Company and the Purchaser
agree that monetary damages may not be adequate compensation for any loss
incurred by reason of any breach of its obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Preferred Stock Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
I-LINK INCORPORATED
By:_____________________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By:_____________________________________
Name:
Title:
<PAGE> 12
EXHIBIT 21
SUBSIDIARIES OF I-LINK INCORPORATED
Percentage Jurisdiction of
Name Ownership Organization
I-Link Systems, Inc. 100% Utah
(formerly I-Link Worldwide, Inc.)
I-Link Communications, Inc. 100% Utah
(formerly Family Telecommunications
Incorporated)
I-Link Worldwide, LLC 100% Delaware
MiBridge, Inc. 100% Utah
(formerly I-Link Mergerco, Inc.,
the surviving entity in merger with
MiBridge, Inc., a New Jersey corporation)
ViaNet Technologies, Ltd. 100% Israel
Medcross Imaging Ltd. 81.75% Florida
Waters Edge Scanning Associates, Inc. 100% Florida
Medcross Asia, Ltd. 100% People's Republic of
China (Hong Kong)
Shenyang Medcross Huamei Medical
Equipment Company, Ltd. 51% People's Republic of
China
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in the registration statement on Form S-1 of our
report dated April 9, 1998, on our audits of the financial statements of I-Link
Incorporated and Subsidiaries. We also consent to the reference to our firm
under the caption "EXPERTS."
PRICEWATERHOUSECOOPERS LLP
Salt Lake City, Utah
September 3, 1998
<PAGE>
