SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A#1
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-17973
___________________________
I-LINK INCORPORATED
(Name of registrant as specified in its charter)
Florida 52-2291344
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801/576-5000)
(Address and telephone number of principal executive offices)
___________________________
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.007 par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such period that the Registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates based upon
the closing bid price on April 12, 1999, as reported by The Nasdaq Stock
Market, was approximately $47,800,000.
As of April 12, 1999, there were 19,535,172 shares of Common Stock, $.007 par
value, outstanding.
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Item 1. Description of Business.
Overview
I-Link Incorporated (the "Company") provides basic and enhanced
telecommunications services to its customers and subscribers nationwide
utilizing IP (Internet Protocol) -enabled technology developed by the Company
that permits the delivery of these services in a manner that dramatically
lowers cost and increases utility, while fully maintaining the high
sound/transmission quality and reliability of calls placed over traditional
telecommunications networks. The technology model that permits the Company to
provide its services at lower cost and with increased utility is similar to
the Internet and its capability to provide users virtually unlimited access
to the Internet at costs that are a fraction of standard long distance rates;
however, I-Link's technology and network infrastructure provide distinct
enhancements and advantages to carrying communications traffic over the
Internet. The Company is also engaged in the research and development of
advanced telecommunications products and equipment, such as its line capacity
expansion device, now in the final testing stage, that allows a single
standard telephone line in a customer's home or office to simultaneously (1)
create the capacity of multiple lines that can carry on simultaneous calls
and other communications functions ("multiplexing"), (2) provide the inter-
office/home functionality of a PBX, and (3) maintain a persistent Internet
connection.
Through its wholly-owned subsidiaries I-Link Worldwide, LLC, I-Link
Communications, Inc., and I-Link Systems, Inc., the Company provides
telecommunications products and services to residential, business and
wholesale customers. Through its wholly-owned subsidiaries MiBridge, Inc.,
and ViaNet Technologies Ltd., the Company undertakes the research and
development of new telecommunications products and technologies, and the
licensing of certain of these products and technologies to other
telecommunications companies. I-Link Incorporated and its subsidiaries are
sometimes collectively referred to herein as the "Company" or "I-Link."
Unlike other providers of telecommunications services utilizing IP
technology, I-Link does not use the Internet to deliver its services. Rather,
I-Link's communications services and products are carried over a new
telecommunications network established by I-Link (the "I-Link Network"). The
I-Link Network is made up of multiple routing facilities or "Hubs"
strategically established in large metropolitan areas nationwide. As of
March 31, 1999 the Company has established seven Hubs in the following
locations: Phoenix, Salt Lake City, Chicago, Orlando, Dallas, Los Angeles
and Seattle. The hubs are comprised of sophisticated equipment and proprietary
software containing I-Link's IP technology ("Communication Engines[TM]") and
interconnected by leased telecommunications spans and lines (similar to the
Internet, but private - an "Intranet"), complemented by access to the existing
public switched telecommunications network where needed to complete the
delivery of I-Link's services to geographic areas outside of I-Link's Intranet.
From these Hubs, the I-Link Network spans out to other geographic areas via
additional dedicated spans and lines.
In 1997 the Company started providing telecommunications products and
services over the traditional public switched telephone network and began the
creation of the I-Link Network through the deployment of its IP technology.
Also in 1997, the Company launched it's direct-sales marketing company,
I-Link Worldwide, LLC, to market its products and services to the residential
and small business markets.
In August 1997 the Company acquired MiBridge, Inc. ("MiBridge"), a New
Jersey-based communications technology company 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
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Internet. Historically, MiBridge has concentrated its development efforts on
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
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, Nortel,
IDP and others. In late 1997 the Company formed ViaNet Technologies, Ltd.,
headquartered in Tel Aviv, Israel, to undertake advanced research and
development of a device expanding the capacity of a single telephone line to
multiple lines with persistent and contemporaneous connection capability
(preliminarily called "C4" and described in greater detail below).
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 over the I-Link
Network , which is comprised of traditional telecommunication facilities
integrated with I-Link's private Intranet. The Intranet portion of the I-Link
Network is comprised of leased and dedicated lines carrying
telecommunications transmissions converted into a data format (TCP/IP).
Network access points ("Gateways") comprised of sophisticated communications
equipment and proprietary software, which I-Link calls Communication
Engines[TM], are used to integrate the traditional segments of the I-Link
Network with the Intranet segments. The resulting network allows for
customers to send and receive communication via the I-Link Network at reduced
rates and with much greater capabilities. The Communication Engine, including
the software and firmware, represents I-Link's patent-pending technology.
Through the Communication Engines the I-Link Network receives traffic from
the public switched telephone network 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 handle 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). I-Link's Gateways are flexible such that the I-Link Network
can readily integrate with other carrier's protocols and infrastructure.
Accordingly, I-Link is also capable of leveraging the access infrastructure
of other carriers, resellers, and Internet service providers (ISP's) and
wholesaling its enhanced services to these providers and their customers
while avoiding the need to build additional access infrastructure.
Unlike the traditional telecommunication network, the I-Link Network
uses TCP/IP as its communication protocol. This is the same protocol used by
the Internet for computer-to-computer communication. I-Link utilizes TCP/IP
because of the potential for interoperability between diverse technologies.
This provides the potential for the I-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 I-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
that are presented to the user; it can easily integrate additional services
because the communication protocol offers interoperability between all types
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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.
I-Link's Products and Services
I-Link's basic enhanced services consist of the following:
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.
Voice Mail. Enables callers to leave recorded messages which can be
retrieved, saved, forwarded, etc.
Other Features. Other features are possible as I-Link continues to
integrate services that it designs and builds as well as those that 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 that are easier to learn and use.
Examples of current integration include news services, stock quotes,
directory services, and address books.
V-Link[TM] Service
V-Link[TM] is a powerful telecommunication service offered by the
Company to its customers that combines all of the basic and enhanced
products and services described above, plus additional innovative and useful
enhanced services. Subscribers access their V-Link service through an
assigned local and/or toll-free (800) number (that also can become the
single, convenient telephone number through which others call and fax the
subscriber) . Once inside the V-Link enhanced communications environment,
all of the subscriber's communications functions are handled over the I-Link
Network, with its associated benefits and capabilities - irrespective of
where the call is originated from. For example, long distance calls are
routed primarily through I-Link's IP Intranet, and secondarily through the
traditional public switched telephone network. In addition to long distance
calling capability, entering the V-Link communications environment allows a
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multitude of enhanced capabilities to the user without the need of any
special equipment by the user. Once the communications session is established
by logging-in to V-Link from any telephone, a subscriber has the ability to
perform any number of multiple operations within the session (multiple long
distance calls, call screening, voice mail, fax, conference calling, etc.)
While there exist other services in the market place that combine some of the
enhanced services offered by V-Link, what differentiates V-Link is the fact
that it is IP-enabled and IP-implemented. This gives V-Link two distinct
advantages - cost savings and flexible integration.
Cost Advantages. The cost advantages realized from the operation of V-
Link in an IP-enabled/implemented environment are two-fold: (a) lower
transmission costs, and (b) lower capital infrastructure costs. The
transmission cost benefit of carrying communications traffic on an IP network
has been described above. The benefit to capital infrastructure costs can be
seen by recognizing that a traditional enhanced service platform (a
"platform" is the equipment and software required to provide a particular
service to customers) - a conference calling platform for example - must be
purchased and installed by the communications provider to work alongside a
traditional telecommunications switch (a "switch" is a large, sophisticated
piece of telecommunications equipment through which calls are routed, and
that has a given capacity of calls that can simultaneously be handled). The
traditional switch, unable to process anything but low-level signals, must
pass an incoming call for conferencing (in our example) to a special
conference call switch for processing. These types of special switches are
highly expensive, costing providers several hundreds of thousands of dollars
each. Because the transmission within the V-Link service has been converted
to an IP signal, the given enhanced service (conference calling in our
example) occurs within a software-defined network handled through standard,
industrial-strength personal computers, rather than a hardware- or equipment-
defined network requiring special and redundant, costly telecommunications
switches for each enhanced service offered. Thus, I-Link is able to provide
the given service at one-tenth (or less) the cost of a traditional
communication services provider, because it is able to avoid the capital
expense of acquiring, installing and servicing an array of special switches.
Lower costs in both the cost of transmission and the capital infrastructure
to provide the services, results in lower costs to the customer.
Flexible integration. In addition to the conference calling service
discussed above, consider now a provider that offers many combined services.
In a traditional telecommunications network, each service - voice mail, fax
mail, conference calling, single number, etc. - must be processed through one
or more separate, non-integrated switches, with the customer being assigned
a separate number for each service: "call this number to send me a fax, . .
. call this number for my voice mail, . . . call this number for my
conference call," etc. Again, because the V-Link services are provided in
an IP environment and a software-defined network, all of these services can
be easily integrated through one switch and function utilizing one customer
number. V-Link's IP environment also provides for the easy integration of
additional new services as they are developed and introduced.
Line Capacity Expansion Device - "C4"
Through its wholly-owned subsidiary ViaNet Technologies, Ltd., the
Company has developed an innovative device that from a single standard
telephone line can simultaneously (a) create the capacity of multiple lines
that can carry on simultaneous calls and other communications functions
("multiplexing"), (2) provide the inter-office/home functionality of a PBX,
and (3) maintain a persistent Internet connection. In other words, through
a single standard telephone wire and line, the customer and his or her family
members or business associates can, from multiple phones, fax machines, and
computers within the customer's home or business premises, simultaneously
carry on multiple independent or conferenced telephone calls, receive or send
faxes as if on one or more dedicated fax lines, and maintain a persistent
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Internet connection, without any sacrifice of quality or functionality. This
device, preliminarily referred to by the Company as "C4", provides the
capacity of up to 24 lines using the existing telephone wires connected to
the customer's home or office. With the C4 device connected to a single
standard telephone line within the customer's home or business office, the
customer obtains the following benefits:
Multiplexing. Multiple independent telephone calls and fax send/receive
calls can be simultaneously carried on from multiple phones and fax machines
within the customer's home or business office, with no degradation of
quality.
Virtual PBX Functionality. The functionality of a PBX system, normally
obtainable only through the acquisition of a costly equipment and software
system, is achieved over the existing telephones within the customer's home
or office. These include inter-home/office call conferencing, call
forwarding, etc.
Persistent V-Link[TM] Connection. Through the C4 device, the customer
is always connected to the V-Link enhanced services environment and can fully
utilize all of the services provided by V-Link (and additional enhancements)
without the need to dial into the V-Link service.
Persistent Internet Connection. Through the C4 device, the customer is
able to maintain a persistent connection to the Internet, usually obtainable
only through the purchase by the customer and on-site installation of
specialized equipment (a router).
Because it obviates the need for the customer to purchase multiple
telephone lines, a PBX system, and routing equipment, the C4 device will
provide both substantial cost savings and increased functionality to the
customer. It is anticipated that a larger version of the C4 device will be
marketed to traditional telecommunications carriers to provide a low-cost and
more functional alternative to the costly and functionally-limited switches
now required within their infrastructure. The C4 device is currently in the
final testing stage, and the Company anticipates it will begin marketing the
C4 device during the second quarter of 1999.
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 I-Link Network and technology, and the V-Link
service make I-Link highly competitive in this marketplace. I-Link has
initially targeted residential and small-business customers through I-Link
Worldwide, L.L.C., a nationwide network marketing and sales program. As I-
Link expands its targeted customers to include larger business users, the
Company anticipates doing so through traditional sales representatives.
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
products and 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
landline networks traditionally used in long distance telecommunications are
generally based on time of day (day time, evening, night or weekend) and
distance, often resulting in substantial long distance charges. In contrast,
customer charges for telecommunications services on IP communication networks
(such as the Internet and the I-Link Network) are generally fixed regardless
of time of day or distance. While the Company's rate for long distance calls
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not originating or terminating on the I-Link Network is 8.9 cents per minute,
the customer can obtain significant cost savings if the long distance call
originates and terminates on the I-Link Network where the call rate is 4.9
cents per minute regardless of the time of day or distance.
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 opportunities for information distribution and access. The
current business infrastructure presents impediments to the integrated use of
these technologies and 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. The I-Link Network and
technology leverages TCP/IP to integrate these technologies and networks and
deliver these services to its users in an easy to use manner.
Opportunity to Deliver Enhanced Capabilities. TCP/IP networks such as
the Internet ("IP Networks") offer substantially reduced cost and improved
voice and data communication capabilities. However, as highlighted above,
telephones and fax machines are not TCP/IP-enabled. In the past, in order to
utilize an IP Network, such as the Internet, users had to own or have access
to a computer and then obtain access to the IP Network through an Internet
Service Provider. Therefore, IP Networks have not easily or effectively
accommodated telecommunications traffic. In contrast, the I-Link Network and
technology permit full utilization of the benefits of an IP Network for
traditional telecommunications applications such as telephone, fax, etc. with
no loss of quality, and increased capability of additional enhanced services
- - while maintaining the cost benefits of an IP Network.
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 an IP 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 an IP 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 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 dependent upon.
The Residential Market
I-Link, through its subsidiary, I-Link Worldwide, L.L.C., has targeted
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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
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 comprised of
large businesses with numerous subsidiaries/affiliates. I-Link's current
primary target business market is comprised of SOHO customers. As I-Link
grows and matures as a company it will pursue channels which target the other
business market segments.
I-Link has initially targeted the SOHO business market because small and
medium-sized businesses often have a difficult time obtaining and 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 products and
services are of significant strategic advantage to small and medium-sized
businesses because they can be adopted and implemented without retraining or
the acquisition of new and different equipment. Large businesses and high-
end national accounts have significant long distance telephone and fax
traffic. These businesses could also realize substantial savings from
I-Link's product and services.
Distribution Plan
I-Link currently uses or intends to utilize the following distribution
methods: (i) Network Marketing sales program; (ii) direct sales using
independent sales agents; (iii) selling through an 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. Although the
Company intends to use these other distribution methods, as of December 31,
1998 the Company principally uses only the Network Marketing Sales Program as
discussed in more detail below.
Network marketing sales program overview. I-Link, through its affiliate
I-Link Worldwide, L.L.C., 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 products and 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
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customers. I-Link formally launched its Network Marketing sales operation and
began marketing in this channel in June 1997. Individuals are recruited by a
word of mouth process and may become an independent sales representative
"IR") upon entering into a standard written independent sales representative
agreement with the Company and paying a fee of either $50 or $295 based on
options selected for promotional and presentation materials. The initial term
of the agreement is for twelve months. At the end of the twelve months the IR
must submit a standard renewal form and pay the appropriate renewal fee
(currently $35). The Company may refuse to accept an IR's renewal application
in which case the IR's relationship with the Company terminates. The Company
relies on its IRs to sponsor new IRs. While the Company provides, at cost,
subscription forms, brochures, and other sales materials, IRs are primarily
responsible for educating new IRs with respect to products, the compensation
plan, and how to build a successful independent business.
IR commission plan. IRs receive commissions based upon sales of I-Link
products and services to customers who become I-Link subscribers. Commissions
range from 2% to 46% based upon the product sold or services utilized and the
IR's seniority within the Network Marketing plan. IRs are not contractually
obligated to purchase products or services, sign-up new customers or sponsor
new IRs, although by doing so, they can increase their seniority within the
Network Marketing plan. An additional commission from $210 to $370 can be
earned by the IR based upon the IR's initial signing up of another IR and
that new IR signing up users of I-Link products or services. IR's personally
solicit potential individual and business customers via one to one sales
presentations wherein customers sign order forms for I-Link telecommunication
products and services.
Revenue growth through network marketing. The majority of the Company's
revenue depends directly upon the efforts of IRs. Growth in revenue for both
marketing services and telecommunications services requires an increase in the
productivity of IRs and/or growth in the total number of IRs. There can be no
assurance that the productivity or number of IRs will be sustained at current
levels or increased in the future. The Company had approximately 12,700 and
12,600 IRs as of December 31, 1998 and 1997, respectively.
IR support. The Company is committed to providing high-level support
services to IRs. Through its call center, national and regional conferences,
personal contact with IRs, IR focus groups, newsletters and fax messaging the
Company seeks to understand and satisfy the needs of each IR. As many IRs
have limited number of hours each week to concentrate on their Network
Marketing business, management believes that effective support of each IR has
been and will continue to be important to the success of the Company.
Rules affecting IRs. The Company's standard IR agreement, policies and
procedures, and compensation plan contained in promotional and presentation
materials provided to every IR outline the scope of permissible IR marketing
activities. The Company's IR rules and guidelines are designed to provide IRs
with flexibility and opportunity within governmental regulations regarding
network marketing and prudent business policies and procedures. IRs are thus
prohibited from representing themselves as agents or employees of the Company.
IRs are obligated to present the Company's products, services and business
opportunity ethically and professionally. IRs agree that the presentation of
the Company's business opportunity must be consistent with, and limited to,
the product and service claims and representations made in literature
distributed by the Company. IRs are prohibited from making earnings claims.
IRs must obtain Company approval before using any form of media advertising
to promote products and services. Literature used to promote Company products
and services must be produced or approved by the Company. Generic business
opportunity advertisements (without using the Company name) may be placed in
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accordance with certain guidelines in some states. IRs may not use the
Company's trademarks or other intellectual property without the Company's
consent and approval. The Company systematically reviews alleged reports of
IR misbehavior. If the Company determines that an IR has violated any of
the IR policies or procedures, it may either terminate the IR's rights
completely or impose sanctions such as warnings, probation, suspension, and
fines or penalties until specified conditions are satisfied, or other
appropriate injunctive relief. IR terminations based on violations of the
Company's policies and procedures have aggregated less than 1.0% of the
Company's IR force since inception. An IR may voluntarily terminate his/her
distributorship at any time.
Technology Licensing
I-Link currently licenses certain pieces of MiBridge technology to other
telecommunication companies such as Lucent, Nortel and others. These licensees
license enabling technology, which augment their existing or future offerings.
These licensees pay I-Link an up-front development fee and a recurring royalty.
The Company may license its V-Link product to other telecommunication companies
in a similar manner.
Competition
The market for business communications services is extremely
competitive. I-Link believes that its ability to compete in this market
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 Network 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 IP 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
offers using the I-Link Network, 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, Level3 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, have announced plans to develop future products and services that
may 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 shares
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
intent "to preserve the vibrant and competitive free market that presently
9
<PAGE>
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, a decision it
reaffirmed in April of 1998 in a report to Congress.
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 and Internet Protocol ("IP") telephony.
ACTA argued that providers of software that enables 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. In
this report, the FCC reiterated its conclusions that information services,
and Internet access services, in particular, are not subject to
telecommunications service regulation or universal service contribution
requirements. The FCC did, however, indicate its belief that certain
gateway-based IP telephony services may be the functional equivalent to a
telecommunications service. The FCC deferred a definitive resolution of this
issue until it could examine a specific case of phone-to-phone IP telephony.
U.S. Senators from several states with large rural areas have expressed
concern that migration of voice services to the Internet could erode the
10
<PAGE>
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.
On April 5, 1999, US West filed a "Petition for Expedited Declaratory
Ruling" with the FCC in which US West seeks to have interexchange carriers
("IXCs") that provide phone-to-phone IP telephony declared telecommunications
service providers whose services are subject to access charges. The Petition
claims principally that because there is no net protocol conversion in the
message as sent and received and IXCs hold themselves out to provide voice
telephony, IP telephony does not qualify as an enhanced service under FCC
rules. The Commission is expected to issue a Public Notice to receive comments
from interested persons prior to issuing a ruling. We cannot predict with
certainty what the Commission will rule or when. If US West is successful in
this petition, the FCC could rule that IP telephony service providers are
obligated to pay interstate access charges to local telephone companies for
originated and terminating interstate calls.
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 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. On February 25, 1999, the
FCC issued an order holding that dial-up telephone traffic directed to the
Internet should be treated as interstate in nature for purposes of
determining regulatory jurisdiction. This order is subject to several
appeals now pending in the United States Court of Appeals for the District of
Columbia Circuit. If upheld, the FCC could substantially reduce the ability
of the states to regulate I-Link's Internet based services.
Delivery of Services over Existing Switched Telecommunications Networks
A portion of I-Link's communications services are delivered over
existing switched telecommunications networks through I-Link Communications,
Inc. ("ILC"). ILC is a long distance telecommunications carrier that provides
long distance service to all states of the United States except Alaska.
11
<PAGE>
Access to the switched telephone network is a necessary component of the
I-Link Network 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 CE Hubs. In addition, the access to the switched telephone
network at favorable pricing permits I-Link to expand its customer bases in
given geographic areas across the switched telephone network until such time
as the size of the customer base in the area can support the transfer of the
customers from the switched telephone network to the I-Link Network. The
agreement with the Company's underlying carrier (Sprint) has minimum monthly
purchase commitments of $550,000 through May 2000.
ILC was incorporated in 1996, and currently maintains traditional switch
facilities in Dallas, Los Angeles, Phoenix, and Salt Lake City.
Item 2. Description of Property.
The Company leases approximately 15,100 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 $12,600 per month. I-Link has
delivered $162,000 in certificates of deposit to the landlord as a security
deposit under the lease. In February 1999, the Company leased an additional
19,000 square feet of office space in Draper, UT. The lease term is four
years and nine months, subject to a five-year extension. The initial base
rent is approximately $18,600 per month. As security to the lease, the
Company was required to make a $53,000 deposit with the lessor. 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 3,662 square feet of office space in Eatontown, New
Jersey under a five-year lease effective December 1, 1997 at a cost of $5,187
per month. The lease may be cancelled at the end of the third year under
certain conditions. ViaNet Technologies leases approximately 1,400 square
feet of office space in Tel Aviv, Israel at a cost of $2,200 per month. The
lease term is for two years beginning in February 1998 with two one-year
extensions.
Item 3. Legal Proceedings.
The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business, none of which is expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1998, to a vote of the Company's security holders.
12
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price Range of Common Stock
The Company's Common Stock is traded on the Nasdaq SmallCap Market
("Nasdaq") tier of The Nasdaq Stock Market, Inc. under the symbol "ILNK."
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 preferred shares, warrants or any
of its other securities for quotation on Nasdaq.
The following table sets forth for the period indicated the high and low
bid prices for the Common Stock as quoted on Nasdaq under the symbol "ILNK"
based on interdealer bid quotations, without retail markup, markdown,
commissions or adjustments and may not represent actual transactions:
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------------ -------- -------
<S> <C> <C>
March 31, 1997 $ 7.50 $3.63
June 30, 1997 15.50 4.00
September 30, 1997 10.56 4.00
December 31, 1997 10.00 4.19
March 31, 1998 $ 8.81 $4.75
June 30, 1998 7.50 4.94
September 30, 1998 5.13 2.38
December 31, 1998 3.22 2.00
</TABLE>
On April 12, 1999, the closing price for a share of Common Stock was $2.688.
Dividend Policy
The Company must be current on dividends for it's Class M and F
Preferred Stock in order to pay any dividends to Common Stock holders.
Preferred stock dividends in the amount of $489 were paid in 1998 in common
stock (non-cash) on the two converted shares of Class F redeemable preferred
stock. Dividends on Class F redeemable preferred stock will continue to be
paid in common stock as the holders convert their preferred stock into common
stock. As of December 31, 1998, dividends in arrears (undeclared) on Class
F, M and C preferred stock were $242,577, $1,481,836 and $472,709,
respectively. The Company does not anticipate that it will pay dividends on
its Common Stock in the foreseeable future.
Shareholders
As of April 12, 1999, the Company had approximately 475 stockholders of
Common Stock of record and approximately 9,000 beneficial owners.
Item 6. Selected Financial Data.
The following selected consolidated financial data of the Company for
each of the past five years including the period ended December 31, 1998, are
derived from the audited financial statements and notes thereto of the
Company, certain of which are included herein. The selected consolidated
financial data should be read in conjunction with "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
13
<PAGE>
the Consolidated Financial Statements and Notes thereto of the Company.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Telecommunications services $ 19,634,681 $ 11,081,007 $ - $ - $ -
Marketing services 4,548,421 2,637,331 - - -
Technology licensing and
development 1,466,315 346,875 - - -
Other - - 170,532 - -
------------- ------------- ------------- ------------- -------------
Total revenues 25,649,417 14,065,213 170,532 - -
------------- ------------- ------------- ------------- -------------
Operating expenses:
Telecommunications
network expenses 19,099,194 14,634,999 1,120,779 - -
Marketing services costs 5,850,873 4,294,014 - - -
Selling, general,
administrative and other 20,345,293 20,997,262 18,536,090 - -
------------- ------------- ------------- ------------- -------------
Total operating expenses 45,295,360 39,926,275 19,656,869 - -
------------- ------------- ------------- ------------- -------------
Operating loss (19,645,943) (25,861,062) (19,486,337) - -
Other income (expense) ( 8,134,130) ( 2,806,630) ( 2,677,640) - -
------------- ------------- ------------- ------------- -------------
Loss from continuing
operations (27,780,073) (28,667,692) (22,163,977) - -
Loss from discontinued
operations ( 178,006) ( 1,191,009) ( 900,263) ( 551,909) ( 715,434)
------------- ------------- ------------- ------------- -------------
Net loss $(27,958,079) $(29,858,701) $(23,064,240) $( 551,909) $( 715,434)
============= ============= ============= ============= =============
Loss from continuing
operations applicable
to Common Stock $(37,621,215) $(118,360,731) $(43,387,606) $( 128,669) $( 121,094)
============= ============= ============= ============= =============
Net loss per common share -
basic and diluted:
Loss from continuing
operations $ (2.13) $ (10.07) $ (6.40) $ (0.07) $ (0.08)
Loss from discontinued
operations (0.01) ( 0.10) (0.13) (0.32) (0.47)
------------- ------------- ------------- ------------- -------------
Net loss per common share $ (2.14) $ (10.17) $ (6.53) $ (0.39) $ (0.55)
============= ============= ============= ============= =============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $( 4,487,914) $( 2,955,180) $ 1,305,814 $ - $ -
Property and equipment, net 7,262,781 3,551,917 1,575,769 - -
Net assets of discontinued
operations 417,371 595,377 1,668,223 2,124,965 2,461,170
Total assets 23,855,363 24,252,876 9,864,696 2,124,965 2,461,170
Long-term obligations 8,371,933 1,921,500 236,705 669,799 525,380
Stockholders' equity (deficit) (16,953,363) 814,376 6,298,617 1,455,166 1,935,790
</TABLE>
In January 1997, the Company acquired I-Link Communications, an FCC-
licensed long distance carrier. With the acquisition, the Company began its
telecommunications services operations. Effective December 31, 1997 the
Company made the decision to discontinue the operations of its Medical
Imaging Division. The Company's Board of Directors approved the plan of
disposal on March 23, 1998. The net operating activities and net assets from
the Medical Imaging Division are presented separately as discontinued
operations in the above table. In 1997, the Company launched operations of a
network marketing program through I-Link Worldwide, L.L.C., to market its
products. Through its wholly-owned subsidiaries MiBridge, Inc., and ViaNet
Technologies Ltd., the Company undertakes the research and development of new
telecommunications products and technologies, and the licensing of certain of
these products and technologies to other telecommunications companies. MiBridge
was acquired during the third quarter of 1997 and ViaNet Technologies Ltd. was
formed in the first quarter of 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Information
This report 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.
Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its expectations will
be achieved. Among many factors that could cause actual results to differ
materially from the forward looking statements herein include, without
limitation, the following: the Company's ability to finance and manage
expected rapid growth; the Company's ability to attract, support and motivate
a growing number of independent representatives; impact of competitive
services and pricing; 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 network; the Company's
15
<PAGE>
success in deploying its Communication Engine network in internet telephony;
the existence of demand for and acceptance of the Company's products and
services; as well as other risks referenced from time to time in the
Company's filings with the SEC.
The Company undertakes no obligation and does not intend to update,
revise or otherwise publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
Operating results for 1998, 1997 and 1996 are not comparable due to
changes in the operations of the Company. The operations of the Company in
1996 were related to (1) diagnostic and clinical services to healthcare
facilities and sales of medical equipment through several subsidiaries of I-
Link Incorporated (formerly Medcross, Inc.), and (2) operations of I-Link
Systems, Inc (formerly I-Link Worldwide Inc.) which I-Link Incorporated
acquired in February 1996. In January 1997 the Company acquired I-Link
Communications (formerly Family Telecommunications, Inc. and referred to
herein as "ILC") and in August 1997 the Company acquired MiBridge, Inc. In
1997, the Company launched operations of a network marketing program through
I-Link Worldwide, L.L.C., to market its products. In March 1998, 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, 1998 has been reported as
discontinued operations. Therefore, 1996 continuing operations includes only
the operations of I-Link Systems, whereas 1997 and 1998 includes the
operations of I-Link Communications Inc., I-Link Systems Inc., I-Link
Worldwide, L.L.C., MiBridge Inc. and (in 1998 only) ViaNet Technologies, Inc.
As of December 31, 1998 the Company's telecommunication and marketing
service revenues were primarily dependent upon the sales efforts of independent
representatives (IRs) functioning within a Network Marketing channel of
distribution which targets residential and small businesses in the United
States. These revenue sources depend directly upon the efforts of IRs.
IRs personally solicit potential individual and business customers via one
to one sales presentations wherein customers sign order forms for I-Link
telecommunications products and services (telecommunication service revenues).
An individual may also become an IR upon entering into a standard
written independent sales representative agreement with the Company and
paying a fee of either $50 or $295 based on options elected for promotional
and presentation materials (included in market service revenues). The
initial term of the agreement is for twelve months and may be renewed on a
yearly basis thereafter. IRs receive commissions based upon sales of I-Link
products and services to customer who become I-Link subscribers. Commissions
range from 2% to 46% based upon the product sold or services utilized and
the IR's seniority within the Network Marketing plan. An additional commission
from $210 to $370 can be earned by the IR based on the IR's initial signing up
of another IR and that new IR signing up users of I-Link products or services.
Growth in revenue for both telecommunications and marketing services
requires an increase in the productivity of IRs and/or growth in the total
number of IRs. There can be no assurance that the productivity or number of
IRs will be sustained at current levels or increased in the future. The
Company had approximately 12,700 and 12,600 IRs as of December 31, 1998 and
1997, respectively.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
16
<PAGE>
Revenues
Net operating revenue of the Company in 1998 and 1997 included three
primary sources of revenue which were: (1) telecommunications service; (2)
marketing services which began in June 1997 and includes revenues from the
Network Marketing channel, including revenues from independent
representatives for promotional and presentation materials and national
conference registration fees; and (3) technology licensing and development
revenues 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.
Telecommunication service revenues increased $8,553,674 to $19,634,681
in 1998 as compared to $11,081,007 in 1997. The increase was primarily due
to an increase of $13,830,000 from growth in the network marketing channel
(started in June 1997). This increase was partially offset by a decrease of
$5,275,000 in revenues from other channels of distribution as 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
and accordingly terminated certain relationships. The increase in revenues
is primarily due to increased usage as the average rate per minute did not
change significantly from 1997 to 1998.
Marketing service revenues increased $1,911,090 to $4,548,421 in 1998 as
compared to $2,637,331 in 1997. As this marketing channel began in June
1997, the increase was primarily due to twelve months of revenue in 1998 as
compared to approximately seven months in 1997. Marketing service costs were
greater than marketing service revenues for the year. As revenues in this
marketing channel are intended to cover the marketing service costs, it is
anticipated that as the base of independent representatives grows, marketing
service revenues will approximate the related costs.
Technology licensing and development revenues increased $1,119,440 to
$1,466,315 as compared to $346,875 in 1997. The increase was primarily due to
increasing acceptance of the Company's products in the market place and as
this source of revenue began with the acquisition of MiBridge, Inc. in August
1997, there are twelve months of revenue in 1998 as compared to approximately
five months in 1997. This increase is not expected to continue in the future
as the Company has decided to direct a greater portion of the MiBridge
resources into research and development rather than technology licensing and
development. Accordingly, revenues from technology licensing and development
in 1999 are anticipated to be less than 1998.
Operating costs and expenses
Telecommunications network expenses increased $4,464,195 to $19,099,194
in 1998 as compared to $14,634,999 in 1997. 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.
Moreover, the deployment of the Company's Communication Engines in 1998 and
better pricing from our underlying carriers have allowed telecommunications
revenues to grow at a rate significantly faster than the related
telecommunication network expenses.
Marketing services costs increased $1,556,859 to $5,850,873 in 1998 as
compared to $4,294,014 in 1997. 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 promotional and presentation
materials and ongoing administrative support of the Network Marketing channel.
Selling, general and administrative expenses decreased $1,385,186 to
$10,563,382 in 1998 as compared to $11,948,568 in 1997. The decrease was
primarily due to (1) decreased legal fees associated with warrants granted to
17
<PAGE>
the Company's outside general counsel in 1997 valued at $1,400,000 compared
to $450,000 in 1998 and (2) the write off of certain intangible assets and
losses on disposal of certain assets totaling $1,212,000 in 1997 which did
not recur in 1998. These decreases were offset by general increases in
corporate expenses, associated with growth of Company operations, such as
salaries and wages.
The provision for doubtful accounts increased $1,775,621 to $3,160,621
in 1998 as compared to $1,385,000 in 1997. The increase is related directly
to the growth in telecommunication service revenues, and increased bad debts
from receivables in the channels which the Company decided to terminate in
order to refocus the resources of the Company on those channels of
distribution of its products which had higher profit margins.
Depreciation and amortization increased $1,642,892 to $4,192,174 in 1998
as compared to $2,549,282 in 1997. The increase is primarily due to
approximately $600,000 increase in amortization related to the intangible
assets acquired in the acquisition of MiBridge in August 1997 (twelve months
of amortization in 1998 as compared to five months in 1997) and approximately
$887,000 related to increased amortization of acquisition costs incurred in
June 1997 with the release from escrow of shares of common stock associated
with the acquisition of I-Link Worldwide Inc. Depreciation expense also
increased due to the continued acquisition of other equipment.
Acquired in-process research and development was $4,235,830 in 1997.
This amount was related to the acquisition of MiBridge in 1997. There was no
such acquisition in 1998. This expense related to the specific acquisition of
MiBridge in 1997 and as such is not of a recurring nature other than as may
occur if the Company were to acquire other similar entities in the future.
Research and development increased $1,550,534 to $2,429,116 in 1998 as
compared to $878,582 in 1997. The increase is associated with the Company's
increased commitment to continuing telecommunication network research and
development efforts. Approximately $700,000 of the increase is associated
with the research and development occurring in the Company's Israeli
subsidiary, ViaNet Technologies, which was formed in 1998.
Other income (expense)
Interest expense increased $5,381,799 to $8,404,418 in 1998 as compared
to $3,022,619 in 1997. The increase is primarily due to the an increase of
approximately $5,040,000 from the accretion of debt discounts (non-cash)
related to certain warrants granted in connection with $7,768,000 in loans to
the Company during 1998 as compared to warrants granted in connection with
$5,000,000 in loans in 1997. In addition there was an increase in interest
expense of approximately $670,000 on loans to the Company outstanding in 1998
as compared to 1997. The increases above were offset by $320,000 (non-cash)
of interest expense in 1997 associated with the issuance of convertible notes
issued at a discount in 1996 that did not recur in 1998.
Interest and other income increased $54,299 to $270,288 in 1998 as
compared to $215,989 in 1997. The increase was primarily due to interest
earned in 1998 on deposits with the Company's primary provider of long-
distance telecommunications capacity.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
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
18
<PAGE>
the Network Marketing channel, including revenues from independent
representatives for 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 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. The increase in
administrative expense in 1997 included $1,400,000 in legal fees associated
with the value of warrants granted to the Company's outside general counsel
and $1,212,000 from the write off of certain intangible assets and losses on
disposal of certain assets. There were no similar costs in 1996.
The 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 was 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 one million
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 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.
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<PAGE>
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 accretion in 1997
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 1997 and accordingly all debt discounts were 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.
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.
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.
Liquidity and Capital Resources
Cash and cash equivalents as of December 31, 1998 were $1,311,003, short
term certificates of deposits were $378,160 and the working capital deficit
was $4,487,914. Cash used by operating activities during 1998 was
$16,825,719 as compared to $12,008,526 in 1997 and $4,840,285 in 1996. The
increase in cash used by operating activities in 1998 and 1997 was primarily
due to operating losses as the Company continued to develop its network
infrastructure and product base.
Net cash used by investing activities in 1998 was $1,602,974 as compared
to $1,387,526 in 1997 and $2,573,486 in 1996. The net increase in cash used
by investing activities in 1998 as compared to 1997 was primarily due to (1)
an increase in purchases of furniture, fixtures and equipment of $1,309,332
which was partially offset by increased funds received from matured
certificates of deposits of $1,291,715 and (2) receipt in 1998 of $310,000 in
proceeds from sales of assets in its discontinued operation. In 1997 the
Company received $514,886 from the acquisition of ILC and MiBridge which did
not recur in 1998. The increase in cash used by investing activities in 1997
as compared to 1996 was primarily attributable to the increases in purchases
of furniture, fixtures and equipment of $1,278,887 which was offset by cash
received in connection with the acquisitions of ILC and MiBridge of $514,886
in 1997 and the purchase of certificates of deposit totaling $1,962,601 in
1996.
Financing activities in 1998 provided net cash of $18,069,765 as
compared to $10,623,680 in 1997 and $11,834,682 in 1996. Cash provided in
1998 included $9,430,582 from issuance of preferred stock (net of offering
costs), $11,009,712 in proceeds from loans to the Company, and $684,943 from
exercise of stock options and warrants. Long term-debt and capital lease
payments of $2,885,007 offset these sources of cash. 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
$27,780,073 for the year ended December 31, 1998, and as of December 31, 1998
had an accumulated deficit of $84,942,815. The Company anticipates that
20
<PAGE>
revenues generated from its continuing operations will not be sufficient
during 1999 to fund the continued expansion of its private telecommunications
network facilities, C4 development and manufacturing, and anticipated growth
in subscriber base. The Company has entered into additional financing
arrangements and proposes to issue additional preferred stock as described
below in order to obtain the additional funds required for its continuing
operations in 1999.
Current Position/Future Requirements
During 1999, the Company plans to use available cash to fund the
development and marketing of I-Link products and services. The Company
anticipates that revenues from all sources of continuing operations, except
technology licensing and development, will grow in 1999 and will increasingly
contribute to meetingthe cash requirements of the Company. In order to enhance
future consolidated revenues, the Company has decided to direct a greater
portion of the MiBridge resources into research and development rather than
technology licensing and development. Accordingly, revenues from technology
licensing and development in 1999 are anticipated to be less than 1998. The
Company anticipates increased cash flow in 1999 primarily from the following
sources:
* During the first quarter of 1999 the Company deployed its Communication
Engines in an additional eight metropolitan areas in the United States
and anticipates continued deployments during the remainder of 1999 to
continue the build out of the Company's IP Telephony network. The
anticipated effect of this expansion is increased revenues and profit
margins for telecommunications services in the future.
* Anticipated increase in revenues from marketing of its C4 product.
* Release of V-Link 3.0 that will have increased functionality and ease of
use thus increasing revenues from incremental sales and usage of V-Link
enhanced services.
* New revenues will be generated from the Company's IR WebCenter product
that was released in late March 1999.
However, the Company anticipates that in preparation for continued
market penetration and deployment of I-Link products cash requirements for
operations and the continued development and marketing of I-Link services
will be at increasingly higher levels than those experienced in 1998.
In January 1999, the Company entered into an agreement with MCI WorldCom
carrier to lease local access spans to continue the build out of the I-Link
Network infrastructure. The three-year agreement includes minimum usage
commitments of $1,512,000 during the first year and $2,160,000 in the second
and third years. If the Company were to terminate the agreement early, it
would be required to pay any remaining first year minimum monthly usage
requirements and pay 25 percent of any remaining second and third year
minimum monthly usage requirements.
In order to provide for capital expenditure and working capital needs,
the Company entered into two agreements with Winter Harbor. The first
agreement, finalized in January 1999, provides an additional $11,000,000 in
financing (the "Winter Harbor Financing Arrangement"); including the issuance
of warrants and a rights offering. The Winter Harbor Financing Arrangement
consists of an $8,000,000 bridge loan facility (the "Bridge Loan") and a
$3,000,000 standby letter of credit (the "Letter of Credit") to secure
additional capital leases of equipment and telephone lines relative to the
proposed expansion of the Company's telecommunications network. As of December
31, 1998, the Company had received advances under the bridge loan and letter
of credit of $3,842,000 and $1,144,000, respectively. The remaining
$4,158,000 of the Bridge Loan was received subsequent to year end. To the
extent that the bridge loan is not exchanged into Series N Preferred stock
(described below), the Bridge Loan matures and must be repaid by October 31,
1999.
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<PAGE>
Under the Winter Harbor Financing Arrangement, the Company is obligated
to issue up to 20,000 shares of a new series of preferred stock (Series N
preferred stock) as part of a rights offering which will be open to the
Company's common and Series M Redeemable Preferred Stockholders. Each share
of Series N preferred stock may be purchased for $1,000. The Company and
Winter Harbor have agreed under the Winter Harbor Financing Arrangement that
the Company can require Winter Harbor to exchange the outstanding balance of
the Bridge Loan plus accrued interest for Series N preferred stock. Winter
Harbor is entitled, but not obligated, to subscribe for any shares of Series N
preferred stock which are subject to rights that are not exercised by other
stockholders. Winter Harbor has indicated its intention to subscribe for all
unexercised rights. Should all of the Series N Preferred Stock be sold and
all $8 million be drawn on the Bridge Loan, the net proceeds to the Company
after repayment of the Bridge Loan would be approximately $11.5 million.
On April 14, 1999, the Shareholders approved an amendment to the
Articles of Incorporation increasing the authorized common stock from
75,000,000 shares to 150,000,000 shares. In addition, the shareholders
voted to approve a plan of financing which includes issuing 10 warrants for
each $10 borrowed under the Bridge Loan and standby letter of credit should
management elect to not repay the amounts owing prior to April 26, 1999. The
Company does not anticipate repaying the loan before April 26, 1999.
In the second agreement, dated April 15, 1999, Winter harbor agreed to
loan the Company up to $4 million under a note due September 30, 1999. The
Loan will accrue interest at a variable rate of prime plus a spread beginning
at 5 points through and including May 9, 1999, and increasing 1 point every
three months thereafter, to a maximum of 7 points. The Company may cause the
loan to be exchanged for Series N Preferred Stock. It is the Company's
intention to exchange the loan for Series N Preferred Stock or repay this
loan from proceeds of the Series N offering. As partial consideration for
the loan, at its next meeting of its shareholders, the Company shall seek
shareholder approval of a modification to the conversion terms of the Series
N Preferred shares. The Company has the option to extend the due date to
April 15, 2000, provided, that in the event the Company's shareholders fail
to approve the modification to the conversion terms of the Series N Preferred
shares, the Company shall be required to issue to Winter Harbor one warrant
for each $1 of principal outstanding on the loan as of the date of such
extension which warrants shall be issued on the same terms and conditions
as the warrants issued in connection with the $8,000,000 Bridge Loan described
above.
In addition, the due date of the Company's prior obligation to Winter
Harbor in the amount of $7.768 million, which was due on demand, was extended
to April 15, 2000.
While the Company believes that the aforementioned sources of funds
will be sufficient to fund operations in 1999, the Company anticipates that
additional funds will be necessary from public or private financing markets
to successfully integrate and finance the planned expansion of the business
communications services, product development and manufacturing, 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.
Other Items
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices in
general. However, the Company's revenues will continue to be affected by
22
<PAGE>
competitive forces in the market place.
Effective January 1, 1999 the Company adopted 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. In accordance with SOP 98-1 the Company
will capitalize material costs associated with developing computer software
for internal use. Previously these costs were recognized as a current
expense. Purchased computer software for internal use is capitalized and
amortized over the expected useful life, usually three years. The impact of
applying this standard is not expected to be material to the consolidated
financial position or results of operations of the Company.
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 supersedes FAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
FAS 131 also requires disclosures about products and services, geographic
areas, and major customers. The adoption of FAS 131 did not affect results
of operations or financial position but did affect the disclosure of segment
information.
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the
results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current financial condition or results of operations.
Impact of Year 2000
I-Link's Year 2000 ("Y2K") program is designed to minimize the
possibility of serious Y2K interruptions. Possible worst case scenarios
include the interruption of significant parts of I-Link's business as a
result of critical telecommunication networks and/or information systems
failure. Any such interruption may have a material adverse impact on future
results. Since their possibility cannot be eliminated, I-Link formed a "Year
2000 Team" during 1998 to evaluate its information technology (IT) systems as
well as its non-IT devices (such as building security, heating and air-
conditioning, safety devices and other devices containing embedded electronic
circuits). The Company does not believe its non-IT systems will be
significantly affected by Y2K. Nevertheless, the Y2K project team is
continuing to evaluate the readiness of all of the facilities the Company
occupies to be certain that the non-IT systems will be compliant. The
Company anticipates its IT and non-IT systems will be Y2K compliant by
September 30, 1999.
State of Readiness. The Company's approach to the Y2K issue includes
six major phases: Inventory, Assessment, Remediation, Testing,
Implementation, and Contingency Planning. Several phases of this methodology
are well underway. The Inventory and Assessment phases are nearly complete,
and efforts have begun in Remediation and Testing. Based upon the results of
the assessment, a significant portion of the Company's software and hardware
already appears to be Y2K compliant, though the Company intends to confirm
that opinion in the Testing phase. As the Company began operations in 1996,
much of the hardware and software currently in use at the Company was Y2K
compliant when acquired and implemented.
While the Company continues to assess various aspects of its Y2K
vulnerability, the project team has begun the process of remediating or
replacing systems and devices that do not appear to be fully compliant. Much
23
<PAGE>
of this remediation effort involves readily available, simple upgrades to
hardware and software components, or relatively minor changes to the
Company's in-house developed systems. The Company intends to complete the
Remediation phase, except for the billing system discussed below, by July 31,
1999. Total costs, past and future, of all remediations are not expected to
exceed $225,000. The Company does not believe that its use of internal
resources will significantly delay any other systems development efforts.
The Company has initiated testing of some systems to confirm that they can
process calendar dates after December 31, 1999.
The Company believes that reliance on other telecommunications providers
represent the Company's greatest Y2K exposure and is the primary third-party
relationship that is critical to the Company's on-going operations. While
the Company has its own communications network to carry much of its traffic,
the Company's network is dependent upon significant third-party carriers
(such as Sprint) and all local exchange carriers (LECs), such as U.S. West
and PacBell. These entities originate and terminate local and long-distance
caller traffic which accesses the Company's communications network or
services areas not covered by I-Link's network. This is substantially the
same risk faced by other telecommunications providers. The Company is in the
process of evaluating the Y2K preparedness of its carriers and the many
LEC's. I-Link's carriers have indicated they intend to be Y2K compliant in
public filings and other notifications. In the event that these carriers do
not become Y2K compliant prior to December 31, 1999, the Company would need
to switch to carriers who were Y2K compliant or face a significant impact on
its ability to deliver telecommunications services. In the event the
Company's current carriers do not become Y2K compliant and the Company is
unable to switch to a carrier(s) that is Y2K compliant, the Company would not
be able to deliver its services which would have a substantial negative
impact on the Company and its results of operations, liquidity, and financial
position. In the event that certain LEC's are not Y2K compliant, customers
of the Company would not be able to originate or terminate a call in
geographic areas serviced by the LEC, which would negatively impact the
financial condition of the Company.
In order to assess the preparedness of third party vendors including I-
Link's carriers and LEC's, the Company is surveying the vendors and their
public statements and Web sites. At the conclusion of its internal and third
party assessments, the Company intends to complete contingency plans to
address various scenarios in which key vendors and suppliers may not be Y2K
compliant.
The internal system the Company believes most vulnerable to Y2K problems
is the existing billing system which: (1) gathers call detail records
("CDRs"); (2) processes the CDRs into billable CDRs; (3) rates the CDRs; (4)
prepares invoices to customers; (5) and records payments received. The
inability of the Company's billing system to operate in the Year 2000 would
adversely impact the recognition and collection of revenue, and therefore,
could negatively impact the results of operations and financial position. The
current billing system contains some programs that are not Y2K compliant.
The Company has contracted with an outside consulting company to design and
implement a new operations and customer care software program, part of which
would replace the existing billing system. This new software program is
designed to be Y2K compliant and thus the Company anticipates the possibility
of significant interruption of normal business related to the billing system
is not significant. The Company anticipates the implementation of this
system by August 1999. Nevertheless, in order to mitigate the risk that
implementation schedules could slip, the Company is also currently making
changes to the existing billing system that would reduce Y2K exposure if the
enhanced billing system were unavailable for use by the end of the year. The
cost of these modifications to the existing billing system would not exceed
$30,000, and would involve internal resources only such as salaries and
benefits.
24
<PAGE>
Costs. The Company is primarily using internal resources to identify,
assess, correct, test, and implement solutions for minimizing Y2K
consequences, but expects to incur some additional consulting, upgrade, and
other expenses. The total cost of modifications and conversions is not known
at this time. However, the Company has already expended approximately
$30,000 to date for upgrades, and approximately $20,000 on internal resources
for Y2K preparation. The Company estimates the remaining expenditures for
outside services and upgrades should not exceed $100,000 and internal
resources should not exceed $75,000. The Company expects to fund such
expenditures from investments or loans from outside parties.
Risks. The failure to correct a material Y2K problem could result in an
interruption of normal business activities. Such a disruption could
materially and adversely affect the Company's results of operations,
liquidity, and financial condition. The Company's assessment of Y2K risk
does not cover all possible catastrophic events, such as the failure of
electrical power grids or the general telecommunications infrastructure. The
following reasonably likely worst case scenario is based upon conceivable,
though not probable, worst-case disruptions to the Company's revenue cycle.
The Company's revenue cycle is dependent on the ability to complete
customer calls and integrate the related CDRs into the billing system
described above. The Company's ability to complete calls is contingent upon
the Y2K compliance of its underlying carriers and LECs, which have
represented that they will be ready. Barring a long-term, catastrophic
failure of electrical services or the telecommunications industry in general,
the most likely worst-case scenario would be a general failure of the
Company's own communications network, which carries its call traffic. In
that case, the Company would not be able to provide enhanced services (such
as V-Link) but customers could still complete long-distance calls as those
calls would be routed over the Company's carriers networks. However unlikely,
such an event would seriously and adversely affect operating margins, but
operations could continue until reparations were made. Continuing on with
the worst-case scenario, a failure of the Company's ability to collect CDRs
might prevent the timely billing of services. Such a failure would result in
a cash-flow exposure to the Company for as long as it may require to correct
CDR collection programs. Since the billing process occurs two to three weeks
after the close of any period, minor problems would probably have minimal
financial impact. Nevertheless, if corrections required a significantly
longer time period, customer billing, revenue collection and cash flows could
be delayed and bad debts increased to the extent that material damages to the
Company could result. The Company intends to test various components of this
scenario to reduce exposure to this reasonably likely worst case scenario.
Milestones and implementation dates and the costs of the Company's Y2K
readiness program are subject to change based on new circumstances that may
arise or new information becoming available, that may alter underlying
assumptions or requirements.
Item 8. Financial Statements.
See Consolidated Financial Statements beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None
25
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
<TABLE>
<CAPTION>
Name Age Title
- ----------------------- ----- -----------------------------------------
<S> <C> <C>
John W. Edwards 44 Chairman of the Board, President and
Chief Executive Officer
John M. Ames 39 Vice President of Operations
Karl S. Ryser, Jr. 43 Treasurer, Chief Financial Officer and
Chief Accounting Officer
David E. Hardy 46 Secretary
Henry Y.L. Toh 41 Director and Assistant Secretary
Thomas A. Keenan 34 Director
David R. Bradford 48 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 five members. The 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 next
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 and Mr. Bradford, the
Class III Directors, will expire at the annual meeting of shareholders in
2000. Mr. Cohen serves as the designee of Commonwealth , a previous
underwriter for the Company, although he is no longer affiliated with
Commonwealth. Commonwealth has the right to approve the Company's selection
of one 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
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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. Mr. Ryser was elected Treasurer of the Company and Vice President of
Finance 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 U.S.
Robotics Corporation acquired Megahertz. 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.
John M. Ames, Vice President of Operations. Mr. Ames joined I-Link as Vice
President of Operations in September of 1998. Between April and August 1997,
Mr. Ames organized, developed and sold Time Key L.C., a company specializing
in Time and Labor Management software and consulting. From June 1996 until
April 1997, he was the Vice President and Chief Financial Officer of Neurex
(now Elan Pharmaceutical), a Menlo Park, California based public biotech
company. From August 1993 until June 1996 Mr. Ames managed various information
services, finance and cost accounting, strategic partnering, international
tax, and human resource functions as the Director of Corporate Services at
TheraTech, a public Utah based pharmaceutical company. From April 1992
through August 1993, he was responsible for overseeing U.S. sites information
services activities as the Corporate Director of Information Services with
Otsuka Pharmaceutical, a large privately owned Japanese conglomerate. Prior
to joining Otsuka, Mr. Ames spent over eight years with KPMG Peat Marwick as
an auditor and consultant in the High Technology practice. He is a graduate
from Brigham Young University with both a Bachelors and Masters (Macc) degree
in accounting with emphasis in accounting information systems and management
consulting.
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
that 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
27
<PAGE>
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.
Thomas A. Keenan, Director of the Company. Mr. Keenan was appointed to
serve as a Class I Director on September 1, 1998. Mr. Keenan was elected to
fill this board seat pursuant to the right of Winter Harbor to designate up
to two board members under the Stockholder Agreement dated September 30, 1997
between Winter Harbor and I-Link. Mr. Keenan is the principal of Wolfeboro
Holdings, an investment fund based in Wellesley, Massachusetts. Mr. Keenan
received a Juris Doctor degree from the University of Michigan Law School,
and from September 1994 to August 1996 was employed by McKinsey & Company, an
international management-consulting firm
David R. Bradford, Director of the Company. The Board of Directors
elected Mr. Bradford as a Class III Director in January 1999. Mr. Bradford
is senior vice-president and general counsel for Novell, Inc. Prior to
joining Novell, Inc., he served as western region legal counsel for Prime
Computer and spent several years as an associate attorney for Irselfd,
Irsfeld and Younger and as the general manager for Businessland in Los
Angeles. Mr. Bradford is past chairman of the board of the Business Software
Alliance, the leading business software trade association representing
Microsoft, Novell, Adobe and Autodesk, among others. Mr. Bradford also serves
on the board of directors of Pervasive Software, Altius Heath, Found.com and
Utah Valley State College. Mr. Bradford received his law degree from Brigham
Young University and a master's degree in business administration from
Pepperdine University.
Joseph A. Cohen, Director of the Company. Mr. Cohen was appointed a
Class II Director of the Company in September 1996 as the designee of
Commonwealth Associates. 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.
Mr. Bradford and Mr. Cohen are the non-employee independent directors
of the Company.
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.
28
<PAGE>
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. The Audit
Committee held three meetings during the last fiscal year.
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 Joseph Cohen
(chairman), Thomas A. Keenan and John Edwards. The Compensation Committee
held four meetings during the last fiscal year.
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 Thomas A. Keenan (chairman), Joseph A. Cohen and John
Edwards. The Finance Committee held four meeting during the last fiscal year.
The Company has no nominating committee or any committee serving a
similar function.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission
("SEC"). Officers, directors, and greater than ten percent shareholders are
required by the SEC regulation to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act during its most recent
fiscal year and Forms 5 with respect to its most recent fiscal year, the
Company believes that all such forms required to be filed pursuant to Section
16(a) of the Exchange Act were timely filed, as necessary, by the officers,
directors, and security holders required to file the same during the fiscal
year ended December 31, 1998, except that reports and transactions were filed
late by the following persons: John M. Ames, 1 report; William Flury, 1
report, 2 transactions; Thomas Keenan, 1 report; Clay Wilkes, 4 reports, 12
transactions. In addition, the Company has received no copies of Forms 3, 4,
or 5 for the following persons relating to the following number of
transactions: Henry Y. L. Toh, 1 transaction, R. Huston Babcock, 1
transaction.
Item 11. 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, 1998, whose compensation was in excess
of $100,000.
29
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
------------------------------------- ---------------------- ----------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary($) Bonus($) sation($) Awards($) SARs(#) Payouts($) sation($)
- ------------------ ---- ---------- -------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. Edwards 1998 133,333(1) - - - 30,000 - N/A
President and CEO 1997 98,292(1) - - - 520,000 - N/A
1996 101,663(1) - - - 1,250,000 - N/A
Karl Ryser, Jr. 1998 125,000(2) - - - - - N/A
Treasurer and CFO 1997 125,000(2) - - - 550,000 - N/A
1996 41,665(2) - - - 250,000 N/A
John M. Ames 1998 37,369(3) - - - 350,000 - N/A
Vice President of
Operations
</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 in exchange for options. 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." Mr. Edwards was paid at an annual rate of
$125,000 commencing January 1, 1998. Mr. Edward's salary was increased
to $200,000 effective May 1997, however the salary increase is to accrue
but not be paid until the Company has generated sufficient cash
resources to enable the increase to be paid without creating an undue
burden on the Company's cash resources. Accordingly as of December 31,
1998, the accrued but unpaid salary to Mr. Edwards was $129,375.
2 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." Mr. Ryser's salary was increased to $175,000
effect May 1997, however the salary increase will not be paid until the
Company has generated sufficient cash resources to enable the increase
to be paid without creating an undue burden on the Company's cash
resources. As of December 31, 1998, the accrued but unpaid salary to
Mr. Ryser was $81,250.
3 Mr. Ames began his employment in September 1998; his annual salary during
1998 was $120,000. See "-- Employment Agreements."
Option/SAR Grants in Last Fiscal Year (1998)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1998, for the persons
named in the Summary Compensation Table (the "Named Executive Officers"):
30
<PAGE>
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options/ Exercise
Underlying SARs Granted or
Options/ to Employees Base Price Grant Date Expiration
Name SARs Granted(#) in Fiscal Year ($/Share) Value(2) Date
- ------------------- --------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
John W. Edwards(1) 30,000 1.7% $3.900 $120,000 1/2/2008
Karl S. Ryser, Jr.(1) - - - - -
John M. Ames 350,000 19.8% 3.125 789,000 8/31/2008
</TABLE>
____________________
* Less than 1%.
1 On December 13, 1998 the Board of Directors authorized the repricing of all
outstanding options of Mr. Edwards (options to purchase 1,800,000 shares
of Common Stock) and Mr. Ryser (options to purchase 800,000 shares of
Common Stock) as part of a general repricing of all outstanding options
held by current employees, directors and consultants of the Company. The
original exercise prices of between $7.00 and $4.88 were reduced to
$3.90. Using the Black Scholes option pricing model the incremental
fair value of the repriced options over the original options was
approximately $351,000 and $119,000 for Mr. Edwards and Mr. Ryser,
respectively.
2 Determined using the Black Scholes option pricing model.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with
respect to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in the
Underlying Unexercised Money Options/SARs at
Shares Options/SARS at FY-End(#) FY-End($)(1)
Acquired on Value ------------------------- ---------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Edwards - - 1,258,328 541,672 - -
Karl S. Ryser, Jr. - - 612,500 187,500 - -
John M. Ames - - 33,333 316,667 - -
</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, 1998, and the exercise price of each option, multiplied
by the number of shares covered by the option. As the exercise price
exceeds the closing bid price on December 31, 1998, no value is ascribed
to unexercised options.
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
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<PAGE>
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.
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 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.
Mr. Toh 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.
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 at 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 was granted an option to
purchase one million 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. Mr. Edwards was paid at
an annual rate of $125,000 commencing January 1, 1998. Mr. Edward's salary
was increased to $200,000 effect May 1997, however the salary increase will
32
<PAGE>
accrue but not be paid until the Company has generated sufficient cash
resources to enable the increase to be paid without creating an undue burden
on the Company's cash resources. Accordingly as of December 31, 1998 accrued
but unpaid salary to Mr. Edwards was $129,375. All of Mr. Edwards outstanding
options were repriced to $3.90 as part of a general repricing of outstanding
options held by current employees, directors and consultants of the Company
effective December 13, 1998.
In October 1996, I-Link entered into a three-year employment agreement
with Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the
Company. Pursuant to the terms of the employment agreement, Mr. Ryser 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 at the sole discretion of the Chief Executive Officer. Mr. Ryser
may participate in fringe benefits, deferred compensation, stock benefits and
option plans of the Company. In addition, Mr. Ryser 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. As partial consideration for Mr. Ryser's
providing funds necessary to permit the Company to settle the JW Charles
litigation, 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. Mr. Ryser's salary was increased to $175,000
effective May 1997, however the salary increase will not be paid until the
Company has generated sufficient cash resources to enable the increase to be
paid without creating an undue burden on the Company's cash resources. As of
December 31, 1998 accrued but unpaid salary to Mr. Ryser was $81,250. 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 a lump sum severance payment equal to one year's then current
salary. The employment agreement contains confidentiality and non-
competition provisions. All of Mr. Ryser's outstanding options were repriced
to $3.90 as part of a general repricing of outstanding options held by
current employees, directors and consultants of the Company effective
December 13, 1998.
In August 1998, I-Link entered into a two-year employment agreement
(with a one-year renewal option) with John M. Ames, Chief Operating Officer
and Vice President of Operations. Pursuant to the terms of the employment
contract, Mr. Ames is required to devote all his time to the business and
affairs of the Company except vacations, illness or incapacity. Mr. Ames 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. Ames is entitled to options to purchase 200,000
shares of Common Stock at an exercise price equal to the closing bid price on
the date of employment agreement and vesting 1/3 at the end of one year of
employment and the balance over theratably subsequent eight quarters. Mr. Ames
also is entitled to options to purchase 150,000 share of Common Stock at an
exercise price equal to the closing bid price on the date of employment
agreement which vest based upon certain incentive milestones. Mr. Ames may
participate in fringe benefits, deferred compensation, and stock benefits and
option plans of the Company.
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
33
<PAGE>
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. Mr. Hardy's fee was increased to $14,583 per month
effect May 1997, however such increase is to accrue but not be paid until the
Company has generated sufficient cash resources to enable the increase to be
paid without creating an undue burden on the Company's cash resources.
Accordingly as of December 31, 1998 accrued but unpaid fees to Mr. Hardy were
$69,875. 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. As partial consideration for
Mr. Hardy's providing funds necessary to permit the Company to settle the JW
Charles litigation, the Company modified the original vesting schedule of the
250,000 options in the Consulting 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. All of Mr. Hardy's outstanding options were
repriced to $3.90 as part of a general repricing of outstanding options held
by current employees, directors and consultants of the Company effective
December 13, 1998.
In September 1996, Joseph A. Cohen, a director, and the Company entered
into a consulting agreement in the amount of $4,000 per month for a 36-month
period. Mr. Cohen provided services including business management and
financial consulting services. The consulting agreement was terminated
effective March 1, 1999 and all unpaid balances ($78,000) were settled by the
grant to Mr. Cohen of 100,000 options to purchase the Company's Common Stock
at an exercise price of $3.00 per share and the additional obligation of the
Company to pay Mr. Cohen an aggregate of $50,000 in installments beginning at
such time as the Company reports positive cash flow of at least $150,000 in
a fiscal quarter.
Repricing of Stock Options and Warrants
On December 13, 1998, the Board of Directors approved a repricing of all
options to purchase Common Stock with exercise prices above $3.90 held by
current employees, directors and consultants of the Company. As a result,
the exercise price on options to purchase 6,475,000 shares of Common Stock
was reduced to $3.90. The options had original exercise prices of between
$4.375 and $9.938. All other terms of the various option agreements remained
the same. The closing price of the Company's Common Stock on December 13,
1998 was $2.56
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 or more
than ten (10) years after the date of grant.
34
<PAGE>
As of December 31, 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 December 31, 1998, options to purchase 15,228 shares of
Common Stock have been exercised. In connection with adoption of the 1995
Director Plans (as 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.
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. 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. As of December 31, 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 December 31, 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.
35
<PAGE>
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 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 December 31, 1998, options to purchase
351,167 shares of Common Stock with exercise prices of $1.125 to $6.75 per
share have been granted 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). 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. 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 December 31,
1998, options to purchase 3,306,500 shares of Common Stock, with exercise
prices of $2.25 to $3.90 per share have been granted under the 1997 Plan. As
of December 31, 1998, no options have been exercised under the 1997 Plan.
Compensation Committee Interlocks and Insider Participation
John Edwards is Chairman of the Board and an executive officer of the
Company. Joseph Cohen and Thomas A. Keenan are non-employee directors of the
36
<PAGE>
Company. See "Executive Compensation" generally, and "Executive Compensation -
Employment Agreements" and Executive Compensation - Director Compensation"
as well as "Security Ownership of Certain Beneficial Owners and
Management".
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table shows, as of March 19, 1999, all directors,
executive officers, and, to the best of our knowledge, all other parties we
know to be beneficial owners of more than 5% of the Common Stock, or
beneficial owners of a sufficient number of shares of Class C preferred
stock, Series F Redeemable Preferred Stock or Series M Redeemable Preferred
Stock to be converted into at least 5% of the Common Stock. JNC Opportunity
Fund Ltd. ("JNC") is the only holder of Series F Redeemable Preferred Stock;
however, JNC is not listed on the table below because, under the terms of the
Series F Redeemable Preferred Stock, JNC may not convert shares of Series F
Redeemable Preferred Stock (or receive related dividends in Common Stock) to
the extent that the number of shares beneficially owned by it and its
affiliates after such conversion or dividend payment would exceed 4.999% of
the issued and outstanding shares following such conversion. This
limitation applies to the number of shares of Common Stock held at any one
time and does not prevent JNC from converting some of its shares of Series F
Redeemable Preferred Stock, selling the Common Stock received, then, subject
to the aforementioned limitation, converting additional shares of Series F
Redeemable Preferred Stock. The 4.999% limitation may be waived by JNC upon
75 days notice to the Company. However, if no effect were given to the
4.999% limitation, then JNC would be deemed to be the beneficial owner of
approximately 4,157,350 shares of Common Stock, or 17.5% of the then-
outstanding Common Stock of I-Link. As of March 19, 1999, there were
19,535,029 shares of Common Stock issued and outstanding, 40,218 shares of
Class C preferred stock issued and outstanding, 859 shares of Series F
Redeemable Preferred Stock issued and outstanding and 4,400 shares of Series
M Redeemable Preferred Stock issued and outstanding.
37
<PAGE>
<TABLE>
<CAPTION>
Number of % of Common
Shares Stock
Name and Address of Beneficially Beneficially
Beneficial Owner (1) Title of Class Owned Owned(2)
- ------------------------- --------------------- -------------- --------------
<S> <C> <C> <C>
John M.Ames Common Stock 1,000 *
David R. Bradford Common Stock 0 0%
Joseph A. Cohen Common Stock 381,000(3) 1.9%
Class C Preferred 3,000
Stock
John W. Edwards Common Stock 1,288,328(4) 6.2%
David E. Hardy Common Stock 827,388(5) 4.1%
Thomas A. Keenan Common Stock 105,000(6) *
Karl S. Ryser, Jr. Common Stock 654,679(7) 3.2%
Henry Y.L. Toh Common Stock 243,501(8) 1.2%
Clay Wilkes Common Stock 1,262,976(9) 6.3%
1077 E. Duffer Lane
N. Salt Lake City, UT 84054
Winter Harbor, L.L.C. Common Stock 44,139,479(10) 69.3%
c/o First Media, L.P. Series M Redeemable 4,400
11400 Skipwith Lane Preferred Stock
Potomac, MD 20854
All Executive Officers and Common Stock 3,500,896(11) 15.2%
Directors as a Group (8 Class C Preferred 3,000
people) 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. All addresses are c/o I-Link Incorporated
unless otherwise indicated.
2 As to each person or entity named as beneficial owners, such person's 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 Includes 309,000 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.
4 Represents 833,330 shares of common stock subject to the vested portion of
Mr. Edwards' option to purchase 1,000,000 shares of common stock
and 454,998 shares of common stock subject to warrants and other options.
5 Includes 823,388 shares of common stock issuable pursuant to options and
warrants.
6 Includes 35,000 shares of common stock subject to options and 70,000 shares
of common stock held of record by members of Mr. Keenan's immediate
family. Mr. Keenan serves on the Board of Directors as
the designee of Winter Harbor. Mr. Keenan's wife is the beneficiary
38
<PAGE>
of a trust which owns non-voting stock in the corporate general
partner of First Media, L.P., the parent of Winter Harbor. For
further information about Winter Harbor, see "Transactions with
Winter Harbor, L.L.C.; Series M Redeemable Preferred Stock."
Neither Mr. Keenan nor his wife has dispositive power or voting
control over the securities of I-Link held by Winter Harbor; Mr.
Keenan disclaims beneficial ownership of the securities held by
Winter Harbor. See also footnote 10 below.
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.
10 Includes 6,778,524 shares of Common Stock issuable upon conversion of Series
M Redeemable Preferred Stock, 3,820,955 shares of Common Stock issuable
upon conversion of Series M Redeemable Preferred Stock which may be
issued on conversion of promissory notes held by the named stockholder,
and 18,640,000 shares of Common Stock issuable upon exercise of
warrants. In addition, I-Link 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, and 9,900,000 shares of Common Stock issuable under
warrants to be issued to Winter Harbor in the event that a bridge loan
is not repaid by April 26, 1999. 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. I-Link'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 in or association with Winter Harbor. Thomas
A. Keenan's wife has an interest in First Media, L.P. (see footnote 6
above).
11 Represents 75,000 shares of Common Stock issued, 3,353,896 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.
Item 13. Certain Relationships and Related Transactions.
During the first quarter of fiscal year 1995, the Company received
advances totaling $218,000 from Mortgage Network International ("MNI"). Henry
Y.L. Toh, a Director of the Company, has management control over MNI.
Payment in full of such advances and interest thereon was made in 1998.
The Company's management has been informed that Winter Harbor had
purchased an ownership interest in Tenfold Corporation, the consulting
company that is assisting in the development of the Company's new internal
information system. In March 1999, Winter Harbor, LLC transferred ownership
of the investment to First Media TF Holdings, LLC, an affiliate of
WinterHarbor, LLC. First Media TF Holdings, LLC beneficially owns 10.6% of
Tenfold's common stock. The Company's referral to Tenfold did not come
through Winter Harbor, and Winter Harbor played no part in the negotiation of
such consulting arrangement. The consulting agreement is a fixed price
contract totaling $2,600,000 providing for development and licensing of a new
telecommunications billing and customer care software system.
See Item 11 hereof for descriptions of the terms of employment and
consulting agreements between the Company and certain officers, directors
and other related parties.
39
<PAGE>
Transactions With Winter Harbor, L.L.C.; Series M Redeemable Preferred Stock
Winter Harbor, L.L.C. ("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
investments in the Company, which are summarized below.
On June 5, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with 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 an exercise 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; 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 was credited toward payment of Winter Harbor's purchase price for the
Investment and the Note was cancelled. The loan from Winter Harbor had an
interest rate of prime plus 2%. In addition to the stated interest rate, the
Company recognized the debt discount attributable to the warrants as interest
expense over the life of the loan (maturity date was October 15, 1998). 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.
On August 18, 1997, the Company and Winter Harbor amended their
agreement pursuant to which the Company borrowed an additional $3,000,000
bringing the total principal amount due under the Note to $5,000,000, and
issued additional warrants to purchase an additional 300,000 shares at an
exercise price of $6.38 per warrant to Winter Harbor in connection therewith.
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 preferred stock (the "Series M Redeemable Preferred Stock").
Winter Harbor purchased approximately 2,545 shares of Series M Redeemable
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 Redeemable
Preferred Stock (convertible into 1,855,000 shares of Common Stock). Such
additional shares of Series M Redeemable 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 shares 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
40
<PAGE>
the Investment Warrants (i) have demand registration rights and anti-dilution
rights and (ii) contain cashless exercise provisions.
The Series M Redeemable 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
Redeemable Preferred Stock will participate with the Common Stock in the
issuance of any dividends on a per share basis. Moreover, the Series M
Redeemable Preferred Stock will have the right to veto the payment of
dividends on any other class of stock, except for cumulative dividends which
accrue pursuant to the terms of the Class C Preferred Stock outstanding prior
to the Winter Harbor investment. The Series M Redeemable Preferred Stock is
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 Redeemable
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 included in
its earnings per share calculation a (non-cash) preferred stock dividend in
the fourth quarter of 1997 in the amount of $88,533,450. This amount was
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 1998, the Company obtained an aggregate of $7.768 million in new
interim debt financing from Winter Harbor, L.L.C. 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. As 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. On April
15, 1999, Winter Harbor agreed that it will not demand payment under the
notes prior to April 15, 2000. Additionally, Winter Harbor has the right
at any time until the loan is repaid to elect to exchange the unpaid balance
of the loan into additional shares of the Company's Series M Redeemable
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.
During 1998, the Company recorded $7,274,000 as a discount against the
new $7.768 million 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.
41
<PAGE>
The exercise prices of the above warrants issued or issuable to Winter
Harbor varied at the time of their respective issuance, however, all are
subject to adjustment downward to equal the market price of Common Stock in
the event the Common Stock market price is below the original exercise price
at the time of exercise, subject to an exercise price lower limit of the
lesser of the original exercise price or $2.75 per share.
On January 15, 1999, I-Link formalized an agreement with Winter Harbor
for additional financing. The financing arrangement consists of an
$8,000,000 bridge loan facility and a $3,000,000 standby letter of credit to
secure additional capital leases of equipment and telephone lines relative to
the expansion of the Company's telecommunications network. As of December
31, 1998, the amount borrowed in anticipation of the Bridge Loan was
$3,841,712. Any unsatisfied obligations under the Bridge Loan will come due
on October 31, 1999. The Company has the option to require that Winter
Harbor exchange the Bridge Loan balance for shares of a new series of
preferred stock (Series N Preferred Stock). This option is dependent upon
the Company mailing the Series N Preferred Stock Rights Offering to its
shareholders by the earlier of June 30, 1999 or the third business day
following clearance from the Securities and Exchange Commission of the Series
N registration statement ("Mailing Date"). In addition, the Company must
complete the rights offering by the earlier of August 6, 1999 or the first
business day following the 35th calendar day from the Mailing Date. The
Bridge Loan accrues interest at a variable rate of prime plus a spread
beginning at 4 points through and including February 9, 1999, and increasing
1 point every three months thereafter, to a maximum of 7 points.
As additional consideration for making the loan, the Company granted
warrants to purchase Common Stock to Winter Harbor. Initially, Winter Harbor
receives one warrant for every $10 borrowed from Winter Harbor including the
standby letter of credit. If the loan is not repaid by April 26, 1999, the
number of warrants will increase in total to 10 warrants for every $10
borrowed. The warrants have 7.5 year exercise periods with an exercise price
of the lower of (a) $2.78, (b) the average trading price for any 20 day period
subsequent to the issuance of the warrants, (c) the price at which new shares
of Common Stock or Common Stock equivalents are issued, or (d) the exercise
price of any new options, warrants, preferred stock or other convertible
security. The exercise price is subject to a $1.25 floor. As of December 31,
1998, the Company has granted to Winter Harbor warrants to purchase 684,171
shares of Common Stock. On April 14, 1999, the shareholders voted to approve
a plan of financing which includes issuing the full 10 warrants for each $10
borrowed under the Bridge Loan and standby letter of credit should
management elect to not repay the amounts owing prior to April 26, 1999. The
Company does not anticipate repaying the loan before April 26, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Current Position/Future Requirements."
During 1998, the Company recorded $1,032,634 as a discount against the
new $8.0 million Bridge Loan representing the relative fair value attributed
to the Bridge Loan warrants and line of credit. The debt discount is being
amortized over the term of the Bridge Loan or leases, as applicable. During
1998, $128,059 of debt discount was amortized.
On April 15, 1999, the Company entered into a new financing agreement
with Winter Harbor. Winter Harbor agreed to loan to the Company up to $4
million under a note due September 30, 1999. The Loan will accrue interest
at a variable rate of prime plus a spread beginning at 5 points through and
including May 9, 1999, and increasing 1 point every three months thereafter,
to a maximum of 7 points. The Company may cause the loan to be exchanged
for Series N Preferred Stock. It is the Company's intention to exchange
the loan for Series N Preferred Stock or repay this loan from proceeds of
the Series N offering. As partial consideration for the loan, at its next
meeting of its shareholders, the Company shall seek shareholder approval
of a modification to the conversion terms of the Series N Preferred
42
<PAGE>
Shares. The Company has an option to extend the due date to April 15,
2000 provided, that in the event the Company's shareholders fail to approve
the modification to the conversion terms of the Series N Preferred shares,
the Company shall be required to issue to Winter Harbor one warrant for
each $1 of principal outstanding on the loan as of the date of such
extension which warrants shall be issued on the same terms and
conditions as the warrants issued in connection with the $8,000,000
Bridge Loan described above.
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
agreed to 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 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) or the average
closing bid price for the five trading days immediately preceding the date
the Company receives notice of conversion whichever is lower. As of December
31, 1998, all shares of the Series D Preferred Stock had been converted into
Common Stock and the balance payable in cash to MiBridge stockholders was
$500,000.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements and those financial statement
schedules required by Item 8 hereof are filed as part of this
report:
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is presented in the Financial Statements
or Notes thereto.
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<PAGE>
(b) On December 18, 1998 the Company filed a Current Report on Form 8-K
disclosing the terms of an agreement in principal between the
Company and Winter Harbor L.L.C. relating to financing
arrangements.
(c) The following exhibits are filed as part of this Registration
Statement:
Number Title of Exhibit
2.2(2) Stock Purchase Agreement, dated February 13, 1996, by and among
Medcross, Inc, I-Link, Ltd., and GNet Enterprises, Inc.
2.3(6) Share Exchange Agreement for the Acquisition of Family
Telecommunications Incorporated by Medcross, Inc., effective as of
January 1, 1997.
3.1(5) Amended and Restated Articles of Incorporation of the Company, as
further amended.
3.2(16) Bylaws of the Company, as amended.
3.3(3) Articles of Incorporation of I-Link Worldwide Inc.
3.4(3) Bylaws of I-Link Worldwide Inc.
3.5(7) Articles of Incorporation of Family Telecommunications Incorporated
and Articles of Amendment to the Articles of Incorporation.
3.6(7) Bylaws of Family Telecommunications Incorporated.
3.7(12) Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company.
3.8(14) Articles of Amendment to the Company's Amended and Restated Articles
of Incorporation, establishing the terms of Series F Redeemable
Preferred Stock
4.4(7) Placement Agent's Common Stock Warrant Agreement and Certificate.
4.5(7) Consultant's Common Stock Warrant Agreement and Certificate.
4.7(8) 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(12) Form of Hardy Group Warrant to purchase 175,000 shares of Common
Stock.
4.9(11) Securities Purchase Agreement by and between the Company and Winter
Harbor, dated as of September 30, 1997.
4.10(17) Amended and Restated Registration Rights Agreement dated as of
January 15, 1999 by and between the Company and Winter Harbor,
amending Registration Rights Agreement dated October 10, 1997.
4.11(11) Form of Shareholders Agreement by and among the Company and Winter
Harbor and certain holders of the Company's securities, which
constitutes Exhibit D to the Purchase Agreement.
4.12(11) Form of Warrant Agreement by and between Medcross, Inc. and Winter
Harbor, which constitutes Exhibit F to the Purchase Agreement.
4.13(9) Warrant Agreement dated as of June 6, 1997, by and between the
Company and Winter Harbor; and related Warrant Certificate.
10.3(3)* Employment Agreement, dated February 4, 1996, between Medcross, Inc.
and Henry Y.L. Toh.
10.4(3)* Employment Agreement, dated January 1, 1996, between Medcross, Inc.
and Dorothy L. Michon.
10.6(3)* Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Alex Radulovic.
10.7(3)* Employment Agreement, dated January 1, 1996, between Medcross, Inc.
and Stephanie E. Giallourakis.
10.8(3)* 1995 Director Stock Option and Appreciation Rights Plan.
10.9(3)* 1995 Employee Stock Option and Appreciation Rights Plan.
10.10(3)* Employment Agreement, dated April 8, 1996, between I-Link Worldwide
Inc. and John W. Edwards.
10.11(4) Consulting Agreement, effective January 1, 1996, by and between
Windy City, Inc. and the Company.
10.12(5) Agreement for Terminal Facility Collocation Space, dated June 21,
1996, by and between I-Link Worldwide Inc. and MFS Telecom, Inc.
44
<PAGE>
10.13(7) Consulting Agreement dated August 21, 1996 between the Company and
Commonwealth Associates.
10.14(7) Sales Agency Agreement dated July 1, 1996 between the Company and
Commonwealth Associates and Amendment No. 1 thereto.
10.15(7) 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(12) Commercial Lease dated September 11, 1996 between I-Link Worldwide
Inc. and Draper Land Partnership II.
10.17(12)* Employment Agreement dated October 15, 1996, between I-Link
Worldwide Inc. and Karl S. Ryser, Jr.
10.18(7) Term Lease Master Agreement dated May 19, 1996 by and between IBM
Credit Corporation and I-Link Worldwide Inc.
10.19(7)* 1997 Recruitment Stock Option Plan.
10.20(7) Lease Agreement dated July 1, 1996 between Broadway Associates and
ILC Communications.
10.21(7) Lease Between Phoenix City Square Partnership and Robert W. Edwards
and Denise A. Edwards dated March 18, 1996.
10.22(7) Carrier Agreement between MCI Telecommunications Corporation and
ILC, Inc. dated August 26, 1996.
10.23(7) Strategic Member Reseller Agreement between I-Link Worldwide Inc.
and WealthNet Incorporated dated January 31, 1997.
10.24(7) Settlement Agreement between WealthNet Incorporated and Family
Telecommunications Incorporated dated January 29, 1997.
10.25(12)* Employment Agreement, dated as of September 2, 1997, between
Medcross, Inc. and Dror Nahumi.
10.26(12) 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(13)* Employment Agreement dated August 29, 1997, between I-Link
Worldwide, LLC and Jon McKillip.
10.28(14) Agreement dated April 14, 1998, by and between the Company and
Winter Harbor.
10.29(14) Pledge Agreement dated April 14, 1998, by and between the Company
and Winter Harbor.
10.30(14) Security Agreement dated April 14, 1998, by and among certain of the
Company's subsidiaries and Winter Harbor.
10.31(14) Form of Promissory Notes issued to Winter Harbor.
10.32(15) 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(14) Registration Rights Agreement dated June 30, 1998 by and between the
Company and JNC.
10.34(14) Warrant to purchase 250,000 shares of Common Stock of the Company,
dated June 30, 1998, issued to JNC.
10.35(14) Exchange Agreement dated July 28, 1998 by and between the Company
and JNC.
10.36(14) Warrant to purchase 100,000 shares of Common Stock of the Company,
dated July 28, 1998, issued to JNC.
10.37(18)* Employment Agreement dated August 28, 1998, between the Company and
John Ames.
10.38(17) Loan Agreement dated as of January 15, 1999 by and between the
Company and Winter Harbor.
10.39(17) First Amendment to Loan Agreement dated March 4, 1999 by and between
the Company and Winter Harbor.
10.40(17) Promissory Note dated November 10, 1998, in principal amount of
$8,000,000 executed by the Company in favor of Winter Harbor.
10.41(17) Series K Warrant Agreement dated as of January 15, 1999 by and
between the Company and Winter Harbor and form of Series K Warrant.
10.42(17) Subsidiary Guaranty dated as of January 15, 1999 executed by five of
the Company's wholly-owned subsidiaries in favor of Winter Harbor.
45
<PAGE>
10.43(17) Agreement dated as of January 15, 1999 by and between the Company
and Winter Harbor.
10.44(17) First Amendment to Security Agreement dated as of January 15, 1999,
by and among the Company, five of its wholly-owned subsidiaries and
Winter Harbor, amending Security Agreement dated April 14, 1997.
10.45(17) First Amendment to Pledge Agreement dated as of January 15, 1999, by
and among the Company and Winter Harbor, amending Pledge Agreement
dated April 14, 1997.
10.46(17) Series D, E, F, G, H, I and J Warrant Agreement dated as of January
15, 1999 by and between the Company and Winter Harbor, and related
forms of warrant certificates.
21(15) Subsidiaries of the Registrant.
27(1) Financial data schedule.
________________
* Indicates a management contract or compensatory plan or arrangement
required to be filed.
1 Filed herewith.
2 Incorporated by reference to the Company's Current Report on Form 8-
K, dated February 23, 1996, file number 0-17973.
3 Incorporated by reference to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1995, file number 0-17973.
4 Incorporated by reference to the Company's Current Report on Form 8-
K, dated February 23, 1996, file number 0-17973.
5 Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996, file number 0-17973.
6 Incorporated by reference to the Company's Current Report on Form 8-
K, dated January 13, 1997, file number 0-17973.
7 Incorporated by reference to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1996, file number 0-17973.
8 Incorporated by reference to the Company's Registration Statement on
Form SB-2, file number 333-17861.
9 Incorporated by reference to the Company's Current Report on Form 8-
K, dated June 5, 1997, file number 0-17973.
10 Incorporated by reference to the Company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, file number 333-17861.
11 Incorporated by reference to the Company's Current Report on Form 8-
K, dated September 30, 1997, file number 0-17973.
12 Incorporated by reference to the Company's Pre-Effective Amendment
No. 3 to Registration Statement on Form SB-2, file number 333-17861.
13 Incorporated by reference to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997, file number 0-17973.
14 Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998, file number 0-17973.
15 Incorporated by reference to the Company's Registration Statement on
Form S-1 filed September 3, 1998, file number 333-62833.
16 Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998, file number 0-17973.
17 Incorporated by reference to the Company's Current Report on Form 8-
K filed on March 23, 1999, file number 0-17973.
18 Incorporated by reference to the Company's Annual Report on Form 10-
K for the year ended December 31, 1998, file number 0-17973.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
I-LINK INCORPORATED
(Registrant)
Dated: June 23, 1999 By: /s/ John W. Edwards
John W. Edwards, Chairman of the Board,
President and Chief Executive Officer
In accordance with Section 13 of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John W. Edwards Chairman of the Board, President June 23, 1999
John W. Edwards and Chief Executive Officer
/s/ Karl S. Ryser, Jr. Treasurer, Chief Financial Officer June 23, 1999
Karl S. Ryser, Jr. and Chief Accounting Officer
/s/ David E. Hardy Secretary June 23, 1999
David E. Hardy
/s/ Henry Y.L. Toh Director June 23, 1999
Henry Y.L. Toh
/s/ Thomas A. Keenan Director June 23, 1999
Thomas A. Keenan
/s/ David R. Bradford Director June 23, 1999
David R. Bradford
/s/ Joseph A. Cohen Director June 23, 1999
Joseph A. Cohen
<PAGE>
FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULES
TABLE OF CONTENTS
Title of Document Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-9
Report of Independent Accountants on Financial
Statement Schedule S-1
Schedule of Valuation and Qualifying Accounts S-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
I-Link Incorporated and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all materials respects, the financial position of I-Link
Incorporated and its subsidiaries (the "Company") as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 17, Series M Redeemable preferred stock has been
reclassified in the 1997 balance sheet.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 15, 1999
F-1
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,311,003 $ 1,643,805
Accounts receivable, less allowance for
doubtful accounts of $1,941,000 and
$1,385,000 as of December 31, 1998 and 1997,
respectively 4,402,016 3,233,207
Certificates of deposit - restricted 378,160 1,628,500
Other current assets 293,789 321,488
Net assets of discontinued operations 417,371 -
---------- ----------
Total current assets 6,802,339 6,827,000
Furniture, fixtures, equipment and software, net 7,262,781 3,551,917
Other assets:
Intangible assets, net 9,420,383 12,314,080
Certificates of deposit - restricted 164,125 259,000
Other assets 205,735 705,502
Net assets of discontinued operations - 595,377
---------- ----------
$ 23,855,363 $ 24,252,876
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,792,651 $ 4,833,452
Accrued liabilities 3,436,989 2,770,997
Current portion of long-term debt 3,987,569 1,008,416
Notes payable to related parties, 500,000 1,000,000
Current portion of obligations under capital
leases 573,044 169,315
---------- ----------
Total current liabilities 11,290,253 9,782,180
Long-term debt - 1,354,341
Notes payable to related parties, net of discount 7,768,000 500,000
Obligations under capital leases 603,933 67,159
---------- ----------
Total liabilities 19,662,186 11,703,680
---------- ----------
Commitments and contingencies (notes 8, 11 and 15)
Redeemable preferred stock - Class M (Note 17) 11,734,820 11,734,820
Redeemable preferred stock - Class F 9,411,720 -
---------- ----------
21,146,540 11,734,820
---------- ----------
</TABLE>
Continued
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Stockholders' equity (deficit):
Preferred stock, $10 par value, authorized
10,000,000 shares, issued and outstanding
44,051 and 115,526 as of December 31, 1998
and 1997, respectively, liquidation preference
of $2,675,259 and $6,461,480 at December 31,
1998 and 1997, respectively 440,510 1,155,260
Common stock, $.007 par value, authorized
75,000,000 shares, issued and outstanding
18,762,596 and 16,036,085 at December 31,
1998 and 1997, respectively 131,338 112,251
Additional paid-in capital 68,632,195 58,820,877
Deferred compensation ( 1,214,591) ( 2,289,765)
Accumulated deficit (84,942,815) (56,984,247)
---------- ----------
Total stockholders' equity (deficit) (16,953,363) 814,376
---------- ----------
$ 23,855,363 $ 24,252,876
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Telecommunication services $ 19,634,681 $ 11,081,007 $ -
Marketing services, net 4,548,421 2,637,331 -
Technology licensing and
development 1,466,315 346,875 -
Other - - 170,532
---------- ---------- ----------
Total revenues 25,649,417 14,065,213 170,532
---------- ---------- ----------
Operating costs and expenses:
Telecommunication network expenses 19,099,194 14,634,999 1,120,779
Marketing services costs 5,850,873 4,294,014 -
Selling, general and administrative 10,563,382 11,948,568 2,903,728
Provision for doubtful accounts 3,160,621 1,385,000 15,996
Depreciation and amortization 4,192,174 2,549,282 690,920
Acquired in-process research and
development - 4,235,830 14,577,942
Research and development 2,429,116 878,582 347,504
---------- ---------- ----------
Total operating costs and expenses 45,295,360 39,926,275 19,656,869
---------- ---------- ----------
Operating loss (19,645,943) (25,861,062) (19,486,337)
---------- ---------- ----------
Other income (expense):
Interest expense ( 8,404,418) ( 3,022,619) ( 2,012,342)
Interest and other income 270,288 215,989 155,702
Accrued litigation settlement - - ( 821,000)
---------- ---------- ----------
Total other expense ( 8,134,130) ( 2,806,630) ( 2,677,640)
---------- ---------- ----------
Loss from continuing operations (27,780,073) (28,667,692) (22,163,977)
---------- ---------- ----------
Discontinued operations:
Loss from discontinued operations
(less applicable income tax
provision of $0 in 1998, 1997
and 1996) - ( 183,556) ( 900,263)
Loss on disposal of discontinued
operations, including provision
in 1997 of $222,000 for operating
losses during phase-out period
(less applicable income tax
provision of $0 in 1998 and 1997) ( 178,006) ( 1,007,453) -
---------- ---------- ----------
Loss from discontinued operations ( 178,006) ( 1,191,009) ( 900,263)
---------- ---------- ----------
Net loss $(27,958,079) $(29,858,701) $(23,064,240)
========== ========== ==========
</TABLE>
Continued
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Calculation of net loss per common
share:
Loss from continuing operations $(27,780,073) $(28,667,692) $(22,163,977)
Cumulative preferred stock
dividends not paid in current
year ( 2,065,894) ( 1,159,589) ( 343,629)
Deemed (non-cash) preferred stock
dividend on Class C, E, F and
M convertible cumulative
preferred stock ( 7,774,759) (88,533,450) (20,880,000)
Dividend paid on Class F
redeemable preferred stock ( 489) -
---------- ----------- ----------
Loss from continuing operations
applicable to Common Stock $(37,621,215) $(118,360,731) $(43,387,606)
========== =========== ==========
Basic and diluted weighted
average shares outstanding 17,627,083 11,756,249 6,780,352
========== =========== ==========
Net loss per common share -
basic and diluted:
Loss from continuing operations $ (2.13) $ (10.07) $ (6.40)
Loss from discontinued operations (0.01) ( 0.10) (0.13)
---------- ----------- ----------
Net loss per common share $ (2.14) $ (10.17) $ (6.53)
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- -------------------- Paid-In Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
- ------------------ ------- ----------- ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 207,500 $ 2,075,000 1,803,092 $ 12,622 $ 3,428,854 $ - $( 4,061,306)
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, Inc. - - 3,000,000 21,000 12,579,000 - -
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 - -
payable
Issuance of stock
warrants below
market value of
Common Stock - - - - 11,875 - -
Interest expense
associated with
issuance of
convertible notes - - - - 1,945,000 - -
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
F-4
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), continued
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- -------------------- Paid-In Deferred Accumulated
Shares Amount Shares Amount Capital Compensation 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 service - - - - 4,757,134 (4,757,134) -
Amortization of
deferred
compensation on
stock options
issued for service - - - - - 2,467,369 -
Exercise of stock
options - - 79,923 559 137,374 - -
Common Stock
issued for the
acquisition of
Family Telecomm-
unications, Inc. - - 400,000 2,800 2,411,783 - -
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 satisfy
accrued litigation
settlement - - - - 821,000 - -
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), continued
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- -------------------- Paid-In Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
- ------------------ ------- ----------- ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Warrants issued
in connection
with certain
notes payable - - - - 2,371,575 - -
Issuance ofClass M
redeemable preferred
stock, net of
issuance costs
of $365,180 4,400 44,000 - - 11,690,820 - -
Reclassification of
Series M Redeemable
preferred stock to
mezzanine (4,400) (44,000) - - (11,690,820) - -
Net loss - - - - - - (29,858,701)
------- ----------- ---------- -------- ----------- ------------ -------------
Balance at
December 31, 1997 115,526 1,155,260 16,036,085 112,251 58,820,877 (2,289,765) (56,984,247)
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), continued
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- -------------------- Paid-In Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit
- ------------------ ------- ----------- ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 115,526 $ 1,155,260 16,036,085 $112,251 $58,820,877 $(2,289,765) $(56,984,247)
Issuance of Class F
redeemable preferred
stock, net of
issuance costs
of $569,418 1,000 10,000 - - 9,420,582 - -
Reclassification of
Class F redeemable
preferred stock to
mezzanine (1,000) (10,000) - - ( 9,420,582) - -
Reclassification of
Class F redeemable
preferred stock
from mezzanine
due to conversion
to common stock 2 20 - - 18,842 - -
Conversion of
preferred stock
into Common Stock (71,477) (714,770) 2,326,731 16,288 698,482 - -
Common Stock
dividend paid to
holders of Class
F redeemable
preferred stock - - 240 2 487 - (489)
Stock options
issued for services - - - - 378,322 (356,322) -
Amortization of
deferred compensation
on stock options
issued for services - - - - - 1,157,901 -
Forfeiture of stock
options issued for
services - - - - ( 273,595) 273,595 -
Warrants issued in
connection with
certain notes payable - - - - 1,032,634 - -
Warrants issued in
connection with
certain convertible
notes payable - - - - 7,274,000 - -
Exercise of stock
options and warrants - - 399,540 2,797 682,146 - -
Net loss - - - - - - (27,958,079)
------- ----------- ---------- -------- ----------- ------------ -------------
Balance at
December 31, 1998 44,051 $ 440,510 18,762,596 $131,338 $68,632,195 $(1,214,591) $(84,942,815)
======= =========== ========== ======== =========== ============ =============
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(27,958,079) $(29,858,701) $(23,064,240)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 4,192,174 2,549,282 690,920
Provision for doubtful accounts 3,160,621 1,385,000 -
Accrued litigation settlement - - 821,000
Amortization of discount on
notes payable 7,402,059 2,371,575 -
Amortization of deferred
compensation on stock options
issued for services 1,157,901 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 ( 4,329,430) ( 2,932,347) 19,490
Other assets 527,466 ( 718,096) ( 294,067)
Accounts payable and accrued
liabilities ( 990,776) 5,769,611 ( 432,375)
Discontinued operations
- noncash charges and working
capital changes 12,345 1,190,358 881,890
---------- ---------- ----------
Net cash used in
operating activities (16,825,719) (12,008,526) ( 4,840,285)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of furniture, fixtures,
equipment and software ( 3,258,189) ( 1,948,857) ( 669,970)
Cash received from the purchase
of MiBridge - 79,574 -
Cash received from the purchase
of I-Link Communications - 435,312 -
Purchase of certificates of
deposit - restricted - - ( 1,962,601)
Proceeds from maturity of
certificates of deposit
- restricted 1,345,215 53,500 60,000
Investing activities of
discontinued operations 310,000 ( 7,055) ( 915)
---------- ---------- ----------
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net cash used in
investing activities ( 1,602,974) ( 1,387,526) (2,573,486)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-
term debt 11,009,712 5,000,000 2,502,333
Repayment of long-term debt ( 2,700,904) ( 892,307) ( 2,860,086)
Payment of capital lease
obligations ( 184,103) ( 187,278) ( 130,299)
Proceeds from issuance of
preferred stock, net of
offering costs 9,430,582 6,618,888 12,290,000
Proceeds from exercise of Common
Stock warrants and options 684,943 137,933 -
Financing activities of
discontinued operations ( 170,465) ( 53,556) 32,734
---------- ---------- ----------
Net cash provided by
financing activities 18,069,765 10,623,680 11,834,682
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents ( 358,928) ( 2,772,372) 4,420,911
Cash and cash equivalents at
beginning of year 1,727,855 4,500,227 79,316
---------- ---------- ----------
Cash and cash equivalents at end of year:
Continuing operations 1,311,003 1,643,805 4,407,465
Discontinued operations 57,924 84,050 92,762
---------- ---------- ----------
Total cash and cash equivalents
at end of year $ 1,368,927 $ 1,727,855 $ 4,500,227
========== ========== ==========
</TABLE>
Continued
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental schedule of non-cash
investing and financing activities:
Preferred stock and note payable
issued inconnection with the
acquisition of MiBridge, Inc. - $ 8,250,000 $ -
Common Stock issued in connection
with theacquisition of Family
Telecommunications, Inc. - 2,414,583 -
Stock options issued for services 378,322 4,757,134 -
Conversion of preferred stock into
Common Stock 714,770 1,449,240 2,000,000
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
Equipment acquired under capital
lease obligations 1,124,606 - 605,609
Stock warrants issued to satisfy
with litigation settlement - 821,000 -
Supplemental cash flow information:
Interest paid -
continuing operations $ 109,866 $ 286,935 $ -
Interest paid -
discontinued operations 158,392 93,625 189,107
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statement
F-8
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 1 - Description of Business, Principles of Consolidation and Liquidity
The consolidated financial statements include the accounts of I-Link
Incorporated and its subsidiaries (the "Company"). The Company's principal
operation is the development, sale and delivery of enhanced communications
products and services utilizing its own private intranet and both owned and
leased network switching and transmission facilities. The Company provides
unique communications solutions through its use of proprietary technology
acquired in the acquisitions of I-Link Worldwide, Inc. and MiBridge, Inc.
Telecommunications services are marketed primarily through independent
representatives to subscribers throughout the United States. The Company's
telecommunication services operations began primarily with the first quarter
of 1997 acquisition of I-Link Communications, 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, L.L.C., through which it launched a network
marketing channel to market its telecommunications services and products.
Previously, all marketing of telecommunications services was provided by
third-party wholesale distributors through the Company's wholly-owned
subsidiary I-Link Systems, Incorporated.
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, were 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 $27,780,073 for
the year ended December 31, 1998, and as of December 31, 1998 had an
accumulated deficit of $84,942,815 and negative working capital of
$4,487,914. The Company anticipates that revenues generated from its
continuing operations will not be sufficient during 1999 to fund ongoing
operations and the continued expansion of its private telecommunications
network facilities, development and manufacturing of its C4 product and
anticipated growth in subscriber base. In order to provide funds towards
working capital needs, the Company has entered into two additional financing
arrangements with Winter Harbor. The first provides for short-term borrowings
of up to $8,000,000 and a $3,000,000 standby letter of credit to guarantee
payment on a new $3,000,000 equipment lease (see Notes 7 and 8). As of
December 31, 1998, the Company had received advances under the short term
bridge loan of $3,842,000 and had made equipment acquisitions on the new lease
of $1,144,000. The remaining $4,158,000 on the Bridge Loan was received
subsequent to year-end. Under the second agreement, finalized on April 15,
1999, Winter Harbor agreed to loan to the Company up to $4,000,000 under a
note due September 30, 1999. The Company may cause the loan to be exchanged
for Series N Preferred Stock. It is the Company's intention to exchange
F-9
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 1 - Description of Business, Principles of Consolidation and Liquidity,
continued
the loan for Series N Preferred Stock or repay this loan from proceeds of
the Series N offering. The Company has an option to extend the due date
on the $4,000,000 note to April 15, 2000 (see Note 16). In addition, the
due date of the Company's prior obligation to Winter Harbor in the amount
of $7,768,000, which was due on demand, was extended to April 15, 2000.
Under the $8,000,000 and $3,000,000 financing arrangements, the Company is
obligated to offer up to 20,000 shares of a new series of preferred stock
(Series N) as part of a rights offering which will be open to the Company's
common and preferred stockholders. Each share of Series N preferred stock
may be purchased for $1,000. The Company has the option to require that Winter
Harbor exchange the outstanding balance on the $8,000,000 financing
arrangement for Series N shares. This option is dependent upon the Company
mailing the Series N Preferred Stock Rights Offering to its shareholders by the
earlier of June 30, 1999 or the third business day following clearance from
the Securities and Exchange Commission of the Series N registration statement
("Mailing Date"). In addition, the Company must complete the rights offering
by the earlier of August 6, 1999 or the first business day following the 35th
calendar day from the Mailing Date. The Company believes it is remote that
the Series N Rights Offering will not be completed. Winter Harbor is entitled,
but not obligated, to subscribe for any shares of Series N stock which are
subject to rights which are not exercised by other stockholders. Winter
Harbor has indicated its intention to subscribe for all unexercised rights.
Should all of the Series N Preferred Stock be sold and all $8,000,000 be
drawn on the financing arrangement, the net proceeds to the Company after
repayment of loan would be approximately $11,500,000. Should the Series N
Rights Offering not be completed, or not be fully subscribed to, the Company
believes that it would be able to generate adequate cash flow to continue
operations through 1999 by arranging alternative financing, reducing expenses
and/or selling Company assets.
While the Company believes that the aforementioned sources of funds will be
sufficient to fund operations into 2000, the Company anticipates that
additional funds will be necessary from public or private financing markets
to successfully integrate and finance the planned expansion of the business
communications services, product development and manufacturing, 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.
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 primarily 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.
F-10
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies, continued
Furniture, fixtures, equipment and software
Furniture, fixtures and equipment and software 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
Software 3 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 its 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. The write off is
included in selling, general and administrative expense. There were no such
write offs for 1998 and 1996. 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
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 promotional and presentation materials
and national conference registration fees. IRs enter into a standard written
independent sales representative agreement with the Company and pay a fee of
either $50 or $295 based on selected options for sales and marketing materials
and on-going administrative support. Revenue from the sale of promotional
and presentation materials (included in Marketing services revenue) is
recognized at the time the materials are shipped. The portion of the sign-up
fee including a normal profit margin, relating to on-going administrative
support is deferred and recognized over twelve months (the initial term of the
IR agreement). Marketing services revenues are presented net of estimated
refunds on returns of network marketing materials.
F-11
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies, continued
Technology licensing and development revenues are recognized as products are
shipped (or used as in the case of royalties) 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 recognized revenue from health care services (discontinued
operations) at the time services were performed, net of contractual allowances
based on agreements with third party payers.
Computer software costs
Effective January 1, 1999 the Company adopted 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. In accordance with SOP 98-1, effective
January 1, 1999, the Company will capitalize material costs associated with
developing computer software for internal use. Previously these costs were
recognized as a current expense. Purchased computer software for internal
use is capitalized and amortized over the expected useful life, usually three
years. The impact of applying this standard is not expected to be material to
the consolidated financial position or results of operations of the Company.
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.
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
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 1998, 1997 and 1996, basic and diluted loss per share are the same.
Basic and diluted loss per common share for 1998, 1997 and 1996 were
calculated as follows:
F-12
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies, continued
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Loss from continuing operations $(27,780,073) $(28,667,692) $(22,163,977)
Cumulative preferred stock
dividends not paid in
current year ( 2,065,894) ( 1,159,589) ( 343,629)
Deemed preferred stock dividends
on Class E and Class F
convertible redeemable preferred
stock ( 7,774,759) - -
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)
Dividend paid on Class F
redeemable preferred stock ( 489) - -
---------- ----------- ----------
Loss from continuing operations
applicable to Common Stock $(37,621,215) $(118,360,731) $(43,387,606)
========== =========== ==========
Loss from discontinued operations $( 178,006) $( 1,191,009) $( 900,263)
========== =========== ==========
Weighted average shares
outstanding 17,627,083 11,756,249 6,780,352
========== =========== ==========
Loss from continuing operations $ (2.13) $ (10.07) $ (6.40)
Loss from discontinued operations (0.01) ( 0.10) (0.13)
---------- ----------- ----------
Net loss per common share $ (2.14) $ (10.17) $ (6.53)
========== =========== ==========
</TABLE>
The deemed preferred stock dividends on Class E and Class F convertible
cumulative redeemable preferred stock equal the sum of the difference
between the conversion price per common share per the agreements and the
market price of the Common Stock as of the date the agreements were
finalized and the difference between the fair value of the Class F
redeemable preferred stock issued and the carrying value of the Class E
stock at the date of redemption.
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 on Class C, E, F and M preferred stock are
implied only and do not represent obligations to pay a dividend.
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Assumed conversion of Class B
preferred stock - - 183,542
Assumed conversion of Class C
preferred stock 1,057,224 2,759,016 5,760,000
Assumed conversion of Class D
preferred stock - 383,108 -
Assumed conversion of Class F
redeemable preferred stock 4,909,001 - -
Assumed conversion of Class M
redeemable preferred stock 5,951,795 4,400,000 -
Assumed conversion of convertible debt 3,820,954 - -
Assumed conversion of warrants
issued on convertible debt 5,000,000 - -
Assumed exercise of options and warrants
to purchase shares of Common Stock 30,265,670 20,998,872 5,761,295
---------- ---------- ----------
51,004,644 28,540,996 11,704,837
========== ========== ==========
</TABLE>
As of December 31, 1998, Winter Harbor, the sole holder of Series M
Redeemable Preferred Stock, held warrants, exercisable at any time, for the
purchase of up to 18,224,171 shares of Common Stock. In addition, should
Winter Harbor elect to exchange its $7.768 million in promissory notes into
additional shares of Series M Redeemable Preferred Stock, it is entitled to
receive additional warrants to purchase 5,000,000 shares of Common Stock. The
exercise prices of all of such warrants varied at the time of their
respective issuance, however, all are subject to adjustment downward to equal
the market price of Common Stock in the event the Common Stock market price
is below the original exercise price at the time of exercise, subject to an
exercise price lower limit of the lesser of the original exercise price or
$2.75 per share.
Segment reporting
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information". FAS 131 supersedes FAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
FAS 131 also requires disclosures about products and services, geographic
areas, and major customers. The adoption of FAS 131 did not affect results
of operations or financial position but did affect the disclosure of segment
information (see Note 14).
F-14
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 2 - Summary of Significant Accounting Policies, continued
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.
Reclassifications
Certain balances in the December 31, 1997 and 1996 financial statements have
been reclassified to conform to 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 has sold principally all of the fixed assets and intends to
sell all of the remaining assets of the medical services subsidiaries, with
the proceeds being used to satisfy outstanding obligations of the medical
services subsidiaries. During 1998 the Company received $310,000 from the
sale of assets from the medical services subsidiaries. In January 1999,
the Company sold additional assets for $15,000 and a note receivable of
$35,000. As of December 31, 1998, there were no significant revenue
generating activities remaining from the medical services operations. On-
going administrative costs include payroll and office rent associated with
collecting outstanding accounts receivable and oversight of the final close
out procedures. These anticipated costs had been previously accrued for as
part of the expected ultimate loss on disposal.
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.
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:
F-15
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 3 - Discontinued operations, continued
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 57,924 $ 84,050
Accounts receivable 941,508 1,033,376
Inventory 555,291 555,939
Other 15,217 24,951
--------- ---------
Total current assets 1,569,940 1,698,316
--------- ---------
Furniture, fixtures and equipment, net 363,345 958,153
Intangible assets, net - 391,757
Other non-current assets 6,230 8,706
--------- ---------
Total assets 1,939,515 3,056,932
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,070,396 1,781,541
Notes payable 241,661 412,126
--------- ---------
Total current liabilities 1,312,057 2,193,667
Other liabilities 210,087 267,888
--------- ---------
Total liabilities 1,522,144 2,461,555
--------- ---------
Net assets - discontinued operations $ 417,371 $ 595,377
========= =========
</TABLE>
Revenues of the discontinued operations were $1,445,376, $2,309,099 and
$2,212,544 for 1998, 1997 and 1996, respectively. The net assets of the
discontinued operations as of December 31, 1998 are shown as current in the
consolidated balance sheet as it is anticipated the remaining assets of
the medical services businesses will be sold in the second quarter of 1999.
Note 4 - Certificates of deposit - restricted
As of December 31, 1998, the Company has $542,285 in restricted certificates
of deposit (CDs). The CDs collateralize certain lease agreements, including
equipment purchase and facilities leases. All of the CDs are held in escrow
and bear interest which is paid to the Company. During 1998, restricted CDs
totaling $1,345,215 were released to the Company in accordance with the lease
agreements. Of the remaining CDs held in escrow, $378,160 will be released
to the Company during 1999 and are classified as a current asset in the
consolidated balance sheet.
F-16
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 5 - Furniture, fixtures, equipment and software
Continuing operations
Furniture, fixtures, equipment and software relating to continuing
operations consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Telecommunications network equipment $ 4,558,946 $ 2,628,422
Furniture, fixtures and office equipment 2,430,663 1,792,958
In-process system development costs 2,284,574 -
Software and information systems 351,728 195,188
--------- ---------
9,625,911 4,616,568
Less accumulated depreciation and amortization (2,363,130) (1,064,651)
--------- ---------
$ 7,262,781 $ 3,551,917
========= =========
</TABLE>
Included in telecommunications network equipment are $1,730,215 and
$605,609 in assets acquired under capital lease at December 31, 1998 and
1997. Accumulated amortization on these leased assets was $538,954 and
$341,602 at December 31, 1998 and 1997. At December 31, 1998, in-process
system development costs of $2,284,574 have been capitalized and are not
being amortized as the development is still in process.
The Company regularly evaluates whether events or circumstances have
occurred that indicate the carrying value of its furniture, fixtures,
equipment and software 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. There were no such write-offs in 1998, 1997 or 1996.
As of April 1999 the Company is evaluating the functionality and progress of
the billing and operations information system (in-process system development
costs) being developed by an outside vendor. The Company is determining
whether the system will ultimately meet its needs and whether to proceed with
the project. Should the Company decide not to continue with the system
development, the asset would be written down to its appropriate carrying value.
The Company feels its current systems are adequate to continue supporting its
operations in the event the Company determines to not proceed with the
development.
Discontinued operations
Furniture, fixtures and equipment relating to discontinued operations
consisted of the following at December 31:
F-17
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 5 - Furniture, fixtures, equipment and software, continued
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Medical services equipment $ 836,885 $ 3,082,756
Furniture, fixtures and office equipment 383,269 388,191
--------- ---------
1,220,154 3,470,947
Less accumulated depreciation ( 856,809) (2,512,794)
--------- ---------
$ 363,345 $ 958,153
========= =========
</TABLE>
Note 6 - Intangible Assets
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Acquired technology $ 1,450,000 $ 1,450,000
Excess acquisition cost over fair
value of net assets acquired 11,072,138 11,072,138
Other intangible assets 1,203,200 1,203,200
---------- ----------
13,725,338 13,725,338
Less accumulated amortization ( 4,304,955) ( 1,411,258)
---------- ----------
$ 9,420,383 $ 12,314,080
========== ==========
</TABLE>
F-18
<PAGE>
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>
1998 1997
------------ ------------
<S> <C> <C>
Note payable to MCI, interest at 7.0%,
payable in monthly installments of $250,436 $ 987,301 $ 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 500,000 1,500,000
Note payable to Winter Harbor, payable
April 15, 2000, interest at prime plus four
percent (11.75% at December 31, 1998) 7,768,000 -
Bridge note payable to Winter Harbor, interest
at prime plus four percent (11.75% at December
31, 1998), increasing to prime plus seven
percent, principal balance due October 31,
1999, net of debt discount of $904,574 2,937,138 -
Note payable to a finance company, interest
at 4.60% payable in monthly installments of
$5,051 59,130 -
Other 4,000 4,000
---------- ----------
12,255,569 3,862,757
Less current portion ( 4,487,569) ( 2,008,416)
---------- ----------
Long-term debt, less current portion $ 7,768,000 $ 1,854,341
========== ==========
</TABLE>
In May 1998, the Company and MCI agreed to restructure the existing note
payable to provide for a fixed monthly payment of $250,436, instead of the
original escalating monthly payment schedule which required a balloon
payment in April 1999. All other terms of the note remained the same.
During 1998, the Company obtained an aggregate of $7.768 million in new
interim debt financing from Winter Harbor, L.L.C. 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 (Loan Warrants) 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
F-19
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 7 - Long-term debt, continued
collateralized by essentially all of the assets of the Company's
subsidiaries. As the loan was not repaid by May 15, 1998, the total
loan, including additional borrowings of $2,000,000 obtained in the second
quarter, continued on a demand basis with interest accruing at prime plus
four percent. On April 15, 1999, Winter Harbor agreed that it will not demand
payment under the notes prior to April 15, 2000. Additionally, Winter
Harbor has the right at any time until the loan is repaid to elect to convert
the unpaid balance of the loan into additional shares of the Company's Series
M Redeemable 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.
During 1998, the Company recorded $7,274,000 as a discount against the new
Winter Harbor 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.
On January 15, 1999, I-Link entered into a formal agreement with Winter Harbor
for additional financing. Advances were made against the anticipated financing
agreement prior to January 15, 1999. The financing arrangement consists of an
$8,000,000 bridge loan facility (Bridge Loan) and a $3,000,000 standby
letter of credit to secure additional capital leases of equipment and
telephone lines relative to the expansion of the Company's
telecommunications network (see Note 8). As of December 31, 1998, the
amount borrowed under the Bridge Loan was $3,841,712. Any unsatisfied
obligations under the Bridge Loan will come due on October 31, 1999. The
Company has the option to require that Winter Harbor exchange the Bridge
Loan balance for shares of a new series of preferred stock (see Note 1).
The Bridge Loan accrues interest at a variable rate of prime plus a spread
beginning at 4 points through and including February 9, 1999, and
increasing 1 point every three months thereafter, to a maximum of 7 points.
As additional consideration for making the $8,000,000 Bridge Loan and
$3,000,000 standby letter of credit, the Company granted warrants to purchase
Common Stock to Winter Harbor. Initially, Winter Harbor receives one warrant
for every $10 borrowed from Winter Harbor. If the loan is not repaid by
April 26, 1999, the number of warrants will increase in total to 10 warrants
for every $10 borrowed. The warrants have 7.5 year exercise periods with an
exercise price of the lower of (a) $2.78, (b) the average trading price for
any 20 day period subsequent to the issuance of the warrants, (c) the price
at which new shares of Common Stock or Common Stock equivalents are issued,
or (d) the exercise price of any new options, warrants, preferred stock or
other convertible security. The exercise price is subject to a $1.25 floor.
On April 14, 1999, the shareholders voted to approve a plan of financing
which includes issuing the full 10 warrants for each $10 borrowed under the
Bridge Loan and standby letter of credit should management elect to not repay
the amounts owing prior to April 26, 1999 (see Note 16). The Company does
not anticipate repaying the loan before April 26, 1999. Winter Harbor has
waived certain debt covenant violations under the $8,000,000 Bridge Loan.
As of December 31, 1998, the Company has granted to Winter Harbor warrants to
purchase 684,171 shares of Common Stock based on borrowings under the Bridge
Loan and standby letter of credit to that date.
During 1998, the Company recorded $1,032,634 as a discount against borrowings
on the new $8,000,000 Bridge Loan representing the relative fair value
F-20
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 7 - Long-term debt, continued
attributed to the Bridge Loan warrants issued in 1998. The debt discount is
being amortized over the term of the Bridge Loan, or leases as applicable.
During 1998, $128,059 of debt discount was amortized.
On June 6, 1997, the Company entered into a term loan agreement and
promissory note with Winter Harbor, LLC, pursuant to which Winter Harbor
agreed to loan to the Company the principal sum of $2,000,000 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 to purchase up to 500,000 shares of Common Stock of the Company 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.
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.
The entire amount of these two loans ($5.0 million) was exchanged for
Series M Redeemable 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:
F-21
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 7 - Long-term debt, continued
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Note payable to a related party, interest at
10.5%, payable on demand $ - $ 175,682
Note payable to a bank, interest payable at
3/4% above prime rate (8.5% at December 31, 1997) - 236,444
Note payable, interest at 12%, interest payable
monthly principle balance due April 10, 1999,
collateralized by accounts receivable and
general assets of the Company 241,661 -
------- -------
241,661 412,126
Less current portion (241,661) (412,126)
------- -------
Long-term debt, less current portion $ - $ -
======= =======
</TABLE>
Note 8 - Commitments under long-term leases
The Company leases a variety of equipment, fiber optics and facilities used
in its operations. The majority of these lease agreements are with two
creditors. During 1998, Winter Harbor obtained a letter of credit totaling
$3,000,000 to guarantee payment on a new lease agreement providing for
equipment purchases of up to $3,000,000. As of December 31, 1998, the Company
had acquired $1,144,066 in assets under this lease. Payments to another
creditor are collateralized by letters of credit totaling approximately
$192,000 (see Note 4).
Agreements classified as operating leases have terms ranging from one to six
years. The Company's rental expense for operating leases was approximately
$2,900,000, $2,850,000 and $1,320,000 for 1998, 1997 and 1996, respectively.
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, 1998:
F-22
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 8 - Commitments under long-term leases, continued
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ ------------
<S> <C> <C>
Year ending December 31:
1999 $ 641,000 $ 2,251,000
2000 172,000 2,869,000
2001 172,000 2,645,000
2002 172,000 443,000
2003 172,000 354,000
Thereafter - -
--------- ---------
Total minimum payments 1,329,000 $ 8,562,000
Less amount representing interest ( 152,023) =========
---------
Present value of net minimum lease payments 1,176,977
Less current portion ( 573,044)
---------
Long-term obligations under capital leases $ 603,933
=========
</TABLE>
Subsequent to year-end, the Company acquired approximately $1,800,000 in
additional assets under its new $3,000,000 lease agreement. The lease terms
are for two and five years and will result in increased monthly payments of
approximately $45,000.
In January 1999, the Company entered into an agreement with a national
carrier to lease local access spans. The three-year agreement includes
minimum usage commitments of $1,512,000 during the first year and $2,160,000
in the second and third years. If the Company were to terminate the
agreement early, it would be required to pay any remaining first year minimum
monthly usage requirements and pay 25 percent of any remaining second and
third year minimum monthly usage requirements.
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 technology. These
were expensed as technological feasibility of the in-process technology had
not yet been established and the software technology had no alternative
F-23
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 9 - Acquisition of subsidiaries, continued
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 consolidated 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 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 net purchase price 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:
<TABLE>
<CAPTION>
<S> <C>
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
=========
</TABLE>
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
F-24
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 9 - Acquisition of subsidiaries, continued
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:
<TABLE>
<S> <C>
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
=========
</TABLE>
Note 10 - Income taxes
The Company recognized no income tax benefit from its losses in 1998, 1997
and 1996.
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:
F-25
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 10 - Income taxes, continued
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Expected federal statutory $( 9,505,747) $(10,151,958) $( 7,841,842)
tax benefit
Increase (reduction) in
taxes resulting from:
State income taxes ( 734,464) ( 360,059) ( 673,059)
Non-deductible litigation
settlement expense - - 279,140
Non-deductible interest on
certain notes 2,516,700 915,136 661,300
Non-deductible intangible
assets from acquisitions - 5,561,039 -
Exercise of stock options
issued for services ( 583,743) ( 47,998) -
Change in valuation
allowance 8,301,669 4,069,760 7,559,551
Other 5,585 14,080 14,910
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========
</TABLE>
At December 31, 1998 the Company had net operating loss carryforwards for
both federal and state income tax purposes of approximately $46,300,000. The
net operating loss carryforwards will expire between 2011 and 2019 if not
used to reduce future taxable income.
The components of the deferred tax assets and liability as of December 31,
1998 and 1997 are as follows:
F-26
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 10 - Income Taxes, continued
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforwards $ 17,267,294 $ 9,582,452
Acquired in-process research and
development and intangible assets 1,714,785 1,047,675
Amortization of deferred compensation
on stock options 1,352,226 920,329
Reserve for loss on disposal of
discontinued operations 138,235 375,780
Reserve for accounts receivable and
inventory valuation 693,338 458,404
Accrued officers wages 235,969 53,712
Accrued interest on related party debt - 16,453
Reserve for product returns - 243,047
Other 37,187 98,062
Valuation allowance (20,988,271) (12,686,602)
---------- ----------
Total deferred tax asset 450,763 109,312
---------- ----------
Deferred tax liability:
Excess tax depreciation and amortization ( 450,763) ( 109,312)
---------- ----------
Total deferred tax liability ( 450,763) ( 109,312)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
The valuation allowance at December 31, 1998 and 1997 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 taxable income from its business communications services. The
change in the valuation allowance is due primarily to the increase in net
operating loss carryforwards. 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,
F-27
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 11 - Legal proceedings, continued
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.
Note 12 - Stockholders' equity
Preferred stock
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, 1998 and 1997, 70,908
and 125,041 shares, respectively, of Class C Preferred Stock had been
converted into common shares. At December 31, 1998 and 1997, 44,051 and
114,959 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 was 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. The Series D Preferred shares are not entitled to dividends. During
the years ending December 31, 1998 and 1997, 567 and 433 shares,
respectively, of Class D preferred stock were converted into a total of
1,092,174 shares of Common Stock. As of December 31, 1998 and 1997, 0 and 567
shares of Class D Preferred Stock remained unconverted and outstanding.
F-28
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 12 - Stockholders' equity, continued
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. Winter Harbor purchased approximately
2,545 shares of Series M Redeemable Preferred Stock, originally 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 Redeemable
Preferred Stock, originally convertible into approximately 1,855,000 shares of
Common Stock. Such additional shares of Series M Redeemable 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 Redeemable 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,
(b) 2,500,000 shares of Common Stock at an exercise price of $4.00 per share,
and (c) 5,000,000 shares of Common Stock at an exercise price of $4.69 per
share. All of the warrants have demand registration rights and anti-dilution
rights and contain cashless exercise provisions.
The Series M Redeemable Preferred Stock is entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred
(other than Class F) or Common Stock receives any dividends. Thereafter, the
Series M Redeemable Preferred Stock participates with the Common Stock in the
issuance of any dividends on a per share basis. The Series M Redeemable
Preferred Stock will have the right to veto the payment of dividends on any
other class of stock. The Series M Redeemable 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. As of December 31, 1998, the conversion price of the
Series M Redeemable Preferred Stock was reduced to $2.033 as a result of
shares of Series F preferred shares being converted at that price. The Series
M Redeemable 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
Redeemable Preferred Stock will have the right to appoint two members of the
Company's board of directors. Furthermore, the Series M Redeemable 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
F-29
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 12 - Stockholders' equity, continued
benefit plans and filing for protection from creditors. As of December 31,
1998, all 4,400 shares of the Company's Class M redeemable preferred stock
remain issued and outstanding.
Because the above redemption provisions are not entirely within the control
of the Company, the Series M Redeemable Preferred Stock is presented as a
separate line item above stockholders' equity.
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"). Under the
original terms of the equity investment, JNC purchased 1,000 shares of the
Company's newly created 5% Series E Convertible 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 a moving average 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 of $5.873
(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 JNC 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 for which the
Series E Preferred Shares originally issued to JNC were exchanged one for one.
Pursuant to the amendment, the Series F Preferred Shares were originally
convertible into common shares at a conversion price of the lesser of $4.00
per common share or 87% of a moving average market price of the Company's
common shares at the time of conversion, subject to a $2.50 floor. The
Series F Preferred Shares provide for adjustments in the initial conversion
price and as of December 31, 1998, the conversion price has been adjusted
to the lesser of $3.76 or 81% of a moving average market price of the
Company's common shares at the time of conversion. 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. As of December 31, 1998, the floor had been reset to
$2.033. 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 on July 9, 1998 absent
shareholder approval as contemplated by the Nasdaq Stock Market Non-
Quantitative Designation Criteria.
JNC may not convert shares of Series F Redeemable Preferred Stock (or receive
related dividends in Common Stock) to the extent that the number of shares of
Common Stock beneficially owned by it and its affiliates after such
conversion or dividend payment would exceed 4.999% of the issued and
outstanding shares following such conversion. This limitation applies to the
number of shares of Common Stock held at any one time and does not prevent
JNC from converting some of its shares of Series F Redeemable Preferred Stock,
selling the Common Stock received, then, subject to the aforementioned
limitation, converting additional shares of Series F Redeemable Preferred
Stock. The 4.999% limitation may be waived by JNC upon 75 days notice to
the Company.
F-30
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 12 - Stockholders' equity, continued
In certain instances, including a change in control of the Company in excess
of 33% and if stock is not listed on NASDAQ or a subsequent market or is
suspended for more than three non-consecutive trading days, the holders of
the Series F Preferred Stock may require that the Company redeem their Series
F Preferred Stock. Because these redemption provisions are not entirely
within the control of the Company, the Series F Preferred Stock is presented
as a separate line item above stockholders' equity.
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.
On December 28, 1998, JNC converted two shares of Series F Redeemable
Preferred Stock into 10,004 shares of Common Stock. In addition, JNC was
paid a stock dividend of 240 shares of Common Stock on the two shares which
were converted. As of December 31, 1998, 998 shares of Series F Redeemable
Preferred Stock remain issued and outstanding. As of April 9, 1999, JNC had
converted a total of 141 shares of Series F Redeemable Preferred Stock into
Common Stock.
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, 1998 were $472,709, $242,577 and $1,481,836 for Class C, F and
M Preferred Stock, respectively.
Note 13 - Stock-based compensation plans
At December 31, 1998 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. On
December 13, 1998, the Board of Directors approved a repricing of all options
to purchase Common Stock with exercise prices above $3.90 held by current
employees, directors and consultants of the Company. As a result, the
exercise price on options to purchase 6,475,000 shares of Common Stock were
reduced to $3.90. The options had original exercise prices of between $4.375
and $9.938. All other terms of the various option agreements remained the
same. The closing price of the Company's Common Stock on December 13, 1998
was $2.56.
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 and based on the incremental fair value associated with the repricing
of options 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:
F-31
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 13 - Stock-based compensation plans, continued
<TABLE>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported $(27,958,079) $(29,858,701) $(23,064,240)
========== ========== ==========
Net loss pro-forma $(38,224,529) $(37,753,358) $(25,563,988)
========== ========== ==========
Basic and diluted loss
per share as reported $ (2.14) $ (10.17) $ (6.53)
========== ========== ==========
Basic and diluted loss
per share pro-forma $ (2.73) $ (10.84) $ (6.90)
========== ========== ==========
</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 103%, 100% and 103% in 1998,
1997, and 1996, respectively, risk free rates ranging from 4.26% to 5.67%,
6.02% to 6.88%, and 5.70% to 6.85% in 1998, 1997, and 1996, respectively,
expected lives of 3 years for each year, and dividend yield of zero for each
year.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- --------------------
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 20,998,872 $4.68 5,761,295 $5.14 850,169 $1.78
Granted 9,978,671 5.48 15,526,000 4.45 5,322,000 1.87
Exercised ( 399,540) 1.71 ( 79,923) 1.73 ( 188,724) 2.02
Expired ( 145,834) 5.42 ( 14,584) 6.75 - -
Forfeited ( 166,499) 6.67 ( 193,916) 5.68 ( 222,150) 2.82
---------- ---- ---------- ---- --------- ----
Outstanding at
end of year 30,265,670 $4.54 20,998,872 $4.68 5,761,295 $5.14
========== ==== ========== ==== ========= ====
Options and
warrants
exercisable
at year end 24,479,374 14,873,577 2,153,294
========== ========== =========
Weighted-average
fair value of
options and
warrants granted
during the year $4.69 $5.78 $5.45
==== ==== ====
</TABLE>
F-32
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Options and Weighted Weighted Weighted
Warrants Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
at 12/31/98 Life(years) Price at 12/31/98 Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.875 to $2.250 351,398 3.59 $1.33 346,398 $1.31
$2.500 to $3.510 5,138,271 5.89 2.77 4,740,271 2.71
$3.875 to $4.894 15,779,334 7.14 4.18 12,021,038 4.26
$5.375 to $6.370 5,297,500 6.88 5.86 5,297,500 5.86
$6.625 to $7.720 3,699,167 5.10 7.02 2,074,167 7.02
---------- ---- ---- ---------- ----
30,265,670 6.59 $4.54 24,479,374 $4.50
========== ==== ==== ========== ====
</TABLE>
1997 Recruitment stock option plan
In October 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, 1998, there were incentive stock options to purchase
1,391,500 shares of the Company's Common Stock and non-qualified stock
options to purchase 1,915,000 shares of the Company's Common Stock
outstanding. The outstanding options vest over three years at exercise
prices of $2.25 to $3.90 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 under the plan. During 1998, options to purchase 228,500 shares of
Common Stock were forfeited or expired.
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, 1998, 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
F-33
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 13 - Stock-based compensation plans, continued
expiration of such options.
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
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, 1998, 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. No options were granted or
exercised under this plan in 1998.
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,
1998, options to purchase 351,167 shares of Common Stock with exercise prices
F-34
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 13 - Stock-based compensation plans, continued
ranging from $1.125 to $6.75 are outstanding under the 1995 Employee Plan.
During 1998, options to purchase 23,833 shares of Common Stock were forfeited
or expired and 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. During 1998, warrants to
purchase 165,563 shares of Common Stock were exercised.
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 (repriced to $3.90 on December
31, 1998) 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. 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 (repriced to $3.90 on December 31, 1998). All
options were vested and exercisable as of December 31, 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
warrants to purchase 750,000 shares of 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 1998 and 1997, warrants to purchase 46,477
and 34,923 shares of Common Stock were exercised, respectively.
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 him options, which vested immediately, to purchase 250,000
shares of Common Stock. The options have a term of 10 years and an exercise
price of $4.875 per share (repriced to $3.90 on December 31, 1998) 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 (repriced to $3.90 on December
31, 1998) based on the closing price of the stock at grant date. The options
vest quarterly over a three-year period and expire in 2000.
F-35
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 13 - Stock-based compensation plans, continued
During 1996, the Company issued 120,000 warrants to non-employees at $4.00
per share. The warrants expire in 1999.
During 1997, the Company issued options to purchase 1,210,000 share of Common
Stock (410,000 of which were issued under the 1997 recruitment stock option
plan) to consultants at exercise prices ranging from $4.875 to $8.438
(repriced to $3.90 on December 31, 1998), which was based on the closing
price of the stock at the grant date. The fair value of the options issued
was recorded as deferred compensation of $4,757,134 to be amortized over the
expected period the services were to be provided. As a result of the
repricing, the Company recorded additional deferred compensation expense
totaling $262,200 (of which $196,733 was expensed in 1998), representing the
incremental fair value of the repriced options over the original options.
During 1998 and 1997, $1,157,901 and $2,467,369 of the deferred compensation
was amortized to expense. During 1998, options to purchase 60,000 shares of
Common Stock expired. The remaining 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 (repriced to $3.90 on December 31, 1998), 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
In 1998, the Company adopted FAS 131. The prior year's segment information
has been restated to present the Company's three reportable segments as
follows:
* Telecommunications services - includes long-distance toll services and
enhanced calling features such as V-Link. The telecommunications services
products are marketed primarily to residential and small business
customers.
* Marketing services - includes promotional and presentation materials sold
To independent sales representatives (IRs) in the network marketing sales
channel. Additionally, revenues are generated from registration fees paid
by IRs to attend regional and national sales conferences.
* Technology licensing and development - provides research and development to
enhance the Company's product and technology offerings. Products developed
by this segment include V-Link, C4, and other proprietary technology. The
Company licenses certain developed technology to third party users, such
as Lucent, Brooktrout and others.
There are no intersegment revenues. The Company's business is conducted
principally in the U.S.; foreign operations are not material. The table
below presents information about net loss and segment assets used by the
Company as of and for the year ended December 31:
F-36
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 14 - Segment of Business Reporting, continued
<TABLE>
<CAPTION>
For the Year Ending December 31, 1998
--------------------------------------------------------
Technology
Telecommu- Licensing Total
nications Marketing and Reportable
Services Services Development Segments
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues from
external customers $ 19,635,000 $ 4,548,000 $ 1,466,000 $ 25,649,000
Interest revenue 63,000 - - 63,000
Interest expense 127,000 - - 127,000
Depreciation and
amortization expense 827,000 30,000 35,000 892,000
Segment loss ( 5,258,000) (1,332,000) (1,823,000) ( 8,413,000)
Other significant
non-cash items:
Amortization of
deferred compensation
on stock options - 706,000 - 706,000
Provision for doubtful
accounts 3,161,000 - - 3,161,000
Expenditures for segment
assets 1,012,000 46,000 56,000 1,114,000
Segment assets 7,006,000 115,000 883,000 8,004,000
Revenues from
external customers $ 11,081,000 $ 2,637,000 $ 347,000 $ 14,065,000
Interest expense 118,000 - - 118,000
Depreciation and
amortization expense 596,000 31,000 9,000 636,000
Segment loss ( 7,781,000) (1,687,000) ( 765,000) (10,233,000)
Other significant
non-cash items:
Amortization of
deferred compensation
on stock options - 627,000 - 627,000
Provision for doubtful
accounts 1,385,000 - - 1,385,000
Expenditures for segment
assets 925,000 104,000 14,000 1,043,000
Segment assets 5,067,000 99,000 383,000 5,549,000
</TABLE>
The following table reconciles reportable segment information to the
consolidated financial statements of the Company:
F-37
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 14 - Segment of Business Reporting, continued
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Total interest revenue for reportable segments $ 63,000 $ -
Unallocated interest revenue from corporate
accounts 207,000 216,000
---------- ----------
$ 270,000 $ 216,000
========== ==========
Total interest expense for reportable segments $ 127,000 $ 118,000
Unallocated amortization of discount on notes
payable 7,405,000 2,372,000
Unallocated interest expense associated
with issuance of convertible debt - 320,000
Unallocated interest expense from
related party debt 851,000 160,000
Other unallocated interest expense from
corporate debt 21,000 53,000
---------- ----------
$ 8,404,000 $ 3,023,000
========== ==========
Total depreciation and amortization for
reportable segments $ 892,000 $ 636,000
Unallocated amortization expense from
intangible assets 2,894,000 1,627,000
Other unallocated depreciation from
corporate assets 407,000 286,000
---------- ----------
$ 4,193,000 $ 2,549,000
========== ==========
Total segment loss $( 8,413,000) $(10,233,000)
Unallocated non-cash amount in
consolidated net loss:
Amortization of discount on notes
payable ( 7,405,000) ( 2,372,000)
Loss on write-off and disposal of certain assets - ( 1,211,000)
Interest expense associated with
issuance of convertible notes - ( 320,000)
Amortization of deferred compensation
on stock options issued for services ( 452,000) ( 1,840,000)
Amortization of intangible assets ( 2,894,000) ( 1,627,000)
Acquired in-process research and development - ( 4,236,000)
Other corporate expenses ( 8,616,000) ( 6,829,000)
---------- ----------
$(27,780,000) $(28,668,000)
========== ==========
Total amortization of deferred compensation
for reportable segments $ 706,000 $ 627,000
Unallocated amortization of deferred
compensation 452,000 1,840,000
---------- ----------
$ 1,158,000 $ 2,467,000
========== ==========
</TABLE>
F-38
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 14 - Segment of Business Reporting, continued
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Expenditures for segment long-lived assets $ 1,114,000 $ 1,043,000
Unallocated expenditures for development
of information systems 1,723,000 -
Other unallocated expenditures for
corporate assets 422,000 906,000
---------- ----------
$ 3,259,000 $ 1,949,000
========== ==========
Segment assets $ 8,004,000 $ 5,549,000
Intangible assets not allocated to segments 9,420,000 12,314,000
Furniture, fixtures and equipment not
allocated to segments 1,496,000 1,156,000
Software and information systems not
allocated to segments 2,476,000 118,000
Net assets of discontinued operations 417,000 595,000
Other assets not allocated to segments 2,042,000 4,521,000
---------- ----------
$ 23,855,000 $ 24,253,000
========== ==========
</TABLE>
The Company's operating segments during 1996 were the medical services
divisions and the Internet Service Provider (ISP) customer accounts obtained
in the I-Link Worldwide, Inc. acquisition. As previously discussed, the
medical services business has been discontinued and is reported as
discontinued operations in the consolidated financial statements. The ISP
accounts were terminated in 1996 and revenues from this line of business did
not continue into 1997. Accordingly, the only reportable segment for 1996
would be the ISP business, and is not included in the above analysis as it is
insignificant to the on-going operations of the Company.
Note 15 - Commitments
Employment and consulting agreements
The Company has entered into employment and consulting agreements with a
consultant and twelve 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, 1998, if the
contracts were to be terminated by the Company, the Company's liability for
salary continuation would be approximately $1,490,000.
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
F-39
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
Note 15 - Commitments, continued
not yet serviced by the Company's dedicated telecommunications network. The
Company's minimum monthly commitment is approximately $550,000. The
agreement is effective through May 2000. Failure to achieve the minimum will
require shortfall payments by the Company equal to 50% of the remaining
monthly minimum usage amounts.
Note 16 - Subsequent Events
Shareholders' Meeting
On April 14, 1999, the Shareholders approved an amendment to the Articles of
Incorporation increasing the authorized common stock from 75,000,000 shares to
150,000,000 shares. In addition, the shareholders voted to approve a plan
of financing that includes the issuance of warrants to purchase up to
11,000,000 shares of common stock, with a variable exercise price ranging
from $1.25 to $2.78 per share, to Winter Harbor, L.L.C. in the event that
management elects not to repay the Bridge Loan debt owing to Winter Harbor
on April 26, 1999 (see Note 7).
Financing Arrangement
On April 15, 1999, the Company entered into a new financing agreement with
Winter Harbor. Winter Harbor agreed to loan to the Company up to $4 million
under a note due September 30, 1999. The Loan will accrue interest at a
variable rate of prime plus a spread beginning at 5 points through and
including May 9, 1999, and increasing 1 point every three months thereafter,
to a maximum of 7 points. The Company may cause the loan to be exchanged
for Series N Preferred Stock. It is the Company's intention to exchange
the loan for Series N Preferred Stock or repay this loan from proceeds of
the Series N offering. As partial consideration for the loan, at its next
meeting of its shareholders, the Company shall seek shareholder approval
of a modification to the conversion terms of the Series N Preferred shares.
The Company has an option to extend the due date to April 15, 2000 provided,
that in the event the Company's shareholders fail to approve the
modification to the conversion terms of the Series N Preferred shares, the
Company shall be required to issue to Winter Harbor one warrant for each $1
or principal outstanding on the loan as of the date of such extension which
warrants shall be issued on the same terms and conditions as the warrants
issued in connection with the $8,000,000 Bridge Loan (see Note 7).
Note 17 - Reclassification of Preferred Stock
The Company has reclassified its 1997 balance sheet to reflect $11,734,820
of Series M Redeemable Preferred Stock as outside stockholders' equity as
required by SEC reporting requirements. The Series M Redeemable Preferred
contains provisions which allow for redemption by Winter Harbor on the
occurrence of a change in control of the Company; which is not totally
within the control of the Company (see Note 12). The reclassification
had no effect on either net income for the year ended December 31, 1997
or on retained earnings at December 31, 1997.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
I-Link Incorporated and Subsidiaries:
In our opinion, the accompanying financial statement schedule is fairly stated
in all material respects in relation to the basic financial statements, taken
as a whole, of I-Link Incorporated and subsidiaries for the years ended
December 31, 1998, 1997 and 1996, which are covered by our report dated April
15, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. This information is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
April 15, 1999
S-1
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions(a) Period
- ------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
December 31, 1996 $ - $ 15,996 $ 15,996 $ -
December 31, 1997 - 1,385,000 - 1,385,000
December 31, 1998 1,385,000 3,160,621 2,604,621 1,941,000
Valuation allowance
for deferred tax
assets:
December 31, 1996 1,057,291 7,559,551 - 8,616,842
December 31, 1997 8,616,842 4,069,760 - 12,686,602
December 31, 1996 12,686,602 8,301,669 - 20,988,271
</TABLE>
__________________
(a) For the allowance for doubtful accounts represents amounts written off as
uncollectible and recoveries of previously reserved amounts.
S-2
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS DATED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1311003
<SECURITIES> 0
<RECEIVABLES> 6343016
<ALLOWANCES> 1941000
<INVENTORY> 0
<CURRENT-ASSETS> 6802339
<PP&E> 9625911
<DEPRECIATION> 2363130
<TOTAL-ASSETS> 23855363
<CURRENT-LIABILITIES> 11290253
<BONDS> 0
0
440510
<COMMON> 131338
<OTHER-SE> (17525211)
<TOTAL-LIABILITY-AND-EQUITY> 23855363
<SALES> 25649417
<TOTAL-REVENUES> 25649417
<CGS> 0
<TOTAL-COSTS> 45295360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8404418
<INCOME-PRETAX> (27780073)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27780073)
<DISCONTINUED> (178006)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27958079)
<EPS-BASIC> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
