<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-17973
I-LINK INCORPORATED
(Exact name of registrant as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13751 S. WADSWORTH PARK DRIVE, SUITE 200, DRAPER, UTAH 84020
(Address of principal executive offices)
(801) 576-5000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter time period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
--------------
As of August 10, 1999, the registrant had outstanding 21,801,652 shares of
$0.007 par value common stock.
<PAGE>
PART I - FINANCIAL INFORMATION
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,538,443 $ 1,311,003
Accounts receivable, less allowance for doubtful
accounts of $3,693,000 and $1,941,000 as of
June 30, 1999 and December 31, 1998, respectively 5,099,509 4,402,016
Certificates of deposit - restricted 75,619 378,160
Other current assets 329,171 293,789
Net assets of discontinued operations 67,371 417,371
------------ ------------
Total current assets 7,110,113 6,802,339
Furniture, fixtures, equipment and software, net 6,512,025 7,262,781
Other assets:
Intangible assets, net 7,973,536 9,420,383
Certificates of deposit - restricted 107,000 164,125
Other assets 588,788 205,735
------------ ------------
$ 22,291,462 $ 23,855,363
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,386,540 $ 2,792,651
Accrued liabilities 4,003,270 3,436,989
Current portion of long-term debt 781,448 1,050,431
Current portion of notes payable to related parties,
net of discount 7,768,000 3,437,138
Current portion of obligations under capital leases 939,241 573,044
------------ ------------
Total current liabilities 15,878,499 11,290,253
Notes and accrued interest payable to a related party,
net of discount, to be exchanged for Series N
preferred stock 10,576,875 -
Notes payable to a related party - 7,768,000
Obligations under capital leases 1,155,928 603,933
------------ ------------
27,611,302 19,662,186
------------ ------------
Commitments and contingencies (note 7)
Redeemable preferred stock - Class M 11,734,820 11,734,820
Redeemable preferred stock - Class F 4,243,761 9,411,720
------------ ------------
15,978,581 21,146,540
------------ ------------
Stockholders' deficit:
Preferred stock, $10 par value, authorized 10,000,000
shares, issued and outstanding 33,677 and 44,051 at
June 30, 1999 and December 31, 1998, respectively,
liquidation preference of $2,145,769 and $2,675,259
at June 30, 1999 and December 31, 1998, respectively 336,770 440,510
Common stock, $.007 par value, authorized 150,000,000
shares, issued and outstanding 21,731,759 and
18,762,596 at June 30, 1999 and December 31, 1998,
respectively 152,122 131,338
Additional paid-in capital 77,295,116 68,632,195
Deferred compensation (842,886) (1,214,591)
Accumulated deficit (98,239,543) (84,942,815)
------------ ------------
Total stockholders' deficit (21,298,421) (16,953,363)
------------ ------------
$ 22,291,462 $ 23,855,363
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
1
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services $ 6,225,552 $ 4,134,967 $ 12,408,250 $ 8,915,944
Marketing services, net 1,476,090 963,962 2,235,962 2,305,209
Technology licensing and development 754,557 374,660 1,048,973 580,610
------------ ------------ ------------ ------------
Total revenues 8,456,199 5,473,589 15,693,185 11,801,763
------------ ------------ ------------ ------------
Operating costs and expenses:
Telecommunication network expense 4,740,624 4,612,334 9,064,054 9,510,550
Marketing services 1,763,447 1,343,072 2,979,756 3,210,957
Selling, general and administrative 3,087,696 2,520,506 5,924,819 4,932,092
Provision for doubtful accounts 1,038,309 675,000 1,944,015 1,448,662
Depreciation and amortization 1,437,403 1,039,099 2,780,823 2,049,826
Write-down of capitalized software costs - - 1,847,288 -
Research and development 501,070 576,060 1,074,105 1,144,155
------------ ------------ ------------ ------------
Total operating costs and expenses 12,568,549 10,766,071 25,614,860 22,296,242
------------ ------------ ------------ ------------
Operating loss (4,112,350) (5,292,482) (9,921,675) (10,494,479)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (1,742,543) (5,459,535) (2,868,432) (7,640,577)
Interest and other income 33,172 18,172 56,751 63,464
------------ ------------ ------------ ------------
Total other income (expense) (1,709,371) (5,441,363) (2,811,681) (7,577,113)
------------ ------------ ------------ ------------
Loss from continuing operations (5,821,721) (10,733,845) (12,733,356) (18,071,592)
Loss from discontinued operations (less applicable
income tax provision of $0 for the six and three
month periods ended June 30, 1999 and 1998) - (100,564) (350,000) (108,006)
------------ ------------ ------------ ------------
Net loss $ (5,821,721) $(10,834,409) $(13,083,356) $(18,179,598)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CALCULATION OF NET LOSS PER COMMON SHARE:
Loss from continuing operations $(5,821,721) $(10,733,845) $(12,733,356) $(18,071,592)
Cumulative preferred stock dividends (380,448) (540,460) (873,359) (902,224)
------------ ------------ ------------ ------------
Loss from continuing operations applicable
to common stock $ (6,202,169) $(11,274,305) $(13,606,715) $(18,973,816)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted weighted average shares
outstanding 20,799,250 17,102,887 20,037,109 16,616,545
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.30) $ (0.66) $ (0.68) $ (1.14)
Loss from discontinued operations - (0.01) (0.02) (0.01)
------------ ------------ ------------ ------------
Net loss per common share $ (0.30) $ (0.67) $ (0.70) $ (1.15)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
2
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
<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, 1998 44,051 $ 440,510 18,762,596 $ 131,338 $68,632,195 $(1,214,591) $(84,942,815)
Conversion of preferred
stock into common stock (10,733) (107,330) 2,826,543 19,786 87,544 - -
Reclassification of Class F
redeemable preferred stock
from mezzanine due to
conversion to common stock 359 3,590 - - 5,164,369 - -
Common stock dividend paid
to holders of Class F
redeemable preferred stock - - 100,003 700 212,672 - (213,372)
Exercise of stock options - - 42,617 298 4,702 - -
Warrants issued in connection
with certain notes payable - - - - 2,220,563 - -
Warrants issued in connection
with a standby letter of credit - - - - 735,720 - -
Stock options issued for services - - - - 237,351 (237,351) -
Amortization of deferred
compensation on stock options
issued for services - - - - - 609,056 -
Net loss - - - - - - (13,083,356)
------- --------- ---------- --------- ----------- ----------- ------------
BALANCE AT JUNE 30, 1999 33,677 $ 336,770 21,731,759 $ 152,122 $77,295,116 $ (842,886) $(98,239,543)
------- --------- ---------- --------- ----------- ----------- ------------
------- --------- ---------- --------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (13,083,356) $ (18,179,598)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,780,823 2,049,826
Provision for doubtful accounts 1,944,015 1,448,662
Amortization of discount on notes payable 1,766,938 7,274,000
Write-down of capitalized software costs 1,847,288 -
Loss on disposal of assets 7,495 -
Amortization of deferred compensation on stock
options issued for services 609,056 524,027
Increase (decrease) from changes in operating
assets and liabilities:
Accounts receivable (2,641,508) (2,298,846)
Other assets (331,361) (210,184)
Accounts payable and accrued liabilities 735,845 2,299,326
Discontinued operations - noncash charges and
working capital changes 320,652 (16,847)
------------ -------------
Net cash used in operating activities (6,044,113) (7,109,634)
------------ -------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (615,810) (1,906,659)
Maturity of restricted certificates of deposit 359,666 533,215
Investing activities of discontinued operations 30,000 310,000
------------ -------------
Net cash used in investing activities (226,144) (1,063,444)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and warrants 7,600,000 7,768,000
Payment of long-term debt (268,984) (209,616)
Payment of related party debt (500,000) (500,000)
Payment of capital lease obligations (337,667) (98,732)
Proceeds from exercise of common stock warrants and options 5,000 684,943
Financing activities of discontinued operations - (170,465)
------------ -------------
Net cash provided by financing activities 6,498,349 7,474,130
------------ -------------
Increase (decrease) in cash and cash equivalents 228,092 (698,948)
Cash and cash equivalents at beginning of period 1,368,927 1,727,855
------------ -------------
Cash and cash equivalents at end of period $ 1,597,019 $ 1,028,907
------------ -------------
------------ -------------
Cash and cash equivalents at end of period:
Continuing operations $ 1,538,443 $ 930,176
Discontinued operations 58,576 98,731
------------ -------------
Total cash and cash equivalents at end of period $ 1,597,019 $ 1,028,907
------------ -------------
------------ -------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of preferred stock into common stock $ 107,330 $ 213,630
Reclassification of Class F redeemable preferred
stock from mezzanine 5,167,959 -
Warrants issued in connection with a standby
letter of credit 735,720 -
Equipment acquired under capital lease obligations 1,822,193 -
Accrued interest to be exchanged for Series N
preferred stock 575,675 -
Sale of assets of discontinued operations for
note receivable 35,000 -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<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
developed internally and 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.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
On March 23, 1998, the Company's Board of Directors approved a plan to
dispose of the Company's medical services businesses in order to focus its
efforts on the sale of telecommunication services and technology licensing.
The Company has sold or intends to sell all of the assets of the medical
services subsidiaries, with the proceeds being used to satisfy outstanding
obligations of the medical services subsidiaries. During 1998, the Company
received $310,000 from the sale of assets from the medical service
subsidiaries. In January 1999, the Company sold additional assets for $15,000
and a note receivable of $35,000. The Company has experienced unexpected
delays in disposing of the remaining non-operating assets, including certain
assets located in China. Additionally, the Company's best estimate of
proceeds from the remaining assets is expected to be less than originally
estimated by management. As the remaining asset disposals have not occurred
as expected, during the first quarter of 1999, the Company revised its best
estimate of the ultimate loss on disposal and recognized an additional loss
on disposal of $350,000. As of June 30, 1999, 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 have been accrued for as part of
management's best estimate 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.
The interim financial data are unaudited; however, in the opinion of the
management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of (a) the results of operations for the three-month and
six-month periods ended June 30, 1999 and 1998, (b) the financial position at
June 30, 1999, and (c) cash flows for the six-months ended June 30, 1999 and
1998. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The financial statements should be read in
conjunction with the Company's annual report on Form 10-K as amended for the
year ended December 31, 1998 and quarterly report on Form 10-Q for the
three-months ended March 31, 1999.
The results of operations for the three-month and six-month periods ended
June 30, 1999 are not necessarily indicative of those to be expected for the
entire year.
The Company incurred a net loss from continuing operations of $12,733,356 for
the six-month period ended June 30, 1999, and as of June 30, 1999 had an
accumulated deficit of $98,239,543 and negative working capital of
$8,768,386. The Company anticipates that revenues generated from its
continuing operations will not be sufficient during the remainder of 1999 to
fund ongoing operations, the continued expansion of its private
telecommunications network facilities, development and manufacturing of its
C4 product and anticipated growth in subscriber base.
5
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 1 - DESCRIPTION OF BUSINESS, PRINCIPLES OF CONSOLIDATION AND LIQUIDITY,
CONTINUED
In order to provide funds towards working capital needs, the Company has
entered into two new financing arrangements with Winter Harbor L.L.C.
("Winter Harbor"). 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 first financing arrangement 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. As of
June 30, 1999, the Company had received advances under the short term bridge
loan of $8,000,000 and had made equipment acquisitions on the new lease of
$2,645,000. The $8,000,000 short-term borrowings were originally due October
31, 1999. 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. As of June 30, 1999, the Company had received advances
under the $4,000,000 loan totaling $3,400,000. The Company had the option to
require Winter Harbor to exchange the $4,000,000 loan for Series N preferred
stock. The Company also had the option to extend the due date on the
$4,000,000 note to April 15, 2000. 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 was
obligated to offer up to 20,000 shares of a new series of preferred stock
(Series N) as part of a rights offering which was open to the Company's
common and preferred stockholders. Each share of Series N preferred stock
could be purchased for $1,000. On July 23, 1999, the Company completed its
offering of 20,000 shares of Series N preferred stock (see Note 9). The
offering was fully subscribed through cash subscriptions and the Company
exercising its rights to exchange the above mentioned $8,000,000 and
$4,000,000 loans plus accrued interest from Winter Harbor. In total the
Company received $7,281,085 in cash (before expenses of approximately
$150,000) and exchanged $12,718,915 in Winter Harbor debt and accrued
interest.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the three-month
and six-month periods ending June 30, 1999 and 1998, basic and diluted loss
per share are the same. During the three-month periods ending June 30, 1999
and March 31, 1999, holders of the Series F Redeemable preferred stock
converted 409 and 139 of those shares, respectively. Accordingly, they were
paid stock dividends of 81,343 and 18,660 shares of common stock on the
converted shares.
REVENUE RECOGNITION
During the second quarter of 1999, the Company began offering its WebCentre
product to Independent Representatives ("IR") in the network marketing
channel. WebCentre is a personalized web page that can be used for business
promotion and back-office support. Each user pays a set-up fee of between
$395 - $495, plus a monthly recurring charge of $15.95. Revenue relating to
the set-up fee is partially recognized at the time the WebCentre product is
made available to the user. The portion of the set-up fee, plus a normal
profit margin, relating to ongoing support of the WebCentre is deferred over
the estimated life of the IR agreement. Revenue related to the monthly
recurring charge is recognized in the month the services are provided.
6
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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 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 was not material to the
consolidated financial position or results of operations of the Company.
NOTE 3 - DISCONTINUED OPERATIONS
Net assets of the Company's discontinued operations (excluding intercompany
balances which have been eliminated against the net equity of the
discontinued operations) are as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 36,031 $ 57,924
Accounts receivable 722,752 941,508
Inventory 555,291 555,291
Other 11,143 15,217
------------ ------------
Total current assets 1,325,217 1,569,940
Furniture, fixtures and equipment, net 30,077 363,345
Other non-current assets 785 6,230
------------ ------------
Total assets 1,356,079 1,939,515
------------ ------------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 1,047,047 1,280,483
Notes payable 241,661 241,661
------------ ------------
Total current liabilities 1,288,708 1,522,144
------------ ------------
Net assets - discontinued operations $ 67,371 $ 417,371
------------ ------------
------------ ------------
</TABLE>
The net assets of the discontinued operations as of June 30, 1999 and
December 31, 1998 are shown as a current asset in the consolidated balance
sheet as it is anticipated that the disposal of the medical services
businesses will be completed by the third quarter of 1999. Revenues of the
discontinued operations were $104,498 and $375,063 and $235,121 and $582,298
for the three-month and six-month periods ending June 30, 1999 and 1998,
respectively.
7
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 4 - WRITE-DOWN OF CAPITALIZED SOFTWARE COSTS
During 1998, the Company contracted with an outside consulting firm to
develop a billing and operations information system and capitalized as a
component of furniture, fixture, equipment and software $2,284,574 in costs
(including amounts in accounts payable of $437,286) associated with this
in-process system development. The Company continually evaluated the
functionality and progress of the in-process system development. In May 1999,
the Company's management and its Board of Directors concluded that the new
system would not significantly enhance the Company's existing billing and
information systems, would not meet its ultimate needs and had no alternative
future use and accordingly did not justify paying additional billed and
contracted expenses of approximately $1,000,000. Negotiations to discontinue
work under the contract were concluded in May 1999, with the consulting
company forgoing any future payments on the project while retaining amounts
paid to date of $1,847,288. Accordingly, in March 31, 1999, the Company
recorded a write-down of capitalized software costs on the in-process system
development of $1,847,288.
NOTE 5 - CAPITAL FINANCING
On January 15, 1999, I-Link finalized an agreement that had been negotiated
in November 1998 with Winter Harbor for additional financing. The financing
arrangement consisted 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 relative to the expansion of the Company's telecommunications
network. As of June 30, 1999, the amount borrowed under the Bridge Loan was
$8,000,000 and acquisitions under the lease agreement totaled $2,645,000.
Unsatisfied obligations under the Bridge Loan were due on October 31, 1999.
In July 1999, the Company exercised its option to exchange the $8,000,000 in
outstanding notes payable along with accrued interest for Series N preferred
stock (see Note 9). The Bridge Loan accrued interest at a variable rate of
prime plus a spread beginning at 4 points through and including February 9,
1999, 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 received one warrant
for every $10 borrowed from Winter Harbor. On April 14, 1999, the
shareholders voted to approve a plan of financing which included issuing 10
warrants for each $10 borrowed under the Bridge Loan and standby letter of
credit if management were to not repay the bridge loan on April 26, 1999. As
the loan was not repaid by April 26, 1999, the number of warrants increased
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.
The Company has recorded $3,253,196 (of which $2,220,563 was recorded in
1999) as a discount against borrowings on the $8,000,000 Bridge Loan
representing the relative fair value attributed to the Bridge Loan warrants
issued in 1999. The debt discount is being amortized over the term of the
Bridge Loan. In addition, the Company recorded $735,720 as debt issuance
costs related to obligations under certain capital leases guaranteed by the
Winter Harbor letter of credit representing the fair value of the letter of
credit warrants. The debt issuance costs are being amortized over the term of
the lease agreements. During the six-month and three-month periods ending
June 30, 1999, $1,766,938 and $1,107,758 of debt discount and lease
obligation issuance costs were amortized. As the $8,000,000 loan was
exchanged for Series N preferred stock, the unamortized debt discount of
$1,400,000 will be expensed in July 1999.
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.
8
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 5 - CAPITAL FINANCING, CONTINUED
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 accrued interest at a variable
rate of prime plus a spread beginning at 5 points through and including May
9, 1999, increasing 1 point every three months thereafter, to a maximum of 7
points. As of June 30, 1999, the amount borrowed under this loan was
$3,400,000 (additional borrowings of $600,000 were made in July 1999). In
July 1999, the Company exercised its option to exchange the loan for Series N
preferred Stock. As partial consideration for Winter Harbor making the loan,
the Company agreed to seek shareholder approval at its next shareholders
meeting of a modification to the conversion terms of the Series N preferred
shares (see Note 9).
NOTE 6 - INCOME TAXES
The Company recognized no income tax benefit from the losses generated in
1999 and 1998 because of the uncertainty of the realization of the related
deferred tax asset.
NOTE 7 - PURCHASE COMMITMENTS
The Company has commitments to purchase long-distance telecommunications
capacity on lines from a national provider in order to provide long-distance
telecommunications services to the Company's customers who reside in areas
not yet serviced by the Company's dedicated telecommunications network. The
Company's minimum monthly commitment is approximately $550,000. The new
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.
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 8- SEGMENT OF BUSINESS 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.
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 training and promotional materials to
independent sales representatives (IRs) in the network marketing sales
channel and WebCentre set-up and monthly recurring fees. 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.
9
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 8- SEGMENT OF BUSINESS REPORTING, CONTINUED
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 revenues from external customers and net loss for
the three-month and six-month periods ended June 30, 1999 and 1998. There has
been no material change in segment assets from the amounts reported in the
Company's annual report on Form 10-K as amended for the year ended December
31, 1998.
<TABLE>
<CAPTION>
For The Three-Month For The Six-Month
Period Ended Period Ended
----------------------------------- ----------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
Telecommunications services $ 6,225,000 $ 4,135,000 $ 12,408,000 $ 8,916,000
Marketing services 1,476,000 964,000 2,236,000 2,305,000
Technology licensing and development 755,000 375,000 1,049,000 581,000
----------- ------------ ------------ ------------
Total revenues from external customers
for reportable segments $ 8,456,000 $ 5,474,000 $ 15,693,000 $ 11,802,000
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
SEGMENT INCOME ( LOSS):
Telecommunications services $ (249,000) $ (2,064,000) $ 67,000 $ (3,626,000)
Marketing services (301,000) (386,000) (770,000) (918,000)
Technology licensing and development 77,000 (382,000) (345,000) (946,000)
----------- ------------ ------------ ------------
Total segment loss for reportable
segments (473,000) (2,832,000) (1,048,000) (5,490,000)
Unallocated non-cash amounts in
consolidated net loss:
Amortization of discount on notes
payable (1,108,000) (5,213,000) (1,767,000) (7,274,000)
Write-down of capitalized software costs - - (1,847,000) -
Amortization of deferred
compensation on stock options
issued for services (295,000) (219,000) (609,000) (524,000)
Amortization of intangible assets (724,000) (724,000) (1,447,000) (1,447,000)
Other corporate expenses (3,221,000) (1,746,000) (6,015,000) (3,337,000)
Loss from discontinued operations - (101,000) (350,000) (108,000)
----------- ------------ ------------ ------------
$(5,821,000) $(10,835,000) $(13,083,000) $(18,180,000)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
ANNUAL SHAREHOLDERS MEETING
On July 19, 1999, the Company's Shareholders approved a modification of the
terms of the Series N preferred stock to establish a conversion price floor
of $1.25 and to link the Series N conversion price to the price at which
common stock is issued upon the exercise or conversion of any new options,
warrants, preferred stock or other convertible security, including the
conversion rate of the Series F preferred stock. The conversion price is
discussed in more detail below.
10
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 9 - SUBSEQUENT EVENTS, CONTINUED
SERIES N PREFERRED STOCK
On July 23, 1999 the Company completed its offering of 20,000 shares of
Series N preferred stock. The offering was fully subscribed through cash
subscriptions and the Company exercising its rights to exchange notes payable
to Winter Harbor of $8,000,000 and $4,000,000, plus accrued interest. In
total the Company received $7,281,085 in cash (before expenses of
approximately $150,000) and exchanged $12,718,915 in Winter Harbor debt and
accrued interest. The Series N conversion price was initially set at $2.78,
but may be reset to the lowest of: (1) 110% of the average trading price for
any 20 day period following the date that Series N preferred stock is first
issued; (2) the price at which any new common stock or common stock
equivalent is issued; (3) the price at which common stock is issued upon the
exercise or conversion of any new options, warrants, preferred stock or other
convertible security; and (4) the conversion price of any Series F preferred
stock converted after the date that Series N preferred stock is first issued.
The conversion price is subject to a floor of $1.25. The Series N preferred
stock votes with the common stock on an as converted basis and is senior to
all other preferred stock of the Company, except that the Series N preferred
stock will in all rights be equal in seniority to the already outstanding
Series F preferred stock. Dividends will be paid on an as converted basis
equal to common stock dividends.
As the conversion price of the Series N preferred stock at issuance was less
than the market price, the Company will recognize a deemed preferred stock
dividend in the third quarter of 1999 of approximately $7.2 million. The
deemed preferred stock dividend is calculated as the difference between the
conversion price per common share per the Series N agreement and the market
price of the common stock on the date the proceeds from the offering were
received and the debt was exchanged.
11
<PAGE>
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto
appearing elsewhere herein and in conjunction with the Management's
Discussion and Analysis set forth in the Company's Form 10-K as amended for
the year ended December 31, 1998.
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," "MAY," "WILL," "BELIEVE,"
"ESTIMATE," "EXPECT," "PLAN," 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, retain and motivate a growing
number of independent representatives; the 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 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.
OPERATIONS
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 a 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 field 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."
12
<PAGE>
Unlike other providers of telecommunications services utilizing IP
technology, I-Link does not use the public 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 June
30, 1999 the Company had established eight Hubs in the following locations:
Phoenix, Salt Lake City, Chicago, Orlando, Dallas, Los Angeles, Seattle and
New York. In July 1999 the San Francisco Hub was established. 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 Network. From these
Hubs, the I-Link Network spans out to other geographic areas via additional
dedicated spans and lines. The Company plans continued deployments during the
remainder of 1999 to continue the build out of the Company's IP Telephony
network. Continued deployment of the Company's Communications Engines should
result in a decrease in telecommunications costs as more traffic is carried
on the Company's own infrastructure and an increase in revenues from
subscribers as the Company extends the geographic areas where the Company can
offer increasingly competitive rates for long-distance and enhanced
telecommunications services.
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 its 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
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).
During the first quarter of 1999, the Company began field-testing of its
communication product dubbed "C4" (Customer Communications Control Center).
The product will provide small business and home customers the capacity of up
to 24 phone lines using the existing telephone lines and wires that are
connected to their offices or homes today. In addition, C4 will provide
around-the-clock Internet access and access to the enhanced services I-Link
currently offers, including voice mail, fax, paging, e-mail, conference
calling and follow-me-anywhere One-Number service. The C4 uses existing
telecommunications networks, including the standard copper-wire lines
currently installed in nearly every home and business, as well as high-speed
data lines and infrastructure that have been announced or are being installed
by local and long-distance telecommunications companies. Field trials
continue and are expected to continue into the third quarter of 1999 with
anticipated sales beginning in late 1999.
On July 30, 1999 the Company and Casio Phonemate, Inc. announced their
signing of a Memorandum of Understanding to form a business relationship to
manufacture and jointly market the Company's C4 product. The Company believes
that this relationship will accelerate the distribution of the Company's C4
product in conjunction with the Company's telecommunication and internet
services through Casio Phonemate's channels of distribution in addition to
the Company's channels.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 1999 were $1,538,443, short-term
certificates of deposits were $75,619 and the working capital deficit was
$8,768,386. Cash used by operating activities during the six-month period
ended June 30, 1999 was $6,044,113 as compared to $7,109,634 during the same
period ended June 30, 1998. The decrease in cash used by operating activities
in 1999 was primarily due to a decrease of approximately $3,070,000 in the
Company's net loss after allowance for non-cash expenses with the balance
associated with timing of collections and payments related to accounts
receivable, other assets, accounts payable and accrued expenses.
Net cash used by investing activities in the six-month period ended June 30,
1999 was $226,144 as compared to net cash used of $1,063,444 in the same
period ended June 30, 1998. Cash used by investing activities in 1999 was
attributable to the purchase of furniture, fixtures and equipment of $615,810
which was offset by $30,000 received from the sale of certain assets from
discontinued operations and the maturity of certificates of deposits in the
amount of $359,666. In the first six-months of 1998 cash used by investing
activities was primarily due to purchase of furniture, fixtures and equipment
of $1,906,659 which was offset by $310,000 received from sale of certain
assets from discontinued operations and $533,215 from matured restricted
certificates of deposit.
Financing activities provided net cash of $6,498,349 in the first six-months
of 1999 as compared to cash provided of $7,474,130 in the same period of
1998. Cash provided in 1999 included proceeds of $7,600,000 from short-term
debt and common stock warrants, and $5,000 in net proceeds from exercises of
common stock warrants and options. Repayments of $1,106,651 on long-term
debt, notes payable and capital lease obligations from continuing operations
offset these proceeds. During the same six months in 1998, cash provided by
financing activities included $7,768,000 in proceeds from issuance of
long-term debt and warrants and $684,943 from the exercise of common stock
warrants and options which sources were offset by repayments of $808,348 on
long-term debt and capital lease obligations from continuing operations and
$170,465 from discontinued operations.
The Company incurred a net loss from continuing operations of $12,733,356 for
the first six-months of 1999, and as of June 30, 1999 had an accumulated
deficit of $98,239,543. The Company anticipates that revenue generated from
continuing operations will not be sufficient during the remainder of 1999 to
fund the Company's ongoing operations, the continued expansion of its private
telecommunications network facilities, development and manufacturing of the
C4 product and anticipated growth in subscriber base. To provide a portion of
its capital needs, the Company has entered into two financing arrangements
and completed a $20,000,000 offering of Series N preferred stock as described
below. Additional funds will be necessary from public or private financing
markets to fund continued operations, to successfully integrate and finance
the planned expansion of the business communications services and to
discharge the financial obligations of the Company.
CURRENT POSITION/FUTURE REQUIREMENTS
During the remainder of 1999, the Company plans to use available cash and
funds raised from the sale of debt or equity securities to fund its on-going
operations and the development and marketing of I-Link products and services.
During the second quarter of 1999 revenue from continuing operations
increased $1,219,213 (16.8%) from the first quarter of 1999 as shown below:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
3/31/99 6/30/99 Increase % Increase
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Telecommunications services $ 6,182,698 $ 6,225,552 $ 42,854 0.7%
Marketing services 759,872 1,476,090 716,218 94.3%
Technology licensing and development 294,416 754,557 460,141 156.3%
----------- ----------- -----------
Net operating revenue $ 7,236,986 $ 8,456,199 $ 1,219,213 16.8%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Telecommunications services revenues in the first and second quarters of 1999
were comparable even though the number of minutes billed in the second
quarter were approximately 6% greater than the first quarter. This revenue
from increased minutes
14
<PAGE>
billed was essentially offset by a decrease in the average billed rate per
minute which is a direct result of the reduced rate plans offered by the
Company. The Company anticipates that this rate of growth in minutes and
related revenue will increase in future periods as the Company continues it
IP Telephony network expansion into new geographic areas allowing the Company
to offer increasingly competitive rates for long-distance and enhanced
telecommunications services.
The increase in marketing services revenue was primarily due to revenues of
$615,000 from the sale of the Company's new WebCentre product which was first
offered in the second quarter of 1999. Revenues from new independent
representatives (IRs) signed up increased in the second quarter by $104,000
as compared to the first quarter of 1999. WebCentre revenues in the second
quarter were generated from a base of existing IRs and accordingly future
WebCentre revenues may be more directly related to the future growth of the
number of IRs. The Company anticipates that revenues from marketing services
will increase as the year continues primarily due to: (1) the expansion of
the Company's IP Telephony network resulting in reduced telecommunication
rates to users of I-Link's telecommunications services, (2) increased
availability of enhanced services, and (3) the anticipated release of V-Link
3.0.
Technology licensing and development revenue increased in the second quarter
of 1999. 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 not anticipated to exceed 1998 revenue. Revenue from this source
will vary from quarter to quarter based on timing of technology licensing and
development projects and royalties from products previous sold.
The Company anticipates improved cash flow from operations in the remainder
of 1999 primarily from the following sources:
- - During the first six months of 1999 the Company continued deployment of its
Communication Engines 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 in late
1999.
- - Release of V-Link 3.0 (in the third quarter of 1999) that will have
increased functionality and ease of use thus increasing revenues from
incremental sales and usage of V-Link enhanced services.
- - The Company's IR WebCentre product that was released in late March 1999.
- - New product pricing and expanded marketing channels.
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 experienced in the first six-months of 1999.
In January 1999, the Company entered into an agreement with a national
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% 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, provided for an additional $11,000,000 in
financing (the "Winter Harbor Financing Arrangement"), as well as 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
June 30, 1999, the Company had received advances under the Bridge Loan and
Letter of Credit of $8,000,000 and $2,645,000 respectively. In July 1999, the
Bridge Loan plus accrued interest was exchanged for Series N preferred stock
as discussed below.
In the second agreement, dated April 15, 1999, Winter Harbor agreed to loan
to the Company up to $4,000,000 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
15
<PAGE>
cause the Loan to be exchanged for Series N preferred stock. As partial
consideration for the Loan, at its next meeting of its shareholders, the
Company was required to seek shareholder approval of a modification to the
conversion terms of the Series N Preferred shares. As of June 30, 1999, the
Company had received advances under the $4,000,000 loan of $3,400,000. In
July 1999 this loan plus accrued interest was exchanged for Series N referred
stock as discussed below.
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.
At the Company's annual meeting on July 19, 1999 the Company sought
shareholder approval of a modification to the conversion terms of the Series
N preferred stock as required under the above mentioned agreements. At that
meeting the shareholders approved the modification to the conversions price
of the Series N preferred stock which was originally set at $2.78 per common
share but with the shareholder approval can now be less than $2.78, subject
to a floor of $1.25 dependent upon certain events taking place primarily
related to the average common stock market price and new issuance of common
stock warrants or options.
On July 23, 1999 the Company completed its rights offering of 20,000 shares
of Series N preferred stock. The offering was fully subscribed through cash
subscriptions and the Company exercising its rights to exchange the above
mentioned $8,000,000 and $4,000,000 loans plus accrued interest from Winter
Harbor. In total the Company received $7,281,085 in cash (before expenses of
approximately $150,000) and exchanged $12,718,915 in Winter Harbor debt and
accrued interest.
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 the 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.
THREE-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THREE-MONTH PERIOD
ENDED JUNE 30, 1998
In March 1998, the Company made the decision to dispose of the operations of
the subsidiaries of the Company operating in the medical services industry in
order to concentrate on its telecommunications and technology sectors.
Accordingly, medical services operations during the three-month periods
ending June 30, 1999 and 1998 have been reported as discontinued operations.
REVENUES
Telecommunication services revenue increased $2,090,585 to $6,225,552 in the
second quarter of 1999 as compared to $4,134,967 in the second quarter of
1998. The increase is due primarily to the new customers obtained through the
Network Marketing channel which began generating revenue in the third quarter
of 1997.
Marketing services revenue, which includes revenue recognized from
independent representatives for promotional and presentation materials,
WebCentre, and ongoing administrative support increased $512,128 to
$1,476,090 in the second quarter of 1999 as compared to $963,962 in the same
quarter of 1998. The increase was primarily due to revenues of $615,000
related to the Company's new WebCentre product which was first offered in the
second quarter of 1999. The new revenue source was offset by discontinuance
of certain products which generated revenues of $61,000 in the second quarter
of 1998 and accordingly did not generate revenues in 1999. 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 revenue increased $379,897 to $754,557
in the second quarter of 1999 as compared to $374,660 in the same quarter of
1998. These revenues are from the licensing and development of technology
through
16
<PAGE>
MiBridge, Inc. and are due to increased acceptance of its products in the
marketplace. This rate of 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 and development in 1999
are not expected to exceed revenues in 1998. Additionally, revenue from this
source will vary from quarter to quarter based on timing of technology
licensing and development projects and royalties from products previous sold.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $128,290 in the second quarter of
1999 to $4,740,624 as compared to $4,612,334 for the same quarter of 1998.
These expenses include the costs related to the continuing development and
deployment of the Company's communication network and expenses related to the
telecommunication services revenue. The increase in expense was primarily due
to the increase in telecommunication services revenue. However the rate of
increase is significantly below the rate of increase in telecommunications
revenues primarily do to (1) continued deployment of the Company's enhanced
IP (Internet protocol) telephony network and related economies of scale and
increased traffic on the network, (2) efforts of the Company to negotiate
reduced rates from its underlying carriers, and (3) better utilization of the
Company's telecommunication infrastructure. The Company expects that
telecommunications network expense will increase as telecommunication
services revenue increases, but at a lesser rate of growth.
Marketing service costs increased $420,375 to $1,763,447 in the second
quarter of 1999 as compared to $1,343,072 for the same quarter of 1998. The
expenses relate directly to the Company's marketing services revenue.
Marketing services expense includes commissions and the costs of providing
promotional and presentation materials, the Company's new WebCentre product
and ongoing administrative support to independent representatives.
Selling, general and administrative expense increased $567,190 to $3,087,696
in the second quarter of 1999 as compared to $2,520,506 in the second quarter
of 1998. The increase was primarily due to increased overhead and personnel
costs associated with growth in the Company's telecommunication business.
The provision for doubtful accounts increased $363,309 to $1,038,309 in the
second quarter of 1999 as compared to $675,000 in the same quarter of 1998.
This increase is primarily due to growth in the Company's telecommunication
services revenue.
Depreciation and amortization increased $398,304 to $1,437,403 in the second
quarter of 1999 as compared to $1,039,099 in the second quarter of 1998. The
increase is primarily due to increased depreciation related to continuing
acquisitions of equipment under capital lease agreements. Depreciation
expense also increased due to continued acquisition of telecommunication
equipment.
Research and development decreased $74,990 to $501,070 in the second quarter
of 1999 as compared to $576,060 in the same period of 1998. The Company
anticipates that research and development expenses for 1999 will approximate
those for 1998.
Interest expense decreased $3,716,992 to $1,742,543 in the second quarter of
1999 as compared to $5,459,535 in the same quarter of 1998. Interest in the
second quarter of 1999 included $1,129,620 (non-cash) in amortization of debt
discount related to certain warrants granted in connection with $8,000,000 in
loans and a $3,000,000 letter of credit to the Company from Winter Harbor and
interest on outstanding debt of the Company of $612,923. Interest in the
second quarter of 1998 was primarily related to $5,213,000 (non-cash) in
amortization of debt discount related to certain warrants granted in
connection with $7,768,000 in loans to the Company from Winter Harbor and
interest on the same loans of $235,909.
Interest and other income increased $15,000 to $33,172 in the second quarter
of 1999 as compared to $18,172 in the same quarter of 1998. The increase was
primarily due to an increase in the average balance of cash on hand in the
second quarter of 1999 as compared to the same quarter of 1998.
SIX-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THE SIX-MONTH PERIOD
ENDED JUNE 30, 1998
In December 1997, the Company made the decision to dispose of the operations
of the subsidiaries of the Company operating in the medical services industry
in order to concentrate on its telecommunications and technology sectors.
17
<PAGE>
Accordingly, medical services operations during the six-month periods ending
June 30, 1999 and 1998 have been reported as discontinued operations.
REVENUES
Telecommunications service revenue increased $3,492,306 to $12,408,250 in the
first six months of 1999 as compared to $8,915,944 in the first six months of
1998. The increase is due primarily to the new customers obtained through the
Network Marketing channel which began generating revenues in the third
quarter of 1997.
Marketing services revenue, which includes revenue recognized from
independent representatives for promotional and presentation materials,
WebCentre, and ongoing administrative support decreased $69,247 to $2,235,962
in the first six-months of 1999 as compared to $2,305,209 in the same period
of 1998. The net decrease was primarily due to increased revenues of $615,000
related to the Company's new WebCentre product which was first offered in the
second quarter of 1999 which new revenues were offset by: (1) a decrease of
$337,000 in revenues from independent representatives for promotional and
presentation materials and (2) discontinuance of certain products sold
totaling $298,000 in the first six-months of 1998 which accordingly did not
have revenues in 1999. 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 revenue increased $468,363 to $1,048,973
in the first six months of 1999 as compared to $580,610 in the first six
months of 1999. These revenues are from the licensing and development of
technology through MiBridge, Inc. and are due to increased acceptance of its
products in the marketplace. This rate of 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
and development in 1999 are not anticipated to exceed revenues in 1998.
Additionally, revenue from this source will vary from quarter to quarter
based on timing of technology licensing and development projects and
royalties from products previous sold.
OPERATING COSTS AND EXPENSES
Telecommunication network expenses decreased $446,496 in the first six months
of 1999 to $9,064,054 as compared to $9,510,550 for the same period in 1998.
These expenses include the costs related to the continuing development and
deployment of the Company's communication network and expenses related to the
telecommunication services revenue. The decrease in expense was primarily due
to the deployment of the Company's IP network and the Company's efforts to
negotiate reduced rate contracts with other carriers. The Company expects
that telecommunications network expense will increase as telecommunication
services revenue increases but at a lesser rate of growth as the Company
benefits from economies of scale and increased traffic on the Company's
enhanced IP telephony network.
Marketing service costs were decreased $231,201 to $2,979,756 in the first
six months of 1999 as compared to $3,210,957 for the same period in 1998. The
decrease is a direct result of the decreased marketing service revenues
during the same period. Marketing service expenses include commissions and
the costs of providing promotional and presentation materials, the Company's
new WebCentre product, and ongoing administrative support to independent
representatives.
Selling, general and administrative expense increased $992,727 to $5,924,819
in the first six months of 1999 as compared to $4,932,092 in the first six
months in 1998. The increase was primarily due to increased overhead and
personnel costs associated with growing the Company's telecommunication
business.
The provision for doubtful accounts increased $495,353 to $1,944,015 in the
first six months of 1999 as compared to $1,448,662 in the same period in
1998. This increase is primarily due to growth in the Company's
telecommunication services revenue.
Depreciation and amortization increased $730,997 to $2,780,823 in the first
quarter of 1999 as compared to $2,049,826 in the first six months of 1998.
The increase is primarily due to increased depreciation related to continuing
acquisitions of equipment under capital lease agreements. Depreciation
expense also increased due to continued acquisition of telecommunication
equipment.
18
<PAGE>
In the first quarter of 1999, the Company recorded a write-down of
capitalized software costs of $1,847,288. In early 1998 the Company
contracted with an outside consulting company to develop a billing and
operations information system. The Company continually evaluated the
functionality and progress of the in-process system development. In May 1999,
the Company's management and its Board of Directors concluded that the new
system would not significantly enhance the Company's existing billing and
information systems or meet its ultimate needs and accordingly did not
justify paying additional contracted expenses of approximately $1,000,000.
Accordingly the Company recorded a write-down on the in-process system
development of $1,847,288.
Research and development decreased $70,050 to $1,074,105 in the first six
months of 1999 as compared to $1,144,155 in the same period in 1998. The
Company anticipates that research and development expenses for 1999 will
approximate those for 1998.
Interest expense decreased $4,772,145 to $2,868,432 in the first six months
of 1999 as compared to $7,640,577 in the same period in 1998. Interest
expense in the first six months of 1999 was primarily due to $1,766,938
(non-cash) in amortization of debt discount related to certain warrants
granted in connection with $8,000,000 in loans and a $3,000,000 letter of
credit to the Company from Winter Harbor and interest on outstanding debt of
the Company of $1,101,494. The interest expense in the first six months of
1998 was primarily due to $7,274,000 (non-cash) in amortization of debt
discount related to certain warrants granted in connection with $7,768,000 in
loans to the Company in the first six months of 1998 and interest expense of
$366,577 on outstanding debt of the Company.
Interest and other income decreased $6,713 to $56,751 in the first six months
of 1999 as compared to $63,464 in the same period of 1998. The decrease was
primarily due to a decrease in the average balance of cash on hand in the
first six months of 1999.
The Company recorded an additional loss from discontinued operations in the
first six months of 1999 in the amount of $350,000. The Company has
experienced unexpected delays in disposing of the remaining non-operating
assets, including certain assets located in China. Additionally, the
Company's best estimate of proceeds from the remaining assets is expected to
be less than originally estimated by management. As the remaining asset
disposals have not occurred as expected, during the first six months of 1999
the Company revised its best estimate of the ultimate loss on disposal and
related on-going administrative costs and accordingly recorded the additional
estimated loss of $350,000.
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 October 31, 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. Since 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
of this remediation effort involves readily available, simple upgrades to
hardware and software components, or relatively minor changes to the
19
<PAGE>
Company's in-house developed systems. While the Company has completed much of
the Remediation phase, except for the billing system discussed below, the
Company anticipates that this phase will not be completed until September 30,
1999. Total costs, past and future, of all remediations, including the
billings system discussed below, are not expected to exceed $250,000. 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
represents 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 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 LECs. I-Link's
carriers have indicated in public filings and other notifications they intend
to be Y2K compliant. 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 LECs 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 LECs, 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 been making and will continue to make enhancements to the
existing billing system in order for that system to be Y2K compliant by
October 15, 1999. The cost of these modifications to the existing billing
system are not anticipated to exceed $50,000, and would involve internal
resources only such as salaries and benefits.
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
Company has already expended approximately $40,000 to date for upgrades, and
approximately $45,000 on internal resources for Y2K preparation. The Company
estimates the remaining expenditures for outside services and upgrades should
not exceed $90,000 and internal resources should not exceed $75,000. However,
the ultimate final cost of modifications and conversions could change and is
not definitively known at this time. The Company expects to fund such
expenditures from public or private financing markets.
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
20
<PAGE>
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 repairs 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 requirement.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - 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 are 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
The Company held a special meeting of stockholders on April 14, 1999, at
which two proposals were considered and passed by the stockholders:
Proposal 1 was "Approval of 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 in the
event that management elects not to repay certain debt owing to Winter Harbor
on April 26, 1999. Any unsatisfied obligations under such debt will still
come due on the October 31, 1999 maturity date even if the warrants are
issued." The vote for Proposal 1 was: 13,775,647 votes for; 1,045,981 votes
against, 106,115 votes abstaining.
Proposal 2 was "Approval of an Amendment to the Articles of Incorporation
Increasing the Authorized common stock from 75,000,000 shares to 150,000,000
shares to allow for the issuance of the warrants in the first proposal and a
rights offering of convertible preferred stock to be conducted in connection
with the Winter Harbor Financing Arrangement." The vote for Proposal 2 was:
13,819,744 votes for; 1,012,289 votes against, 95,710 votes abstaining.
ITEM 6(a) - EXHIBITS
Exhibit
Number Item
- ------- ----
27 Financial data schedule.
ITEM 6(b) - REPORTS ON FORM 8-K
A report on Form 8-K was filed on May 3, 1999 which included the Second
Amendment to the Loan Agreement dated April 15, 1999, by and between the
Company and Winter Harbor. The 8-K also included a Term Sheet dated April 15,
1999 by and between the Company and Winter Harbor relative to a new
$4,000,000 loan to the Company.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
I-LINK INCORPORATED
-------------------
(Registrant)
Date: August 19, 1999 By: /s/ John W. Edwards
---------------------------
John W. Edwards
President, Chief Executive Officer
By: /s/ John M. Ames
---------------------------
John M. Ames
Chief Operating Officer and
Acting Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS DATED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,538,443
<SECURITIES> 0
<RECEIVABLES> 8,792,509
<ALLOWANCES> 3,693,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,110,113
<PP&E> 10,192,886
<DEPRECIATION> 3,680,861
<TOTAL-ASSETS> 22,291,462
<CURRENT-LIABILITIES> 15,878,499
<BONDS> 0
0
336,770
<COMMON> 152,122
<OTHER-SE> (21,787,313)
<TOTAL-LIABILITY-AND-EQUITY> 22,291,462
<SALES> 15,693,185
<TOTAL-REVENUES> 15,693,185
<CGS> 0
<TOTAL-COSTS> 25,614,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,811,681
<INCOME-PRETAX> (12,733,356)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,733,356)
<DISCONTINUED> (350,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,083,356)
<EPS-BASIC> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
