<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, 2000
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, 2000, the registrant had outstanding 27,922,032 shares of
$0.007 par value common stock.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,190,520 $ 2,950,730
Accounts receivable, less allowance for doubtful
accounts of $44,000 and $1,789,000 as of
June 30, 2000 and December 31, 1999, respectively 14,785,764 4,344,406
Other current assets 278,373 362,191
------------- -------------
Total current assets 22,254,657 7,657,327
Furniture, fixtures, equipment and software, net 8,378,230 7,019,361
Other assets:
Intangible assets, net 5,113,313 6,551,453
Other assets 589,949 430,058
------------- -------------
$ 36,336,149 $ 21,658,199
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,255,815 $ 4,131,675
Accrued liabilities 3,588,942 2,629,046
Unearned revenue 15,000,000 --
Accrued interest on notes payable 1,924,298
Current portion of long-term debt 746,625 751,660
Current portion of notes payable to a related party 7,768,000
Current portion of obligations under capital leases 1,457,701 1,380,957
Net liabilities of discontinued operations 82,629 82,629
------------- -------------
Total current liabilities 33,824,010 8,975,967
Notes payable to a related party -- 7,768,000
Accrued interest on long-term notes payable -- 1,345,801
Obligations under capital leases 401,436 544,724
Unearned revenue 4,166,667 --
------------- -------------
38,392,113 18,634,492
------------- -------------
Commitments and contingencies (note 7)
Redeemable preferred stock - Class M 11,734,820 11,734,820
Redeemable preferred stock - Class F -- 2,338,784
------------- -------------
11,734,820 14,073,604
------------- -------------
Stockholders' deficit:
Preferred stock, $10 par value, authorized
10,000,000 shares, issued and outstanding
31,721 and 49,992 at June 30, 2000 and
December 31, 1999, respectively, liquidation
preference of $16,200,445 at June 30, 2000 317,210 499,920
Common stock, $.007 par value, authorized
150,000,000 shares, issued and outstanding
27,645,838 and 24,150,829 at June 30, 2000
and December 31, 1999, respectively 193,522 169,056
Additional paid-in capital 105,756,046 98,734,475
Deferred compensation (172,862) (499,377)
Accumulated deficit (119,884,700) (109,953,971)
------------- -------------
Total stockholders' deficit (13,790,784) (11,049,897)
------------- -------------
$ 36,336,149 $ 21,658,199
============= =============
</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,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services $ 4,589,112 $ 6,225,552 $ 9,876,319 $ 12,408,250
Marketing services -- 1,476,090 464,354 2,235,962
Technology licensing and development 1,739,906 754,557 6,246,406 1,048,973
Other 1,008,563 -- 1,709,667 --
------------ ------------ ------------ ------------
Total revenues 7,337,581 8,456,199 18,296,746 15,693,185
------------ ------------ ------------ ------------
Operating costs and expenses:
Telecommunication network expense 5,537,946 4,740,624 11,651,008 9,064,054
Marketing services -- 1,763,447 349,034 2,979,756
Selling, general and administrative 5,724,953 3,087,696 9,644,041 5,924,819
Provision for doubtful accounts 54,187 1,038,309 379,903 1,944,015
Depreciation and amortization 1,560,816 1,437,403 3,049,705 2,780,823
Write-down of capitalized software costs -- -- -- 1,847,288
Research and development 841,446 501,070 1,674,358 1,074,105
------------ ------------ ------------ ------------
Total operating costs and expenses 13,719,348 12,568,549 26,748,049 25,614,860
------------ ------------ ------------ ------------
Operating loss (6,381,767) (4,112,350) (8,451,303) (9,921,675)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (350,481) (1,742,543) (794,323) (2,868,432)
Interest and other income 112,969 33,172 150,796 56,751
Settlement expense (Note 6) 720,385 -- (639,565) --
------------ ------------ ------------ ------------
Total other income (expense) 482,873 (1,709,371) (1,283,092) (2,811,681)
------------ ------------ ------------ ------------
Loss from continuing operations (5,898,894) (5,821,721) (9,734,395) (12,733,356)
Loss from discontinued operations (less
applicable income tax provision of
$0 for the six and three month periods
ended June 30, 2000 and 1999) -- -- -- (350,000)
------------ ------------ ------------ ------------
Net loss $ (5,898,894) $ (5,821,721) $ (9,734,395) $(13,083,356)
============ ============ ============ ============
CALCULATION OF NET LOSS PER COMMON SHARE:
Loss from continuing operations $ (5,898,894) $ (5,821,721) $ (9,734,395) $(12,733,356)
Cumulative preferred stock dividends (393,095) (380,448) (800,488) (873,359)
Dividends paid on Class F preferred stock -- -- (18,214) --
------------ ------------ ------------ ------------
Loss from continuing operations
applicable to common stock $ (6,291,989) $ (6,202,169) $(10,553,097) $(13,606,715)
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding 24,901,536 20,799,250 26,026,948 20,037,109
============ ============ ============ ============
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.25) $ (0.30) $ (0.41) $ (0.68)
Loss from discontinued operations -- -- -- (0.02)
------------ ------------ ------------ ------------
Net loss per common share $ (0.25) $ (0.30) $ (0.41) $ (0.70)
============ ============ ============ ============
</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, 1999 49,992 $ 499,920 24,150,829 $169,056 $ 98,734,475 $(499,377) $(109,953,971)
Conversion of preferred stock
into common stock (18,519) (185,190) 1,970,590 13,794 171,396 -- --
Reclassification of Class F
redeemable preferred stock
from mezzanine due to
conversion to common stock 248 2,480 -- -- 2,336,305 -- --
Common stock dividend paid to
holders of Class F redeemable
preferred stock -- -- 87,477 612 195,721 -- (196,334)
Exercise of stock options
and warrants -- -- 1,286,965 9,009 3,523,710 -- --
Common stock issued as payment
of accrued liabilities -- -- 149,977 1,051 739,537 -- --
Stock options issued for services -- -- -- -- 54,902 (54,902) --
Amortization of deferred
compensation on stock options
issued for services -- -- -- -- -- 381,417 --
Net loss -- -- -- -- -- -- (9,734,395)
------- --------- ---------- -------- ------------ --------- -------------
BALANCE AT JUNE 30, 2000 31,721 $ 317,210 27,645,838 $193,522 $105,756,046 $(172,862) $(119,884,700)
======= ========= ========== ======== ============ ========= =============
</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,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,734,395) $(13,083,356)
Adjustments to reconcile net loss to net cash used in
(provided by) operating activities:
Depreciation and amortization 3,049,705 2,780,823
Provision for doubtful accounts 379,903 1,944,015
Common stock issued as payment of accrued liabilities 740,588 --
Amortization of discount on notes payable -- 1,766,938
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 381,417 609,056
Increase (decrease) from changes in operating assets and liabilities:
Accounts receivable (10,821,262) (2,641,508)
Other assets (76,073) (331,361)
Accounts payable, accrued liabilities and unearned revenue 19,824,180 735,845
Discontinued operations - noncash charges and working capital changes (26,141) 320,652
------------ ------------
Net cash provided by (used in) operating activities 3,717,922 (6,044,113)
------------ ------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (2,970,434) (615,810)
Maturity of restricted certificates of deposit -- 359,666
Investing activities of discontinued operations 19,674 30,000
------------ ------------
Net cash used in investing activities (2,950,760) (226,144)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party 2,600,000 7,600,000
Proceeds from advance under strategic marketing agreement 1,751,183 --
Payment of related party debt (2,600,000) (500,000)
Payment of advance under strategic marketing agreement (1,751,183) --
Payment of long-term debt -- (268,984)
Payment of capital lease obligations (66,544) (337,667)
Proceeds from exercise of common stock warrants and options 3,532,719 5,000
Financing activities of discontinued operations (24,719) --
------------ ------------
Net cash provided by financing activities 3,441,456 6,498,349
------------ ------------
Increase in cash and cash equivalents 4,208,618 228,092
Cash and cash equivalents at beginning of period 2,996,004 1,368,927
------------ ------------
Cash and cash equivalents at end of period $ 7,204,622 $ 1,597,019
============ ============
Cash and cash equivalents at end of period:
Continuing operations $ 7,190,520 $ 1,538,443
Discontinued operations 14,102 58,576
------------ ------------
Total cash and cash equivalents at end of period $ 7,204,622 $ 1,597,019
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of Class F redeemable preferred stock from mezzanine $ 2,338,784 $ 5,167,959
Warrants issued in connection with a standby letter of credit -- $ 735,720
Stock options issued for services $ 54,902
Equipment acquired under capital lease obligations -- $ 1,822,193
Accrued interest exchanged for Series N preferred stock -- $ 575,675
</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 is an integrated
voice and data communications company focused on simplifying the delivery of
"Unified Communication." Unified Communication is the integration of traditional
telecommunications with new data IP (Internet Protocol) communications systems
with the effect of simplifying communications, increasing communication
capabilities and lowering overall communication costs. Unified Communication
platforms integrate telecommunication, mobile communication, paging,
voice-over-IP (VoIP), fax and Internet technologies. Through its wholly owned
subsidiaries I-Link Communications, Inc., and I-Link Systems, Inc., the Company
provides enhanced telecommunications services on a wholesale and retail basis.
Through its wholly-owned subsidiaries MiBridge, Inc., and ViaNet Technologies
Ltd., the Company undertakes the research and development of new
telecommunications services, products, and technologies, and the licensing of
certain of these products and technologies to other telecommunications
companies.
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. In April 2000, the Company completed the sale of certain
non-operating assets located in China, which had experienced unexpected delays
in disposal. The Company sold the net assets for $150,000 of which $50,000 was
used to pay down an outstanding note payable and accrued interest with the
purchaser. As of June 30, 2000, there were no revenue generating activities
remaining from the medical services operations. On-going administrative costs
primarily consist of fees associated with collecting outstanding accounts
receivable. 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 liabilities of
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, 2000 and 1999, (b) the financial position at June 30, 2000, and (c) cash
flows for the six-months ended June 30, 2000 and 1999. The year-end balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The financial
statements should be read in conjunction with the Company's annual report on
Form 10-K for the year ended December 31, 1999 and quarterly report on Form 10-Q
for the three-months ended March 31, 2000.
The results of operations for the three-month and six-month periods ended June
30, 2000 are not necessarily indicative of those to be expected for the entire
year.
The Company incurred a net loss from continuing operations of $9,734,395 for the
six-month period ended June 30, 2000, and as of June 30, 2000 had an accumulated
deficit of $119,884,700 and negative working capital of $11,569,353. The Company
anticipates that revenues generated from its continuing operations will not be
sufficient during the remainder of 2000 to fund ongoing operations, the
continued expansion of its private telecommunications network facilities,
development and manufacturing of its Indavo 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 for capital needs, the Company entered into two agreements
during the second quarter of 2000, namely a line of credit agreement with Winter
Harbor and a strategic alliance with Red Cube International AG ("Red Cube"). 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, 2001.
While the Company believes that the aforementioned sources of funds combined
with ongoing revenues and other available sources of financing will be
sufficient to fund its operations in 2000, the Company anticipates that
additional funds will be necessary after such time to fund its operations and
finance the planned expansion of the Company's business communications services,
product development and manufacturing, and to discharge the financial
obligations of the Company. The availability of such funds 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 funds will be
available, or if available that they will be on terms and conditions favorable
to the Company. Furthermore, the Company may need to raise funds prior to 2001
if, for example, the Company accelerates the expansion of its network, pursues
acquisitions or experiences operating losses that exceed our current
expectation.
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, 2000 and 1999, basic and diluted loss per
share are the same. During the six-month period ended June 30, 2000, holders of
the Series F Redeemable preferred stock converted 248 of those shares (none were
converted in the three months ended June 30, 2000). Accordingly, they were paid
stock dividends of 87,477 shares of common stock on the converted shares during
first six-months of 2000. During the three-month and six-month periods ending
June 30, 1999, holders of the Series F Redeemable preferred stock converted 409
and 548 of those shares respectively. Accordingly they were paid stock dividends
of 81,343 and 100,003 shares of common stock, respectively, on the converted
shares. As of June 30, 2000 all Series F preferred stock has been converted to
common stock and therefore there will be no further stock dividends paid on the
Series F preferred stock.
REVENUE RECOGNITION
The agreement with Red Cube Group consisted of a $7,500,000 licensing fee and
$2,500,000 for consulting services. The $10,000,000 is nonrefundable and will be
recorded as revenue ratably over a two-year period in accordance with the
provisions of Statement of Position #97-2. Accordingly, $833,333 was recorded as
technology licensing revenue in the second quarter of 2000 while the balance of
$9,166,667 has been recorded as unearned revenue as of June 30, 2000. The
agreement also includes a nonrefundable payment of a $10,000,000 (received in
July 2000) service prepayment which is to be credited against the cost of
services performed and/or provided by I-Link to Red Cube. To the extent the
service prepayment credit has not been fully utilized by Red Cube by June 30,
2001 (the "Utilization Date"), any unused service prepayment shall be deemed
fully earned by I-Link and utilized as of that date if the I-Link Network has
met certain requirements during the service period. The service prepayment of
$10,000,000 has been recorded as unearned revenue as of June 30, 2000 and will
be recognized as revenue when the related services are performed or provided.
6
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 3 - DISCONTINUED OPERATIONS
Net assets of the Company's discontinued operations (excluding intercompany
balances which have been eliminated against the net equity of the discontinued
operations) are as follows (unaudited):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 14,102 $ 45,274
Accounts receivable 206,419 391,590
Inventory -- 555,291
Other 31,936 33,233
--------- -----------
Total current assets 252,457 1,025,388
Furniture, fixtures and equipment, net 18,176 37,850
Other non-current assets 253 854
--------- -----------
Total assets 270,886 1,064,092
--------- -----------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 136,572 905,060
Note payable 216,943 141,661
--------- -----------
Total current liabilities 353,515 1,046,721
--------- -----------
Note Payable 100,000
--------- -----------
Net liabilities - discontinued operations $ (82,629) $ (82,629)
========= ===========
</TABLE>
The net assets of the discontinued operations as of June 30, 2000 and December
31, 1999 are shown as a current liabilities 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 2000. Revenues of the discontinued operations
were $0 and $104,498 and $0 and $235,121 for the three-month and six-month
periods ending June 30, 2000 and 1999, respectively.
NOTE 4 - CAPITAL FINANCING
In March 2000, the Company entered into a new lease facility providing for
equipment purchases of up to $5,000,000. The equipment will be used in expanding
the Company's real-time IP ("RTIP network") network. The lease agreement
requires monthly payments over the three-year term. As of June 30, 2000, the
Company had purchased $875,000 of equipment under the lease facility.
NOTE 5 - INCOME TAXES
The Company recognized no income tax benefit from the losses generated in 2000
and 1999 because of the uncertainty of the realization of the related deferred
tax asset.
7
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 6 - STOCKHOLDER'S EQUITY, REDEEMABLE PREFERRED STOCK- SERIES F AND
REDEEMABLE COMMON STOCK TO BE ISSUED
On March 10, 2000, the Company and JNC Opportunity Fund, Ltd. ("JNC") entered
into a settlement and release agreement relating to certain litigation with
respect to shares of Series F Preferred stock then held by JNC. The shares of
Series F Preferred stock then held by JNC were convertible into 1,104,972 shares
of common stock under the original agreement with JNC prior to the commencement
of the litigation. On March 10, 2000, the Company issued 531,968 shares of
common stock to JNC pursuant to the settlement agreement in cancellation of the
Series F shares then held by JNC. The balance of the shares required to be
issued pursuant to the settlement agreement required approval at a special
meeting of the shareholders held on May 23, 2000, at which time approval of the
shareholders was received. Due to delay in issuance of the shares required to be
issued pursuant to the settlement agreement until shareholder approval was
received and the related common shares were registered, the Company issued
20,458 "Additional Shares" of common stock in accordance with the agreement.
The issuance of 87,477 shares representing dividends associated with the Series
F stock has been recorded in the Company's financial statements as dividends
paid, and 129,519 shares have been recorded as settlement expense. As of June
30, 2000, the Company has also recorded interest expense of $111,021
representing the common stock issued as Additional Shares, Late Shares and
Additional Late Shares (20,458) on May 24, 2000. The settlement and interest
payables and expense as of the end of the first quarter were determined by the
respective shares issuable as of March 31, 2000, multiplied by the market price
of the Company's common stock on March 31, 2000. The ultimate amount of
settlement and interest expense was determined by reference to the market value
of the Company's common stock on the date of issuance (May 24, 2000) times the
common shares issued. Accordingly, the total settlement and interest expense was
$639,565 and $111,021, respectively.
NOTE 7 - PURCHASE COMMITMENTS
I-Link has an agreement with a national carrier to lease local access spans. The
agreement includes minimum usage commitments of $2,160,000 per year for the two
years beginning July 2000. If I-Link were to terminate the agreement early, it
would be required to pay 25 percent of any remaining minimum monthly usage
requirements.
In December 1999, I-Link entered into an agreement with a national carrier to
provide long-distance capacity in order to provide long-distance
telecommunications services to I-Link's customers who reside in areas not yet
serviced by I-Link's dedicated telecommunications network. The eighteen-month
agreement includes minimum monthly usage commitments of $250,000 beginning in
the sixth month of the agreement. Either party may terminate the agreement with
90 days notice.
NOTE 8 - SEGMENT OF BUSINESS REPORTING
The Company's three reportable segments are 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. Additionally, revenues are generated from registration fees paid
by IRs to attend regional and national sales conferences. This segment
ceased operations in February 2000.
- 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, Indavo, and other proprietary technology.
The Company licenses certain developed technology to third party users,
such as Lucent, Brooktrout and others.
8
<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, 2000 and 1999. There has been
no material change in segment assets from the amounts reported in the Company's
annual report on Form 10-K for the year ended December 31, 1999.
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Period Ended Period Ended
------------------------------ --------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
Telecommunications services $ 5,598,000 $ 6,225,000 $ 11,187,000 $ 12,408,000
Marketing services -- 1,476,000 464,000 2,236,000
Technology licensing and development 1,740,000 755,000 6,646,000 1,049,000
----------- ----------- ------------ ------------
Total revenues from external customers
for reportable segments $ 7,338,000 $ 8,456,000 $ 18,297,000 $ 15,693,000
=========== =========== ============ ============
SEGMENT INCOME (LOSS):
Telecommunications services $(1,558,000) $ (249,000) $ (3,787,000) $ 67,000
Marketing services (58,000) (301,000) (154,000) (770,000)
Technology licensing and development 309,000 77,000 3,971,000 (345,000)
----------- ----------- ------------ ------------
Total segment loss for reportable
segments (1,307,000) (473,000) 30,000 (1,048,000)
Unallocated non-cash amounts in consolidated net loss:
Settlement expense 720,000 (640,000)
Amortization of discount on notes
payable -- (1,108,000) -- (1,767,000)
Write-down of capitalized software costs -- -- -- (1,847,000)
Amortization of deferred
compensation on stock options
issued for services (189,000) (295,000) (381,000) (609,000)
Amortization of intangible assets (719,000) (724,000) (1,438,000) (1,447,000)
Other corporate expenses (4,404,000) (3,222,000) (7,305,000) (6,015,000)
Loss from discontinued operations -- -- -- (350,000)
----------- ----------- ------------ ------------
$(5,899,000) $(5,822,000) $ (9,734,000) $(13,083,000)
=========== =========== ============ ============
</TABLE>
9
<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 for the year ended December
31, 1999 and Form 10-Q for the quarter ended March 31, 2000.
FORWARD LOOKING INFORMATION
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS MAY BE DEEMED TO INCLUDE 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," "COULD " "SHOULD",
"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 AND AS SUCH ARE NOT HISTORICAL FACTS. 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 impact of competitive services and pricing;
- the Company's ongoing relationship with its long distance carriers and
vendors;
- the impact of vigorous competition in the markets in which the Company
operates;
- the impact of technological change on the Company's business including new
entrants and alternative technologies;
- risks associated with debt service requirements and interest rate
fluctuations;
- dependence upon key personnel;
- subscriber attrition including the concentration of services rendered
through one vendor;
- 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 further expanding it's real-time IP ("RTIP
network") network;
- the existence of demand for and acceptance of the Company's technology,
products and services;
- 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
In January 1997, I-Link Incorporated (the "Company") acquired I-Link
Communications ("ILC"); in August 1997, the Company acquired MiBridge, Inc.; and
in the first quarter of 1998 the Company formed ViaNet Technologies, Ltd.
("ViaNet"). 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 six-month periods
ending June 30, 2000 and 1999 have been reported as discontinued operations.
The Company is an integrated voice and data communications company focused on
simplifying the delivery of "Unified Communication." Unified Communication is
the integration of traditional telecommunications with new data IP (Internet
Protocol) communications systems with the effect of simplifying communications,
increasing communication capabilities and lowering overall communication costs.
Unified Communication platforms integrate telecommunication, mobile
communication,
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paging, voice-over-IP (VoIP) and Internet technologies. Through its wholly owned
subsidiaries I-Link Communications, Inc., and I-Link Systems, Inc., the Company
provides enhanced telecommunications services on a wholesale and retail basis.
Through its wholly-owned subsidiaries MiBridge, Inc., and ViaNet Technologies
Ltd., the Company undertakes the research and development of new
telecommunications services, products, and technologies, and the licensing of
certain of these products and technologies to other telecommunications
companies. I-Link is a leader in the delivery of Unified Communications as a
result of six core technology offerings: I-Link's Intranet, Softswitch Plus-TM-,
GateLink-TM-, V-Link-TM-, Indavo-TM-, and I-Link TalkFree.
Prior to February 15, 2000 and as of December 31, 1999, 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 depended directly upon
the efforts of IRs. IRs personally solicited potential individual and business
customers via one to one sales presentations wherein customers sign order forms
for I-Link telecommunication products and services (telecommunication service
revenues). Growth in revenue for both telecommunications and marketing services
required an increase in the productivity of IRs and/or growth in the total
number of IRs.
On February 15, 2000, the Company signed a strategic marketing and channel
agreement with Big Planet, a wholly owned subsidiary of Nu Skin Enterprises,
Inc. Under terms of the agreement, I-Link's independent network marketing sales
force (the IR's) transitioned to Big Planet, and Big Planet was granted the
exclusive worldwide rights to market and sell I-Link's products and services
through the Network Marketing (sometimes referred to as "Multi-Level") sales
channel to residential and small business users. Other I-Link sales channels
into the residential, small business, and other markets are unaffected by the
agreement with Big Planet. The result of the agreement with Big Planet is that
the Network Marketing channel became the single largest customer in I-Link's
wholesale distribution channel.
On May 9, 2000, the Company and Red Cube International AG ("Red Cube"), a
leading international provider of Internet Protocol (IP) Telephony and enhanced
Web-based communications services, announced an alliance to offer global,
enhanced IP communications to the customers of each of the two companies. Under
the terms of the agreement, Red Cube Group licensed I-Link's IP Telephony
technology, is standardizing on I-Link's software-based Softswitch Plus-TM-
network platform and preparing to deploy it throughout its existing networks in
Europe and other parts of the world. In addition, the two companies
interconnected their IP Telephony networks, creating a single, unified network,
in order to provide customers from both companies global access to enhanced IP
services. (See more detailed discussion of this agreement in the "Current
Position/Future Requirements" section below).
During the first two quarters of 2000, the Company began commercial deployment
of its Indavo (Integrated Data and Voice) communications services gateway
product. The initial device called Indavo V6 provides small office, home office
and small business, including branch office and remote office customers, the
capacity of up to six simultaneous voice and fax lines using any data service
over network facilities that are already available to their homes or offices
today. Indavo also provides access to I-Link's other enhanced services,
including voice mail, fax, paging, e-mail, conference calling and
follow-me-anywhere One-Number service. Indavo installations include both
stand-alone and customer phone system integrated service configurations. Indavo
devices and services are being marketed and deployed through both wholesale and
retail channels using both general Internet access and fully managed access
facilities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 2000 were $7,190,520 and the working
capital deficit was $11,569,353. Cash provided by operating activities during
the six-month period ended June 30, 2000 was $3,717,922 as compared to cash used
by operations of $6,044,113 during the same period ended June 30, 1999. The
increase in cash provided by operating activities in 2000 was primarily due to
$10,000,000 received as of June 30, 2000 from Red Cube (See more detailed
discussion of this agreement in the "Current Position/Future Requirements"
section below.)
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Net cash used by investing activities in the six-month period ended June 30,
2000 was $2,950,760 as compared to net cash used of $226,144 in the same period
ended June 30, 1999. Cash used by investing activities in 2000 was primarily
attributable to the purchase of network equipment of $2,970,434 which was offset
by $19,674 received from the sale of certain assets from discontinued
operations. In the first six-months of 1999 cash used by investing activities
was primarily due to 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 $359,666 from matured restricted certificates of
deposit.
Financing activities provided net cash of $3,441,456 in the first six-months of
2000 as compared to cash provided of $6,498,349 in the same period of 1999. Cash
provided in 2000 included proceeds of $2,600,000 from a note payable to a
related party, $3,532,719 in net proceeds from exercises of common stock
warrants and options and a $1,751,183 advance received under the strategic
marketing and channel agreement with a customer. The $2,600,000 note and
$1,751,183 advance were both repaid during the second quarter of 2000.
Repayments of capital lease obligations of $66,544 and repayments of $24,719 on
certain notes in discontinued operations offset these proceeds. During the same
six months in 1999, cash provided by financing activities included $7,600,000
from short-term debt and common stock warrants and $5,000 in net proceeds from
the exercise of common stock warrants and options. Repayments of $1,106,651 on
long-term debt, notes payable and capital lease obligations offset these
proceeds.
The Company incurred a net loss from continuing operations of $9,734,395 for the
first six-months of 2000, and as of June 30, 2000 had an accumulated deficit of
$119,884,700. The Company anticipates that revenue generated from continuing
operations will not be sufficient during the remainder of 2000 to fund the
Company's operations or continued expansion of its private telecommunications
network facilities and anticipated growth in subscriber base. The Company has
entered into additional financing arrangements as described below in order to
obtain the additional funds required for its continuing operations in 2000.
CURRENT POSITION/FUTURE REQUIREMENTS
During the second quarter of 2000, revenue from continuing operations decreased
$3,621,584 (33.0%) from the first quarter of 2000 as shown below:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------- Increase % Increase
3/31/00 6/30/00 (Decrease) (Decrease)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Telecommunications services $ 5,287,208 $ 4,589,112 $ (698,096) (13.2)%
Marketing services 464,354 (464,354) (100.0)%
Technology licensing and development 4,506,500 1,739,906 (2,766,594) (61.4)%
Other 701,103 1,008,563 307,460 43.9 %
----------- ----------- -----------
Net operating revenue $10,959,165 $ 7,337,581 $(3,621,584) (33.0)%
=========== =========== ===========
</TABLE>
The decrease in telecommunications services was a direct result of an agreement
with Big Planet effective February 15, 2000. Prior to February 15, 2000, the
Company's telecommunication services revenues were primarily dependent upon the
sales efforts of independent representatives (IRs) functioning within a Network
Marketing channel of distribution which targeted residential users and small
businesses in the United States. These revenue sources were recorded at retail.
Under terms of the agreement, I-Link's independent network marketing sales force
(the IR's) transitioned to Big Planet. A substantial decrease in
telecommunication services revenues for the quarter ended June 30, 2000 was the
financial impact as the Company's revenues from its single largest wholesale
customer's subscribers migrated from retail sales to the sell of its services to
the same subscribers through this customer at wholesale prices. While a
significant portion of the revenues has converted to wholesale, a portion of the
customer's subscriber base remains on a retail billing basis with I-Link, for
which the wholesale customer is paid a commission. Should this customer convert
this portion of their business to a wholesale relationship, I-Link would have
further declines in reported revenue with a corresponding related decrease in
commissions paid on this retail business. The first quarter of 2000 included 1
1/2 months of conversion from retail to wholesale of a portion of the revenues.
The second quarter included all three months of the conversion to wholesale on
this same portion of its revenues. The reduction in telecommunications services
revenues when going from retail to wholesale is partially offset by a
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<PAGE>
reduction in commissions paid to IRs related to telecommunication services
revenues. In addition to the transition from retail to wholesale rates with
these subscribers, the number of minutes decreased 18% primarily due to a
decrease in the number of subscribers associated with the Company's single
largest wholesale customer, who accounted for approximately 85% of the Company's
telecommunications services revenue in the second quarter. The Company's single
largest wholesale customer anticipates that minutes, subscribers and related
revenue will increase in future periods, however, the Company no longer controls
this channel and therefore cannot control future results related to this
channel.
The Company transitioned its network marketing channel to Big Planet in February
2000. Accordingly, marketing service revenues ceased in February 2000.
Technology licensing and development revenue decreased in the second quarter of
2000. During the first quarter, the Company's revenues were primarily related to
two licensing agreements that resulted in revenues of nearly $4,000,000. The
Company did not have agreements of this magnitude prior to the first quarter. On
May 9, 2000, the Company and Red Cube Group, a leading international provider of
Internet Protocol (IP) Telephony and enhanced Web-based communications services,
announced an alliance to offer global, enhanced IP communications to the
customers of each of the two companies. Red Cube Group, upon signing of the
agreement, paid the Company $10,000,000 that consisted of a $7,500,000 licensing
fee and $2,500,000 for consulting services. The $10,000,000 is nonrefundable and
will be recorded as income ratably over a two-year period. Accordingly, $833,333
was recorded as technology licensing revenue in the second quarter of 2000 while
the balance of $9,166,667 has been recorded as unearned revenue as of June 30,
2000. Revenue from this source (excluding Red Cube) will vary from quarter to
quarter based on timing of future technology licensing and development projects
and royalties from products previous sold.
Other revenues in the second quarter of 2000 of $1,008,563 represent revenues
relating to services performed for Big Planet as part of the transitioning of
the network-marketing channel, which occurred in the first quarter of 2000.
Revenues from these services to Big Planet are expected to decrease at least 50%
during the third and fourth quarters of 2000, as services rendered during the
transition are no longer needed. However, revenues from these types of services
from new customers may occur in the future. During the first quarter of 2000
other revenues included $301,103 from similar services to Big Planet and
royalties of $400,000 from the sale of Indavo units through a distributor of the
Company to a company which will not utilize the Indavo units over the I-Link
Network. As sales of the Indavo unit to customers who will not utilize the
I-Link Network are not expected to recur, there were no such revenues in the
second quarter nor is there expected to be significant revenues of this type in
the future.
The Company anticipates improved cash flow from operations in the remainder of
2000 primarily from the following sources:
- Additional $10,000,000 in prepaid services associated with the agreement
between Red Cube Group and the Company in May 2000 (see discussion below).
This amount was received in July 2000.
- Anticipated increase in monthly recurring subscription revenues from
marketing of Indavo product. While the Company has decided to sell its
Indavo devices at cost, primarily through an independent distributor, the
Company anticipates increased recurring revenues form the sale of other
enhanced services to Indavo users.
- Anticipated revenues from its GateLink product offering which commenced in
the second quarter of 2000. During the second quarter, the Company agreed
to host applications for five GateLink partners including Nortel (internet
call waiting service), BigZoo.com (pre-paid cards), Me.Net (unified
messaging), Cumulus (call center technology) and OgilvyInteractive (voice
enabled web page). The Company anticipates that efforts in the second and
third quarters should lead to growth of our GateLink business and related
revenues in the fourth quarter of 2000 with significant revenues
anticipated in the first quarter of 2001.
- The affiliation with Big Planet effective February 15, 2000 is anticipated
to have a positive overall financial impact in the long-term to the Company
by increasing revenues, reducing expenses and increasing profit margins
through customer growth. However, the Company no longer controls this
channel and therefore cannot control future results related to this
channel.
The Company anticipates that in preparation for continued market penetration and
deployment of I-Link products, cash requirements for operations, continued
development of the Company's network and marketing of I-Link services will be at
increasingly higher levels than experienced in the first six months of 2000.
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Since December 31, 1999, the Company entered into three agreements as follows:
- On May 9, 2000, the Company and Red Cube announced an alliance to offer
global, enhanced IP communications to the customers of each of the two
companies. Red Cube, upon signing the agreement, paid the Company
$10,000,000 that consisted of a $7,500,000 licensing fee and $2,500,000 for
consulting services. I-Link and Red Cube Group were obligated to use their
best commercially reasonable effort to complete certain milestones defined
in the agreement and to negotiate in good faith to enter into a revenue
sharing agreement by June 23, 2000, which date was extended to July 7,
2000. On June 30, 2000 the Company completed Milestone #1 as required under
the agreement and signed a revenue sharing agreement. Completion of
Milestone #1 and the signing of the revenue sharing agreement, both as
prescribed under the agreement, obligated Red Cube to pay to I-Link an
additional $10,000,000 for future services and removes any potential
obligations that I-Link might have had to repay any of the $20,000,000
received or to be received from Red Cube. The $10,000,000 for future
services was paid to I-Link in July 2000.
- On February 25, 2000, the Company obtained a leasing arrangement for
certain network equipment up to $5,000,000 dollars. As of June 30, 2000 the
Company had approximately $4,100,000 of this lease available for additional
equipment acquisitions.
- The due date of the Company's existing obligation to Winter Harbor in the
amount of $7,768,000 and accrued interest of $1,345,801 as of December 31,
1999, which was due April 15, 2000, was extended to April 15, 2001.
While the Company believes that the aforementioned sources of funds will be
sufficient to fund its operations in 2000, the Company anticipates that
additional funds will be necessary after such time to fund its operations and
finance the planned expansion of the Company's business communications services,
product development and manufacturing, and to discharge the financial
obligations of the Company. The availability of such funds 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 funds
will be available or if available that they will be on terms and conditions
favorable to the Company. Furthermore, the Company may need to raise funds prior
to 2001 if, for example, the Company accelerates the expansion of its network
and services, pursue acquisitions or experiences operating losses that exceed
our current expectations.
THREE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO
THREE-MONTH PERIOD ENDED JUNE 30, 1999
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, 2000
and 1999 have been reported as discontinued operations.
REVENUES
Telecommunication services revenue decreased $1,636,440 to $4,589,112 in the
second quarter of 2000 as compared to $6,225,552 in the second quarter of 1999.
The decrease is a direct result of the agreement with Big Planet effective
February 15, 2000. Prior to February 15, 2000, the Company's telecommunication
services revenues were primarily dependent upon the sales efforts of independent
representatives (IRs) functioning within a Network Marketing channel of
distribution. These revenue sources were recorded at retail. Under terms of the
agreement, I-Link's independent network marketing sales force (the IR's)
transitioned to Big Planet. A substantial decrease in telecommunication services
revenues for the quarter ended June 30, 2000 was the financial impact as the
Company's revenues from its single largest wholesale customer's subscribers
migrated from retail sales to the sell of its services to the same subscribers
through this customer at wholesale prices. While a significant portion of the
revenues has converted to wholesale, a portion of the customer's subscriber base
remains on a retail billing basis with I-Link, for which the customer is paid a
commission. Should this customer convert this portion of their business to a
wholesale relationship, I-Link would have further declines in reported revenue
with a corresponding related decrease in commission paid on this retail
business. In addition to the transition from retail to wholesale rates with
these subscribers, the number of minutes increased 16% primarily due to an
increase in the number of subscribers as compared to the similar period of 1999.
The increase in minutes was offset by a decrease in the average rate per minute
of approximately 36%. This decrease in rate per minute was a result of two
events: (1) transition from retail to wholesale pricing with the Company's
single largest wholesale customer who accounted for approximately 56% of the
Company's telecommunications
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<PAGE>
services revenue in the first six months of 2000 and (2) competitive pricing
pressures. The Company's single largest wholesale customer anticipates that
minutes, subscribers and related revenue will increase in future periods,
however, the Company no longer controls this channel and therefore cannot
control future results related to this channel.
The Company transitioned its network marketing channel to Big Planet in February
2000. Accordingly, marketing service revenues ceased in February 2000.
Technology licensing and development revenue increased $985,349 to $1,739,906 in
the second quarter of 2000 as compared to $754,557 in the same quarter of 1999.
On May 9, 2000, the Company and Red Cube Group entered into an agreement under
which Red Cube paid the Company $10,000,000 that consisted of a $7,500,000
licensing fee and $2,500,000 for consulting services. The $10,000,000 is
nonrefundable and is being recorded as income ratably over a two-year period.
Accordingly, $833,333 was recorded as technology licensing revenue in the second
quarter of 2000 while the balance of $9,166,667 has been recorded as unearned
revenue as of June 30, 2000. Revenue from this source (excluding Red Cube) will
vary from quarter to quarter based on timing of future technology licensing and
development projects and royalties from products previously sold.
Other revenues in the second quarter of 2000 relate to services performed for
Big Planet as part of the transitioning of the network-marketing channel.
Revenues from these services to Big Planet are expected to decrease at least 50%
during the third and fourth quarters of 2000, as services rendered during the
transition are no longer needed. However, revenues from these types of services
from new customers may occur in the future. There were no comparable revenues in
the same period of 1999.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $797,322 in the second quarter of
2000 to $5,537,946 as compared to $4,740,624 for the same quarter of 1999. These
expenses include the costs related to the continuing development and deployment
of the Company's communication network and expenses related to the generation of
telecommunication service revenue. While telecommunication network expense is
directly related to telecommunication services revenues, the relationship is not
comparable with the same quarter in 1999 due to the transition to wholesale
rather than retail revenues as a result of the agreement with Big Planet
discussed in Telecommunication services revenue above.
Marketing service costs ceased in the first quarter of 2000. The expenses
related directly to the Company's marketing services revenue, which revenues
ceased in the first quarter of 2000. Accordingly there were no such expenses in
the second quarter of 2000.
Selling, general and administrative expense increased $2,637,257 to $5,724,953
in the second quarter of 2000 as compared to $3,087,696 in the second quarter of
1999. The increase was primarily due to increased overhead, outside services
used in connection with complex business transactions and increasing personnel
costs associated with hiring highly skilled employees to expand and administer
the Company's network and provisioning of telecommunications services.
The provision for doubtful accounts decreased $984,122 to $54,187 in the second
quarter of 2000 as compared to $1,038,309 in the same quarter of 1999. The
decrease is directly related to the transitioning of the network channel
subscribers to Big Planet in February 2000. With the transition, Big Planet
assumed the risk of collections from individual subscribers. Accordingly, the
Company continues to assess its risks of collections of accounts receivable, the
effect of which resulted in reduced provision for the three months ended June
30, 2000 as compared to the same period of 1999.
Depreciation and amortization increased $123,413 to $1,560,816 in the second
quarter of 2000 as compared to $1,437,403 in the second quarter of 1999. The
increase is primarily due to increased depreciation related to continuing
acquisitions of equipment, primarily telecommunication equipment.
Research and development increased $340,376 to $841,446 in the second quarter of
2000 as compared to $501,070 in the same period of 1999. The Company anticipates
that research and development expense will continue at a comparable amount
during the remainder of 2000.
Interest expense decreased $1,392,062 to $350,481 in the second quarter of
2000 as compared to $1,742,543 in the same quarter
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<PAGE>
of 1999. Interest in the second quarter of 2000 was primarily related to
interest on outstanding debt of the Company and capitalized leases. 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 L.L.C. and interest on outstanding debt of the Company of
$612,923.
Interest and other income increased $79,797 to $112,969 in the second quarter of
2000 as compared to $33,172 in the same quarter of 1999. The increase was
primarily due to an increase in the average balance of cash on hand in the
second quarter of 2000 as compared to the same quarter of 1999.
A settlement expense of $1,359,950 was recorded in the first quarter of 2000.
This expense is the result of an obligation to issue 129,519 shares of common
stock in exchange for certain trading restrictions imposed on JNC Opportunity
Fund Ltd. ("JNC") in relation to the common stock to be issued to JNC pursuant
to a settlement and release agreement entered into in February 2000. The
settlement and release agreement settled certain litigation between the Company
and JNC over un-converted Series F preferred stock held by JNC. The amount of
this expense was subject to change in the future in relation to the changes in
the market price of the Company's common stock until May 24, 2000 when the
common stock was issued. The market price of the Company's common stock
decreased from March 31 to May 24, 2000, accordingly the Company recognized a
reduction in settlement expense of $720,385 from $1,359,950 recorded as of March
31, 2000 to $639,565 as of May 24, 2000. There was no comparable expense in
1999.
SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE
SIX-MONTH PERIOD ENDED JUNE 30, 1999
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 six-month periods ending June 30, 2000
and 1999 have been reported as discontinued operations.
REVENUES
Telecommunications service revenue decreased $2,531,931 to $9,876,319 in the
first six months of 2000 as compared to $12,408,250 in the first six months of
1999. The decrease is a direct result of the agreement with Big Planet effective
February 15, 2000. Prior to February 15, 2000, the Company's telecommunication
services revenues were primarily dependent upon the sales efforts of independent
representatives (IRs) functioning within a Network Marketing channel of
distribution. These revenue sources were recorded at retail. Under terms of the
agreement, I-Link's independent network marketing sales force (the IR's)
transitioned to Big Planet. A substantial decrease in telecommunication services
revenues for the six months ended June 30, 2000 was the financial impact as the
Company's revenues from its single largest wholesale customer's subscribers
migrated from retail sales to the sell of its services to the same subscribers
through this customer at wholesale prices. While a significant portion of the
revenues has converted to wholesale, a portion of the customer's subscriber base
remains on a retail billing basis with I-Link, for which the customer is paid a
commission. Should this customer convert this portion of their business to a
wholesale relationship, I-Link would have further declines in reported revenue
with a corresponding related decrease in commission paid on this retail
business. In addition to the transition from retail to wholesale rates with
these subscribers, the number of minutes increased 32% primarily due to an
increase in the number of subscribers as compared to the similar period of 1999.
The increase in minutes was offset by a decrease in the average rate per minute
of approximately 35%. This decrease in rate per minute was a result of two
events: (1) transition from retail to wholesale pricing with the Company's
single largest wholesale customer who accounted for approximately 56% of the
Company's telecommunications services revenue in the first six months of 2000
and (2) competitive pricing pressures. The Company's single largest wholesale
customer anticipates that minutes, subscribers and related revenue will increase
in future periods, however, the Company no longer controls this channel and
therefore cannot control future results related to this channel.
Marketing services revenue, which included revenue from independent
representatives for promotional and presentation materials, WebCentre, and
ongoing administrative support decreased $1,771,608 to $464,354 in the first
six-months of 2000
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as compared to $2,235,962 in the same period of 1999. The decrease was primarily
a result of transition of this network-marketing channel to Big Planet in
February 2000, which with such transition, marketing service revenues ceased.
Technology licensing and development revenue increased $5,197,433 to $6,246,406
in the first six months of 2000 as compared to $1,048,973 in the first six
months of 2000. During the first six months of 2000, the Company's increase in
these revenues was primarily from two sources. First, the Company entered into
two licensing agreements that resulted in revenues of nearly $4,000,000. Second,
on May 9, 2000, the Company and Red Cube Group entered into an agreement under
which Red Cube paid the Company $10,000,000 that consisted of a $7,500,000
licensing fee and $2,500,000 for consulting services. The $10,000,000 is being
recorded as income ratably over a two-year period. Accordingly, $833,333 was
recorded as technology licensing revenue in the second quarter of 2000 while the
balance of $9,166,667 has been recorded as unearned revenue as of June 30, 2000.
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.
Other revenues in the first six months of 2000 include $1,309,667 which
represent revenues relating to services performed for Big Planet as part of the
transitioning of the network marketing channel which occurred in the first
quarter of 2000. Revenues from these services to Big Planet are expected to
decrease significantly during the third and fourth quarters of 2000, as services
rendered during the transition are no longer needed. However, revenues from
these types of services from new customers may occur in the future. During the
six months of 2000 other revenues also included royalties of $400,000 from the
sale of Indavo units to through a distributor of the Company to a company which
will not use the Indavo units over the I-Link Network. As sales of the Indavo
unit to customers who will not use the I-Link Network are not expected to recur,
there were no such revenues in the second quarter nor is there expected to be
significant revenues of this type in the future.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $2,586,954 in the six months ended
June 30 2000 to $11,651,008 as compared to $9,064,054 for the same period in
1999. These expenses include the costs related to the continuing development and
deployment of the Company's communication network and expenses related to the
generation of telecommunication service revenue. While telecommunication network
expense is directly related to telecommunication services revenues, the
relationship is not comparable with the same period in 1999 due to the
transition to wholesale rather than retail revenues as a result of the agreement
with Big Planet discussed above in Telecommunication services revenue.
Marketing service costs decreased $2,630,722 to $349,034 in the first six months
of 2000 as compared to $2,979,756 for the same period in 1999. The decrease is a
direct result of the decreased marketing service revenues during the same
period. These expenses related directly to the Company's marketing service
revenue. Marketing service expenses included commissions and the costs of
providing promotional and presentation materials, national and regional
conventions and ongoing administrative support. The decrease in expense is
directly related to the transition of this network marketing channel to Big
Planet in February 2000, which resulted in the cessation of marketing service
revenues and accordingly the related expenses.
Selling, general and administrative expense increased $3,719,222 to $9,644,041
in the first six months of 2000 as compared to $5,924,819 in the first six
months in 1999. The increase was primarily due to increased overhead, outside
services used in connection with complex business transactions and increasing
personnel costs associated with hiring highly skilled employees to expand and
administer the Company's network and provisioning of telecommunications
services.
The provision for doubtful accounts decreased $1,564,112 to $379,903 in the six
months of 2000 as compared to $1,944,015 in the same period in 1999. The
decrease is directly related to the transitioning of the network channel
subscribers to Big Planet in February 2000. With the transition, Big Planet
assumed the risk of collections from individual subscribers. Accordingly, the
Company continues to assess its risks of collections of accounts receivable, the
effect of which resulted in reduced provision for the six months ended June 30,
2000 as compared to the same period of 1999.
Depreciation and amortization increased $268,882 to $3,049,705 in the first
quarter of 2000 as compared to $2,780,823 in the first six months of 1999. The
increase is primarily due to increased depreciation related to continuing
acquisitions of equipment, primarily telecommunication equipment.
17
<PAGE>
In the first quarter of 1999, the Company recorded a write-down of capitalized
software costs of $1,847,288. IIn May 1999, the Company's management and its
Board of Directors concluded that certain systems would not significantly
enhance the Company's existing billing and information systems or meet its
ultimate needs and accordingly the Company recorded a write-down on the
in-process system development of $1,847,288.
Research and development increased $600,253 to $1,674,358 in the first six
months of 2000 as compared to $1,074,105 in the same period in 1999. The Company
anticipates that research and development expense will continue at a comparable
amount during the remainder of 2000.
Interest expense decreased $2,074,109 to $794,323 in the first six months of
2000 as compared to $2,868,432 in the same period in 1999. Interest expense in
the first six months of 2000 was primarily due to interest on outstanding debt
and capitalized leases of the Company other than $111,000 of interest related to
issuance of 20,458 shares of common stock as interest expense included in the
JNC Opportunity Fund Ltd. settlement described below. 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 L.L.C. (which did not recur in 2000) and interest on outstanding
debt of the Company of $1,101,494.
Interest and other income increased $94,045 to $150,796 in the first six months
of 2000 as compared to $56,751 in the same period of 1999. The increase was
primarily due to an increase in the average balance of cash on hand in the first
six months of 2000.
A settlement expense of $639,565 was recorded in the first six months of 2000.
This expense is the result of an obligation to issue 129,519 shares of common
stock in exchange for certain trading restrictions imposed on JNC Opportunity
Fund Ltd. ("JNC") in relation to the common stock to be issued to JNC pursuant
to a settlement and release agreement entered into in February 2000. The
settlement and release agreement settled certain litigation between the Company
and JNC over un-converted Series F preferred stock held by JNC. The amount of
this expense was based upon the market price of the Company's common stock on
May 24, 2000 when the common stock was issued. There was no comparable expense
in 1999.
The Company recorded an additional loss from discontinued operations in the
first six months of 1999 in the amount of $350,000. There was no such loss
recorded in the same period of 2000.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on May 23, 2000, at which one
proposal was considered and passed by the stockholders:
Proposal 1 was "To approve the issuance to JNC Opportunity Fund Ltd. of a number
of shares or our common stock equal to the additional share amount and, if
required, the late share amount and additional late share amount as such terms
were used in the pertinent agreements, all pursuant to the terms set forth in
the settlement and release agreement, dated March 10, 2000, by and between JNC
Opportunity Fund and the Company." The vote on Proposal 1 was 19,020,320 votes
for, 292,507 votes against, with 1,479,572 votes abstaining.
ITEM 6(a) - EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Item
------ ----
<S> <C>
10.6 Form of Cooperation and Framework Agreement between I-Link
Incorporated and Cyber Office International AG. dated May 8, 2000.
10.7 Form of Revenue Sharing Agreement between I-Link Incorporated and Red
Cube International AG (Formerly known as Cyber Office International
AG. dated June 30, 2000.
10.8 Form of Letter dated June 30, 2000, clarifying a Cooperation and
Framework Agreement issue.
27 Financial data schedule.
</TABLE>
ITEM 6(b) - REPORTS ON FORM 8-K
None
19
<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 11, 2000 By: /s/ John W. Edwards
----------------------------------
John W. Edwards
Chief Executive Officer
By: /s/ John M. Ames
----------------------------------
John M. Ames
Acting Chief Financial Officer and
Chief Operating Officer
20
