<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 September 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 October 12, 2000, the registrant had outstanding 28,095,794 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
(UNAUDITED)
1
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,929,375 $ 2,950,730
Accounts receivable, less allowance for doubtful
accounts of $92,000 as of September 30, 2000
and $1,789,000 as of December 31, 1999 3,447,052 4,344,406
Other current assets 391,995 362,191
------------- -------------
Total current assets 13,768,422 7,657,327
Furniture, fixtures, equipment and software, net 9,156,991 7,019,361
Other assets:
Intangible assets, net 4,486,963 6,551,453
Other assets 695,111 430,058
------------- -------------
$ 28,107,487 $ 21,658,199
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,463,342 $ 4,131,675
Accrued liabilities 3,264,455 2,629,046
Unearned revenue 15,000,000 --
Accrued interest on notes payable to a related party 2,112,173 --
Current portion of long-term debt 746,625 751,660
Notes payable to a related party 7,768,000 --
Current portion of obligations under capital leases 1,450,079 1,380,957
Net liabilities of discontinued operations 82,629 82,629
------------- -------------
Total current liabilities 32,887,303 8,975,967
Notes payable to a related party -- 7,768,000
Accrued interest on notes payable to a related party -- 1,345,801
Obligations under capital leases 370,622 544,724
Unearned revenue 2,916,667 --
------------- -------------
36,174,592 18,634,492
------------- -------------
Commitments and contingencies (note 6)
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
25,946 as of September 30, 2000 and 49,992 as
of December 31, 1999, liquidation preference
of $16,200,445 as of September 30, 2000 259,460 499,920
Common stock, $.007 par value, authorized
150,000,000 shares, issued and outstanding
28,072,180 as of September 30, 2000 and 24,150,829 as
of December 31, 1999 196,506 169,056
Additional paid-in capital 106,552,971 98,734,475
Deferred compensation (51,022) (499,377)
Accumulated deficit (126,759,840) (109,953,971)
------------- -------------
Total stockholders' deficit (19,801,925) (11,049,897)
------------- -------------
$ 28,107,487 $ 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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services $ 3,666,119 $ 6,986,968 $ 13,542,438 $ 19,395,218
Marketing services -- 989,157 463,740 3,225,119
Technology licensing and development 1,432,301 853,343 7,678,707 1,902,316
Other 444,582 -- 2,154,862 --
------------ ------------ ------------ ------------
Total revenues 5,543,002 8,829,468 23,839,747 24,522,653
------------ ------------ ------------ ------------
Operating costs and expenses:
Telecommunication network expense 5,736,946 5,224,851 17,387,954 14,288,905
Marketing services -- 1,584,356 456,354 4,564,112
Selling, general and administrative 4,242,074 3,085,766 13,778,795 9,010,585
Provision for (benefit from) doubtful accounts (300,667) 997,788 79,236 2,941,803
Depreciation and amortization 1,565,065 1,564,774 4,614,770 4,345,597
Write-down of capitalized software costs -- -- -- 1,847,288
Research and development 1,085,236 778,638 2,759,594 1,852,743
------------ ------------ ------------ ------------
Total operating costs and expenses 12,328,654 13,236,173 39,076,703 38,851,033
------------ ------------ ------------ ------------
Operating loss (6,785,652) (4,406,705) (15,236,956) (14,328,380)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (339,429) (1,878,978) (1,133,752) (4,747,410)
Interest and other income 249,940 69,182 400,737 125,933
Settlement expense -- -- (639,565) --
------------ ------------ ------------ ------------
Total other income (expense) (89,489) (1,809,796) (1,372,580) (4,621,477)
------------ ------------ ------------ ------------
Loss from continuing operations (6,875,141) (6,216,501) (16,609,536) (18,949,857)
Loss from discontinued operations (less applicable
income tax provision of $0) -- -- -- (350,000)
------------ ------------ ------------ ------------
Net loss $ (6,875,141) $ (6,216,501) $(16,609,536) $(19,299,857)
============ ============ ============ ============
CALCULATION OF NET LOSS PER COMMON SHARE:
Loss from continuing operations $ (6,875,141) $ (6,216,501) $(16,609,536) $(18,949,857)
Cumulative preferred stock dividends (402,529) (400,675) (1,221,231) (1,274,034)
Deemed preferred stock dividends on class E, F & N -- (6,978,417) -- (6,978,417)
------------ ------------ ------------ ------------
Loss from continuing operations applicable to
common stock $ (7,277,670) $(13,595,593) $(17,830,767) $(27,202,308)
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding 27,850,335 22,205,970 26,639,187 20,768,051
============ ============ ============ ============
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.26) $ (0.61) $ (0.67) $ (1.31)
Loss from discontinued operations -- -- -- (0.02)
------------ ------------ ------------ ------------
Net loss per common share $ (0.26) $ (0.61) $ (0.67) $ (1.33)
============ ============ ============ ============
</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 (24,294) (242,940) 2,117,581 14,823 228,116 -- --
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 -- (196,333)
Exercise of stock options and warrants -- -- 1,566,316 10,964 4,263,915 -- --
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 -- -- -- -- -- 503,257 --
Net loss -- -- -- -- -- -- (16,609,536)
------ ---------- ---------- --------- ------------- ---------- -------------
BALANCE AT SEPTEMBER 30, 2000 25,946 $ 259,460 28,072,180 $ 196,506 $ 106,552,971 $ (51,022) $(126,759,840)
====== ========== ========== ========= ============= ========== =============
</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 Nine Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,609,536) $(19,299,857)
Adjustments to reconcile net loss to net cash used in (provided by)
operating activities:
Depreciation and amortization 4,614,770 4,345,597
Provision for doubtful accounts 79,236 2,941,803
Common stock issued as payment of expenses 740,587 --
Amortization of discount on notes payable -- 3,295,042
Write-down of capitalized software costs -- 1,847,288
Loss on disposal of assets -- 7,494
Amortization of deferred compensation on stock options issued for services 503,257 702,168
Increase (decrease) from changes in operating assets and liabilities:
Accounts receivable 818,117 (3,309,114)
Other assets (294,856) (114,079)
Accounts payable, accrued liabilities and unearned revenue 17,645,094 1,413,273
Discontinued operations - noncash charges and working capital changes 66,162 315,483
------------ ------------
Net cash provided by (used in) operating activities 7,562,831 (7,854,902)
------------ ------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (4,687,910) (839,505)
Maturity of restricted certificates of deposit -- 359,149
Investing activities of discontinued operations 29,537 30,000
------------ ------------
Net cash used in investing activities (4,658,373) (450,356)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party 2,600,000 8,200,000
Payment of notes payable to related party debt (2,600,000) (500,000)
Proceeds from advance under strategic marketing agreement 1,751,183 --
Payment of advance under strategic marketing agreement (1,751,183) --
Proceeds from issuance of convertible preferred stock -- 7,281,086
Offering costs from issuance of redeemable preferred stock and warrants -- (164,678)
Payment of long-term debt -- (283,793)
Payment of capital lease obligations (104,979) (577,675)
Proceeds from exercise of common stock warrants and options 4,274,879 5,000
Financing activities of discontinued operations (24,204) --
------------ ------------
Net cash provided by financing activities 4,145,696 13,959,940
------------ ------------
Increase in cash and cash equivalents 7,050,154 5,654,682
Cash and cash equivalents at beginning of period 2,996,004 1,368,927
------------ ------------
Cash and cash equivalents at end of period $ 10,046,158 $ 7,023,609
============ ============
Cash and cash equivalents at end of period:
Continuing operations $ 9,929,375 $ 6,970,202
Discontinued operations 116,783 53,407
------------ ------------
Total cash and cash equivalents at end of period $ 10,046,158 $ 7,023,609
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of Class F redeemable preferred stock from mezzanine $ 2,338,784 $ 5,356,571
Warrants issued in connection with a standby letter of credit -- $ 735,720
Stock options issued for future services $ 54,902 --
Equipment acquired under capital lease obligations -- $ 1,937,091
Accrued interest and debt exchanged for Series N preferred stock -- $ 12,718,914
</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 the Company's
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
these products and technologies to other telecommunications companies.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
On March 23, 1998, our Board of Directors approved a plan to dispose of the
Company's medical services businesses in order to focus its effort on the sale
of telecommunication services and the licensing of technology. The Company has
sold or intend 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, after several unexpected delays, the
Company completed the sale of its non-operating assets located in China.
On-going administrative costs primarily consist of fees associated with
collecting outstanding accounts receivable. These anticipated costs have been
accrued for as part of the Company'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
Company's management, the interim data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of:
- the results of operations for the three-month and nine-month periods
ended September 30, 2000 and 1999,
- the financial position at September 30, 2000, and
- cash flows for the nine-month periods ended September 30, 2000 and
1999.
The year-end balance sheet was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States. These 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 reports on Form 10-Q for the quarters ended
March 31 and June 30, 2000.
The results of operations for the three-month and nine-month periods ended
September 30, 2000 are not necessarily indicative of those to be expected for
the entire year.
While the Company continued to have net losses from continuing operations, an
accumulated deficit and negative working capital, the Company believes that cash
on hand is sufficient to fund its operations until Red Cube, an entity currently
in the process of purchasing I-Link securities owned by our largest shareholder
Winter Harbor, exercises the warrants obtained from Winter Harbor. Red Cube has
previously expressed its intent in it's Form 13D filing with the SEC to exercise
warrants it will obtain from Winter Harbor on a cash basis. This exercise is
anticipated to take place in the fourth quarter of this year. The cash received
upon exercise of these warrants would give the Company the financial resources
necessary to fund anticipated ongoing operations, the continued expansion of its
private telecommunications network facilities, development and manufacturing of
the Company's products and anticipated growth in subscriber base. However,
should the cash exercise of the warrants not take place, or not take place in a
timely manner, the Company will need to obtain additional cash from other
sources. Even if the cash exercise of the warrants does take place in as
expected, the Company may still need to raise additional funds from other
sources as needed. The availability of additional funds will always depend on
prevailing market conditions, interest rates, and our financial position and
results of operations. There can be no assurance that additional funds will be
available, or if available that they will be on terms and conditions favorable
to the Company.
5
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Based upon
the Company's net loss from continuing operations for the three-month and
nine-month periods ending September 30, 2000 and 1999, basic and diluted loss
per share are the same for all periods.
REVENUE RECOGNITION
During the second quarter of 2000 the Company entered into an agreement with Red
Cube. The agreement with Red Cube consisted of a $7,500,000 licensing fee and
$2,500,000 for consulting services. This $10,000,000 is nonrefundable and will
be recorded as revenue ratably over a two-year period. Accordingly, $833,333 was
recorded as technology licensing revenue in the second quarter of 2000 and
$1,250,000 was recorded as revenue in the third quarter of 2000. The balance of
$7,916,667 has been recorded as unearned revenue as of September 30, 2000. In
July 2000 the Company received an additional nonrefundable payment of
$10,000,000. This payment is a service prepayment that will be credited against
services performed for and/or provided to Red Cube. To the extent the service
prepayment credit has not been fully utilized by Red Cube by September 30, 2001,
any unused service prepayment shall be deemed fully earned and utilized as of
that date contingent upon the Company's network meeting certain capacity
requirements during the service period. The service prepayment of $10,000,000
has been recorded as unearned revenue as of September 30, 2000 and will be
recognized as revenue when the related services are performed or the other
criteria are met. There were no services rendered during the third quarter of
2000.
NOTE 3 - DISCONTINUED OPERATIONS
Net assets of the Company's discontinued operations (excluding intercompany
balances that have been eliminated against the net equity of the discontinued
operations) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 116,783 $ 45,274
Accounts receivable 181,813 391,590
Inventory -- 555,291
Other 8,738 33,233
----------- -----------
Total current assets 307,334 1,025,388
Furniture, fixtures and equipment, net 8,313 37,850
Other non-current assets -- 854
----------- -----------
Total assets 315,647 1,064,092
----------- -----------
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 180,804 905,060
Note payable 217,472 141,661
----------- -----------
Total current liabilities 398,276 1,046,721
----------- -----------
Note Payable -- 100,000
----------- -----------
Net liabilities - discontinued operations $ (82,629) $ (82,629)
=========== ===========
</TABLE>
6
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DISCONTINUED OPERATIONS, CONTINUED
The net liabilities of the discontinued operations as of September 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 fourth quarter of 2000. Revenues of the discontinued
operations were $0 and $45,358 and $0 and $280,479 for the three-month and
nine-month periods ending September 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
our real-time IP ("RTIP network") network. The lease agreement requires monthly
payments over the three-year term. As of September 30, 2000, the Company had
purchased $946,000 of equipment under the lease facility.
NOTE 5 - INCOME TAXES
The Company did not recognize any income tax benefit from the losses generated
in 2000 and 1999 because of the uncertainty of the realization of the related
deferred tax asset.
NOTE 6 - 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 usage requirements.
In December 1999, the Company entered into an agreement with a national carrier
to provide long-distance capacity which allows I-link to provide long-distance
telecommunications services to our customers who reside in areas not yet
serviced by the Company's dedicated telecommunications network. The
eighteen-month agreement includes minimum monthly usage commitments of $250,000
beginning in the sixth month of the agreement. If the Company purchases at least
$3,000,000 worth of services during the eighteen months of the agreement, then
no individual month's under-usage will result in a penalty.
NOTE 7 - SEGMENT OF BUSINESS REPORTING
The Company has three reportable segments as follows:
- Telecommunications services - includes long-distance toll services and
enhanced calling features including V-Link, which products are
marketed primarily to residential and small business customers.
Telecommunications services also include revenues related to GateLink
and Indavo.
- Marketing services - included training and promotional materials to
independent sales representatives (IRs) in the network marketing sales
channel. Revenues were 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 our product and technology offerings. Products
developed by this segment include V-Link, Indavo, and other
proprietary technology. The Company licenses developed technology to
third party users, including but not limited to Lucent, Brooktrout and
others.
7
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SEGMENT OF BUSINESS REPORTING, CONTINUED
There are no intersegment revenues. I-Link's business is conducted principally
in the United States; foreign operations are not material. The table below
presents information about revenues and the net losses for the three-month and
nine-month periods ended September 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 Nine-month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
(In thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SEGMENT REVENUES:
Telecommunications services $ 4,111 $ 6,987 $ 15,297 $ 19,395
Marketing services -- 989 464 3,225
Technology licensing and development 1,432 853 8,079 1,902
-------- -------- -------- --------
Total revenues $ 5,543 $ 8,829 $ 23,840 $ 24,522
======== ======== ======== ========
SEGMENT INCOME (LOSS):
Telecommunications services $ (2,761) $ (96) $ (6,548) $ (29)
Marketing services (50) (613) (204) (1,383)
Technology licensing and development (96) (120) 3,875 (465)
-------- -------- -------- --------
Total segment loss (2,907) (829) (2,877) (1,877)
Unallocated non-cash amounts in consolidated net loss:
Settlement expense -- -- (640) --
Amortization of discount on notes
payable -- (1,506) -- (3,295)
Write-down of capitalized software costs -- -- -- (1,847)
Amortization of deferred
compensation on stock options
issued for services (122) (93) (503) (702)
Amortization of intangible assets (626) (723) (2064) (2,170)
Other corporate expenses (3,220) (3,066) (10,526) (9,059)
Loss from discontinued operations -- -- -- (350)
-------- -------- -------- --------
Net loss $ (6,875) $ (6,217) $(16,610) $(19,300)
======== ======== ======== ========
</TABLE>
NOTE 8 - WINTER HARBOR/RED CUBE AGREEMENT
On August 30, 2000, Winter Harbor and Red Cube International AG, a Swiss stock
corporation ("Red Cube") entered into an agreement wherein Red Cube agreed to
purchase all warrants to purchase I-Link common stock held by Winter Harbor, and
all debt securities and preferred stock convertible into I-Link common stock
held by Winter Harbor for an aggregate purchase price of $60 million and options
to purchase an aggregate of 110,832 ordinary shares of Red Cube.
The agreement provides for two closings. The first closing that was to have
occurred in early October 2000 has been delayed by mutual agreement until late
October 2000. This delay was necessary as the time needed to get regulatory and
Red Cube shareholder approvals was greater than originally anticipated. As part
of the first closing Red Cube will pay Winter Harbor $35 million and grant
Winter Harbor an option to purchase from Red Cube 110,832 ordinary shares of Red
Cube. At the
8
<PAGE>
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - WINTER HARBOR/RED CUBE AGREEMENT, CONTINUED
first closing Winter Harbor is to deliver to Red Cube:
(1) 4,400 shares of I-Link Series M preferred stock,
(2) I-Link promissory notes in the amount of $7,768,000 with accrued
interest as of the closing date ($2,098,000 as of September 30, 2000),
and
(3) warrants to purchase 18,800,000 shares of I-link common stock with an
exercise price of $2.033 per share.
At the second closing, Red Cube is required to pay Winter Harbor $25 million,
where upon Winter Harbor is to deliver to Red Cube:
(1) 14,404 shares of I-Link Series N preferred stock, and
(2) warrants to purchase 9,740,000 shares of I-Link common stock with an
exercise price of $2.033 per share.
The second closing is to take place on the earlier of the fifth business day
following the date on which ordinary shares of Red Cube commence trading on the
Swiss Exchange New Market or April 2, 2001.
NOTE 9 - SUBSEQUENT EVENTS
On October 2, 2000, the Company held its annual shareholders meeting. At that
meeting the shareholders approved all proposals they voted on including the
following:
- amendment of the 1997 Recruitment Stock Option Plan (the "Plan")
increasing the amount of shares of common stock eligible for issuance
under the Plan from 4,400,000 to 7,400,000.
- grants to various executive officers of 2,550,000 non-qualified
options to purchase the Company's common stock. The Company's Board of
Directors approved issuance of these options on January 3, 2000.
Shareholder approval was required and was obtained on October 2, 2000.
As the market price of the Company's common stock on October 2, 2000
($3.375) was greater than the option price ($2.75) on the date the
Board of Directors approved the issuance of these options, the grants
will result in recording $1,593,750 of non-cash expense on the
Company's financial statements. This deferred compensation will be
amortized over the vesting period of the options, which is ranges from
2 years 9 months to 5 years but will be accelerated if vesting occurs
based on meeting certain performance criteria. Amortization will be
first recorded in the fourth quarter of this year. As the grants were
effective in January of this year but were not approved by the
stockholders until the fourth quarter, the fourth quarter expense will
include one year's worth of amortization or approximately $560,000.
- establishment of the 2000 Employee Stock Purchase Plan. This plan
allows all eligible employees of the Company to have payroll
withholding of 1 to 15 percent of their wages. The amounts withheld
during a calendar quarter are then used to purchase our common stock
at a 15 percent discount off the lower of the closing sale price of
the Company's stock on the first or last day of each quarter. This
plan was approved by the Board of Directors, subject to shareholder
approval, and was effective during the third quarter of this year.
Upon shareholder approval, the Company issued 23,264 shares to
employees based upon payroll withholdings during the third quarter.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in our financial statements and the accompanying notes which are
included elsewhere in this document and in conjunction with the Management's
Discussion and Analysis included in our Form 10-K for the year ended December
31, 1999 and Forms 10-Q for the quarters ended March 31, and June 30, 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 US 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 US AND OUR MANAGEMENT, IDENTIFY FORWARD-LOOKING STATEMENTS AND
AS SUCH ARE NOT HISTORICAL FACTS. THESE STATEMENTS REFLECT OUR CURRENT VIEW
RESPECTING FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AS DESCRIBED
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 we believe our expectations are based on reasonable assumptions, we
cannot give assurance that our expectations will be achieved. Among many factors
that could cause actual results to differ materially from our forward-looking
statements include, without limitation, the following:
- our ability to finance and manage expected rapid growth;
- the impact of competitive services and pricing;
- our ongoing relationship with long distance carriers and vendors;
- the impact of vigorous competition in the markets in which we operate;
- the impact of technological change on our 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 a single vendor;
- the adoption of new, or changes in, accounting policies, laws and
governmental regulations affecting the long distance
telecommunications and internet industries;
- our ability to maintain, operate and upgrade our information systems
network;
- our success in further expanding our RTIP network;
- the existence of demand for and acceptance of our technology, products
and services;
- other risks referenced from time to time in our filings with the SEC.
We are not obligated and do 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
We are 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) and
Internet technologies. Through I-Link Communications, Inc., we provide
enhanced telecommunications services on a wholesale and retail basis. Through
MiBridge, Inc. and ViaNet Technologies Ltd., we undertake the research and
development of new telecommunications services, products, and technologies,
and the licensing of some of these products and technologies to other
telecommunications companies. We are 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 free
calling initiative (formerly know as TalkFree).
10
<PAGE>
Before February 15, 2000 and as of December 31, 1999, our 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 targeted 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. 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, we signed a strategic marketing and channel agreement with
Big Planet, a wholly owned subsidiary of Nu Skin Enterprises, Inc. Under terms
of the agreement, our 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 our 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. As a result of this agreement, the Network Marketing channel became the
single largest customer in our wholesale distribution channel.
On May 9, 2000, we announced, together with Red Cube International AG ("Red
Cube"), an international provider of IP Telephony and enhanced Web-based
communications services, 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:
- licensed our IP Telephony technology,
- is standardizing on our software-based Softswitch Plus(TM) network
platform and
- is preparing to deploy our technology throughout its existing networks
in Europe and other parts of the world.
In addition, Red Cube and we interconnected our 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).
On August 30, 2000, Red Cube announced that it signed a securities purchase
agreement with Winter Harbor, L.L.C. to acquire all securities of our company
held by Winter Harbor. See additional description of the Winter Harbor/Red Cube
agreement in the "Current Position/Future Requirements" section below.
During the first three quarters of 2000, we began commercial deployment of the
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 our 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.
Following three quarters of marketing activities and commercial deployment of
the Indavo, we have determined that the majority of ISP/Broadband providers
(DSL, ISDN, and cable) do not provide high quality or consistently reliable
connections. While reliability is not a major issue for data transmissions as
most businesses and residential consumers are use to public internet speed and
reliability, when the broadband connection and Indavo are used for voice
transmission consistent reliability and speed is a major issue. Most businesses
using the Indavo are not satisfied with its performance as a result of ISP's not
offering high quality of service connections. We are now in the process of
identifying and hopefully partnering with nationwide ISP's who will provide
guaranteed high quality of service connections to ensure Indavo reliability. We
cannot guarantee that we will be able to partner with any ISP or that the
quality of service connections will be high enough to ensure Indavo reliability.
As a result of these quality of service issues, we have not realized anticipated
Indavo sales and we do not anticipate significant revenue growth from the
product until such time as the quality of service connection issue is resolved.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents from continuing operations as of September 30, 2000
were $9,929,375 and the working capital deficit was $19,118,881. Cash provided
by operating activities during the nine-month period ended September 30, 2000
was $7,562,831 as compared to cash used by operations of $7,854,902 during the
same period ended September 30, 1999. The increase in cash provided by operating
activities in 2000 was primarily due to $20,000,000 received from Red Cube (See
more detailed discussion of this agreement in the "Current Position/Future
Requirements" section below.)
Net cash used by investing activities in the nine-month period ended September
30, 2000 was $4,658,373 as compared to net cash used of $450,356 in the same
period ended September 30, 1999. Cash used by investing activities in 2000 was
primarily attributable to the purchase of network equipment of $4,687,910 that
was offset by $29,537 received from the sale of some assets from discontinued
operations. In the first nine months of 1999 cash used by investing activities
was primarily due to purchase of furniture, fixtures and equipment of $839,505
which was offset by $30,000 received from the sale of some assets from
discontinued operations and $359,149 from matured restricted certificates of
deposit.
Financing activities provided net cash of $4,145,696 in the first nine months of
2000 as compared to cash provided of $13,959,940 in the same period of 1999.
Cash provided in 2000 included proceeds of $2,600,000 from a note payable to a
related party, $4,274,879 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 $104,979 and repayments of $24,204 on
notes in discontinued operations offset these proceeds. During the same nine
months in 1999, cash provided by financing activities included $8,200,000 from
short-term debt and $5,000 in net proceeds from the exercise of common stock
warrants and options. Also in July 1999, we completed an offering of Series N
preferred stock resulting in net proceeds of $7,116,408. Repayments of
$1,361,468 on long-term debt, notes payable and capital lease obligations offset
these proceeds.
Our current liabilities have increased to $32,887,303 as of September 30, 2000
from $8,975,967 as of December 31, 1999. The increase is primarily due to two
items namely:
- an increase of $15,000,000 in deferred revenues. While this amount is
included in current liabilities, we have complied with all
requirements of the agreement between Red Cube and us and thus the
amount is non-refundable. Therefore, this amount will not require a
cash repayment in the future.
- a note payable to a related party of $7,768,000 and related accrued
interest ($2,112,173 as of September 30, 2000) are due on demand but
not before April 15, 2001. This note and accrued interest were
classified as long-term as of December 31, 1999. This note and accrued
interest is convertible into Series M preferred stock at the option of
the holder (Winter Harbor).
Red Cube has expressed intent in its Form 13D filing with the SEC to exercise
warrants it will obtain from Winter Harbor on a cash basis. This exercise is
anticipated to take place in the fourth quarter of this year. The cash we would
receive upon exercise of these warrants would give us the financial resources
necessary to fund:
- continued expansion of our private telecommunications network
facilities,
- development and manufacturing of our products, and
- payment of our note payable and accrued interest to a related party in
the event that note and accrued interest are not converted into Series
M preferred stock.
See additional description of the Winter Harbor/Red Cube agreement in the
"Current Position/Future Requirements" section below.
12
<PAGE>
CURRENT POSITION/FUTURE REQUIREMENTS
During the third quarter of 2000, revenue from continuing operations decreased
$1,794,579 (24%) from the second quarter of 2000 as shown below:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
6/30/00 9/30/00 (Decrease) %(Decrease)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Telecommunications services $ 4,589,112 $ 3,666,119 $ (922,993) (20)%
Technology licensing and development 1,739,906 1,432,301 (307,605) (18)%
Other 1,008,563 444,582 (563,981) (56)%
----------- ----------- -----------
Net operating revenue $ 7,337,581 $ 5,543,002 $(1,794,579) (24)%
=========== =========== ===========
</TABLE>
The decrease in telecommunications services was a primarily the result of
significant decreases in the amounts billed to our single largest wholesale
customer, who accounted for approximately 69% of our telecommunications services
revenues in the third quarter compared to 85% in the second quarter. The number
of minutes billed through this wholesale customer decreased approximately 18%
from those billed in the second quarter. This wholesale customer anticipates
that minutes, subscribers and related revenue will increase in the future
periods, however, we do not control the future results related to this customer.
Part of the decrease in telecommunications services revenues billed through this
wholesale customer have been offset by revenues generated from GateLink partners
during the third quarter and we expect revenues from GateLink partners to
continue to increase in the fourth quarter.
Technology licensing and development revenue decreased in the third quarter of
2000. Revenue from this source will vary from quarter to quarter based on timing
of future technology licensing and development projects and royalties from
products previous sold. On May 9, 2000, together with Red Cube we announced an
alliance to offer global, enhanced IP communications to the customers of each of
the two companies. Red Cube, upon signing of the agreement, paid us $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 and $1,250,000 in the third
quarter of 2000 while the balance of $7,916,667 has been recorded as unearned
revenue as of September 30, 2000.
Other revenues in the third quarter of 2000 of $444,582 represent revenues
relating to customer care, billing and accounts receivable services performed
primarily for Big Planet as part of the transitioning customers of the
network-marketing channel to a Big Planet, which began in the first quarter of
2000. Revenues from these services are expected to be about the same in the
fourth quarter of 2000. However, revenues from these types of services from new
customers may occur in the future. During the second quarter of 2000, other
revenues included $1,008,563 primarily from similar services to Big Planet.
We anticipate improved cash flow from operations in the remainder of 2000
primarily from the following sources:
- Anticipated revenues from our GateLink product that commenced in the
second quarter of 2000. During the second and third quarters, we
agreed to host applications for six GateLink partners including TAA
(IP PBX application), Nortel (internet call waiting service marketed
by Sprint), BigZoo.com (pre-paid cards), Me.Net (unified messaging),
Cumulus (call center technology) and OgilvyInteractive (integrate
complex voice/phone communications to web sites). We anticipate
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.
- Our affiliation with Big Planet, our single largest customer,
effective February 15, 2000 is anticipated to have a positive overall
financial impact in the long-term by increasing revenues, reducing
expenses and increasing profit margins through customer growth.
However, we do not control the future results related to this
customer.
As we continue market penetration and deployment of I-Link products, we believe
that cash requirements for operations, continued development of our network and
marketing of I-Link services will be at increasingly higher levels than
experienced in the first nine months of 2000.
13
<PAGE>
The following transactions during 2000 have had or are anticipated to have a
positive cash flow impact on us:
- On May 9, 2000, together with Red Cube we 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 us
$10,000,000 consisting of a $7,500,000 licensing fee and $2,500,000
for consulting services. In June 2000 we completed milestone #1 as
defined in the agreement. Upon completion of milestone #1 and the
signing of the revenue sharing agreement, Red Cube paid us an
additional $10,000,000 for future services. Both of these amounts are
non-refundable.
- On August 30, 2000, Red Cube announced that it signed a securities
purchase agreement with Winter Harbor, L.L.C. to acquire all
securities of our company held by Winter Harbor. Under the terms of
the transaction, Red Cube will pay Winter Harbor $60 million in cash
and $20 million in long-term, Red Cube share options in return for its
interest in our company. This transaction is expected to close in late
October 2000. Red Cube has expressed it intent in it's Form 13D filing
with the SEC to exercise the warrants it will obtain from Winter
Harbor on a cash basis. This exercise is anticipated to take place in
the fourth quarter of this year. The funds we would receive upon
exercise of these warrants would give us the financial resources
necessary to fund anticipated ongoing operations, the continued
expansion of our private telecommunications network facilities,
development and manufacturing of our products. However, should the
cash exercise of the warrants not take place, or not take place in a
timely manner, we would need to obtain additional financial resources
from other sources. The availability of additional funds will always
depend on prevailing market conditions, interest rates, and our
financial position and results of operations. There can be no
assurance that additional funds will be available, or if available
that they will be on terms and conditions favorable to us.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1999
In March 1998, we decided to dispose of the operations of our subsidiaries
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 September 30, 2000 and 1999
have been reported as discontinued operations.
REVENUES
Telecommunication services revenue decreased $3,320,849 to $3,666,119 in the
third quarter of 2000 as compared to $6,986,968 in the third quarter of 1999.
The decrease is a direct result of the agreement with Big Planet effective
February 15, 2000. Before February 15, 2000, our telecommunication services
revenues were primarily dependent upon the sales efforts of IRs functioning
within a Network Marketing channel of distribution. These revenue sources were
recorded at retail. Under terms of the agreement, our independent network
marketing sales force transitioned to Big Planet. A substantial decrease in
telecommunication services revenues for the quarter ended September 30, 2000 was
the financial impact as our revenues from our single largest wholesale
customer's subscribers migrated from retail sales to the sale 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 our company,
for which the customer is paid a commission. Should this customer convert this
portion of their business to a wholesale relationship, we would have further
declines in reported revenue with a corresponding related decrease in commission
paid on this retail business. Revenues billed to customers of this channel have
decreased due to the decline in rate per minute billed due to the transition
from retail to wholesale of approximately 36%, combined with a decrease in the
number of minutes billed through this channel of 32% primarily related to a
sizable reduction in subscriber base and lower than expected new subscriber
acquisitions. Our single largest wholesale customer anticipates that minutes,
subscribers and related revenue will increase in future periods. However, we no
longer control this channel and therefore cannot control future results related
to this channel. Part of the decrease in telecommunications services revenues
billed through our largest wholesale customer have been offset by revenues
generated from GateLink partners in the third quarter and we expect revenues
from GateLink partners to continue to increase in the fourth quarter of 2000 and
beyond.
We transitioned our network marketing channel to Big Planet in February 2000.
Accordingly, marketing service revenues ceased in February 2000.
14
<PAGE>
Technology licensing and development revenue increased $578,958 to $1,432,301 in
the third quarter of 2000 as compared to $853,343 in the same quarter of 1999.
Revenue from this source will vary from quarter to quarter based on timing of
future technology licensing and development projects and royalties from products
previously sold. On May 9, 2000, together with Red Cube, we entered into an
agreement under which Red Cube paid us $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, $1,250,000 was recorded as technology licensing revenue in the
third quarter of 2000 while the balance of $7,916,667 has been recorded as
unearned revenue as of September 30, 2000.
Other revenues of $444,582 in the third quarter of 2000 primarily related to
customer care, billing and accounts receivable services performed for Big Planet
as part of the transitioning of the network-marketing channel. Revenues from
these services are expected to be about the same in the fourth quarter of 2000.
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 $512,095 in the third quarter of
2000 to $5,736,946 as compared to $5,224,851 for the same quarter of 1999. These
expenses include the costs related to the continuing development and deployment
of our 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 our marketing services revenue, which revenues ceased in the
first quarter of 2000. Accordingly there were no marketing expenses in the
second or third quarter of 2000.
Selling, general and administrative expense increased $1,156,308 to $4,242,074
in the third quarter of 2000 as compared to $3,085,766 in the third 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
our network and provisioning of telecommunications services.
The provision for doubtful accounts decreased $1,298,455 to a negative expense
of $(300,667) in the third quarter of 2000 as compared to $997,788 in the same
quarter of 1999. The decrease is directly related to two items:
(1) 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, thus resulting in a reduced
provision for the three months ended September 30, 2000 as compared to
the same period of 1999.
(2) during the third quarter we settled a lawsuit wherein we sued a former
wholesale customer for non-payment of its bills. Prior to the current
quarter we had written off the receivable from this customer. Upon
settling the lawsuit we received $300,000 for past billings which
amount reduces our bad debt expense in the current quarter.
Depreciation and amortization increased $291 to $1,565,065 in the third quarter
of 2000 as compared to $1,564,774 in the third quarter of 1999. Depreciation
from furniture, fixtures, equipment and software increased in the third quarter
of 2000 as compared to the same period in 1999 primarily due to continuing
acquisitions of equipment, primarily telecommunication equipment. The increase
in depreciation was offset by a reduction in amortization of intangible assets.
Research and development increased $306,598 to $1,085,236 in the third quarter
of 2000 as compared to $778,638 in the same period of 1999. We anticipate that
research and development expense will continue at a comparable amount during the
fourth quarter of 2000. We anticipate that research and development expense will
increase in 2001.
Interest expense decreased $1,539,549 to $339,429 in the third quarter of 2000
as compared to $1,878,978 in the same quarter of 1999. Interest in the third
quarter of 2000 was primarily related to interest on our outstanding debt and
capitalized leases. Interest in the third quarter of 1999 included $1,506,242
(non-cash) in amortization of debt discount related to warrants granted in
connection with $8,000,000 in loans and a $3,000,000 letter of credit to us from
Winter Harbor L.L.C. and $372,736 interest on our outstanding debt.
15
<PAGE>
Interest and other income increased $180,758 to $249,940 in the third quarter of
2000 as compared to $69,182 in the same quarter of 1999. The increase was
primarily due to an increase in the average balance of cash on hand in the third
quarter of 2000 as compared to the same quarter of 1999 and interest income of
$81,184 received as part of a litigation settlement against a former wholesale
customer.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1999
In March 1998, we decided to dispose of the operations of our subsidiaries
operating in the medical services industry in order to concentrate on its
telecommunications and technology sectors. Accordingly, medical services
operations during the nine-month periods ending September 30, 2000 and 1999 have
been reported as discontinued operations.
REVENUES
Telecommunications service revenue decreased $5,852,780 to $13,542,438 in the
first nine months of 2000 as compared to $19,395,218 in the first nine months of
1999. The decrease is a direct result of the agreement with Big Planet effective
February 15, 2000. Before February 15, 2000, our telecommunication services
revenues were primarily dependent upon the sales efforts of IRs functioning
within a Network Marketing channel of distribution. These revenue sources were
recorded at retail. Under terms of the agreement, our independent network
marketing sales force transitioned to Big Planet. A substantial decrease in
telecommunication services revenues for the nine-months ended September 30, 2000
was the financial impact as our revenues from our single largest wholesale
customer's subscribers migrated from retail sales to the sale 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 us, for which
the wholesale customer is paid a commission. Should this customer convert this
portion of their business to a wholesale relationship, we would have further
declines in reported revenue with a corresponding related decrease in commission
paid on this retail business. Revenues billed to customers of this channel have
decreased due to the decline in rate per minute billed due to the transition
from retail to wholesale of approximately 32%, combined with a decrease in the
number of minutes billed through this channel of 8% primarily related to a
sizable reduction in subscriber base and lower than expected new subscriber
acquisitions. Our single largest wholesale customer anticipates that minutes,
subscribers and related revenue will increase in future periods. However, we no
longer control this channel and therefore cannot control future results related
to this channel. Part of the decrease in telecommunications services revenues
billed through our largest wholesale customer have been offset by revenues
generated from GateLink partners in the third quarter and we expect revenues
from GateLink partners to continue to increase in the fourth quarter of 2000 and
beyond.
Marketing services revenue, which included revenue from independent
representatives for promotional and presentation materials, WebCentre, and
ongoing administrative support decreased $2,761,379 to $463,740 in the first
nine months of 2000 as compared to $3,225,119 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 this transition, marketing service
revenues ceased.
Technology licensing and development revenue increased $5,776,391 to $7,678,707
in the first nine months of 2000 as compared to $1,902,316 in the first nine
months of 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. During the first nine months of 2000, our increase in
these revenues was primarily from the following two sources:
- we entered into two licensing agreements that resulted in revenues of
nearly $4,000,000, and
- on May 9, 2000, together with Red Cube, we entered into an agreement
under which Red Cube paid us $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, $2,083,333 was recorded as technology licensing
revenue in the first nine months of 2000 while the balance of
$7,916,667 has been recorded as unearned revenue as of September 30,
2000.
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<PAGE>
Other revenues in the first nine months of 2000 include $1,754,862, which
represent revenues relating to customer care, billing and accounts receivable
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 in the fourth quarter are expected to
approximate the third quarter revenues of $445,000. However, revenues from these
types of services from new customers may occur in the future. During the first
nine months of 2000 other revenues also included royalties of $400,000 from the
sale of Indavo units through a distributor of ours to a company which will not
use the Indavo units over the our 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 Indavo sale revenues included in other income in the third quarter nor
are there expected to be significant revenues of this type in the future.
OPERATING COSTS AND EXPENSES
Telecommunication network expense increased $3,099,049 in the nine months ended
September 30 2000 to $17,387,954 as compared to $14,288,905 for the same period
in 1999. These expenses include the costs related to the continuing development
and deployment of our 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 $4,107,758 to $456,354 in the first nine
months of 2000 as compared to $4,564,112 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 our 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 $4,768,210 to $13,778,795
in the first nine months of 2000 as compared to $9,010,585 in the first nine
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 our network and provisioning of telecommunications services.
The provision for doubtful accounts decreased $2,862,567 to $79,236 in the nine
months of 2000 as compared to $2,941,803 in the same period in 1999. The
decrease is directly related to two items:
(1) the transitioning of the network marketing channel subscribers to Big
Planet in February 2000. With the transition, Big Planet assumed the
risk of collections from individual subscribers, thus resulting in a
reduced provision for the three months ended September 30, 2000 as
compared to the same period of 1999.
(2) during the third quarter we settled a lawsuit wherein we sued a former
wholesale customer for non-payment of its bills. Prior to the current
quarter we had written off the receivable from this customer. Upon
settling the lawsuit we received $300,000 for past billings which
amount reduces our bad debt expense in the first nine months of 2000.
Depreciation and amortization increased $269,173 to $4,614,770 in the first nine
months of 2000 as compared to $4,345,597 in the first nine months of 1999. The
increase is primarily due to increased depreciation related to continuing
acquisitions of equipment, primarily telecommunication equipment.
In the first quarter of 1999, we recorded a write-down of capitalized software
costs of $1,847,288. In May 1999, our management and its Board of Directors
concluded that these systems would not significantly enhance our existing
billing and information systems or meet our ultimate needs and accordingly we
recorded a write-down on the in-process system development of $1,847,288.
Research and development increased $906,851 to $2,759,594 in the first nine
months of 2000 as compared to $1,852,743 in the same period in 1999. We
anticipate that research and development expense in the fourth quarter of 2000
will be comparable to the expense in the third quarter. We anticipate that
research and development expense will increase in 2001.
17
<PAGE>
Interest expense decreased $3,613,658 to $1,133,752 in the first nine months of
2000 as compared to $4,747,410 in the same period in 1999. Interest expense in
the first nine months of 2000 was primarily due to interest on our outstanding
debt and capitalized leases 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
nine months of 1999 was primarily due to $3,295,042 (non-cash) in amortization
of debt discount related to warrants granted in connection with $8,000,000 in
loans and a $3,000,000 letter of credit to us from Winter Harbor L.L.C. and
$1,452,368 interest on outstanding debt.
Interest and other income increased $274,804 to $400,737 in the first nine
months of 2000 as compared to $125,933 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 nine months of 2000 and interest income of $81,184 received as part of a
litigation settlement against a former wholesale customer.
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 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 litigation between JNC and us over unconverted
Series F preferred stock held by JNC. The amount of this expense was based upon
the market price of our common stock on May 24, 2000 when the common stock was
issued. There was no comparable expense in 1999.
We recorded an additional loss from discontinued operations in the first nine
months of 1999 in the amount of $350,000. There was no comparable 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
None
ITEM 6(a) - EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Item
------- ----
<S> <C>
27 Financial data schedule.
</TABLE>
ITEM 6(b) - REPORTS ON FORM 8-K
A report on Form 8-K was filed on September 14, 2000 which reported a change in
control of our company related to a Purchase Agreement between Winter Harbor,
L.L.C. and Red Cube International AG (Red Cube) and KPR Finanz-Und Verwaltungs
AG wherein Red Cube agreed to purchase from Winter Harbor all preferred stock,
warrants and convertible debt instruments of our company held by Winter Harbor.
<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: October 18, 2000 By: /s/ John W. Edwards
----------------------------
John W. Edwards
Chief Executive Officer
By: /s/ John M. Ames
----------------------------
John M. Ames, CPA
Chief Financial Officer
