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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-17973
I-LINK INCORPORATED
(Name of registrant as specified in its charter)
Florida 52-2291344
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801/576-5000)
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.007 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
period that the Registrant was required to file such reports); and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates based upon
the closing bid price on March 31, 1998, as reported by The Nasdaq Stock
Market, was approximately $99,515,500.
As of March 31, 1998, there were 16,717,705 shares of Common Stock, $.007 par
value, outstanding.
Portions of the Registrant's Registration Statement on Form SB-2 (File No. 333-
17861, filed October 20, 1997) are incorporated by reference into Parts I and
III hereof.
Item 1. Description of Business.
Overview
The primary business of the Company, as carried on through its wholly-owned
subsidiaries I-Link Systems, Inc. (formerly named I-Link Worldwide Inc.), I-Link
Communications, Inc. (formerly named Family Telecommunications Incorporated),
MiBridge, Inc., and I-Link Worldwide, L.L.C. (collectively referred to as the
"Company" or "I-Link"), is the development, sale and delivery of communications
products and services to residential, small business and wholesale customers.
I-Link is an Enhanced Internet Protocol (IP) communications company that, as
a result of new technology and architectural innovations, is able
to deliver to its customers enhanced communications services not available
through traditional telecommunications companies, and lower the cost of
telephone service, while maintaining the traditional reliability, functionality
and ease of use of their existing communications equipment. Unlike other
providers of communications services utilizing IP technology, I-Link does not
use the Internet as its primary source of delivering services. Rather, I-Link's
communications services and products are delivered to customers via both a
dedicated data communication network established by I-Link that operates in
the same manner as the Internet (the "I-Link Intranet") and existing switched
telecommunications networks. I-Link seeks to provide more effective
communications solutions and enhanced capabilities to users of traditional
telecommunications services through utilization of the I-Link Intranet and
other existing data communications networks, as well as through volume
purchasing of capacity on traditional switched telecommunications networks.
I-Link has developed patent-pending technology and has deployed a national
network infrastructure of communications equipment and dedicated lines that
enable it to carry traditional telecommunications services over the I-Link
Intranet in a manner that maintains traditional telecommunications quality, is
transparent to the user, and permits the customer to use his or her existing
telecommunications devices and equipment (telephone, fax, pager, etc.).
With its acquisition of Family Telecommunications Incorporated (now
renamed I-Link Communications, Inc.), a regional long distance
telecommunications carrier with nationwide delivery of telecommunications
services over traditional switched telecommunications networks, the Company in
January 1997 launched its marketing efforts and began to obtain customers for
its long distance telecommunications services through I-Link. In June 1997,
I-Link launched its Network Marketing program, I-Link Worldwide, L.L.C., to
market its products and services to the residential and small business markets.
Through its marketing activities and through strategic acquisitions of existing
customer bases, I-Link will aggressively seek to enlarge its overall customer
base. In a given geographic area, the I-Link services are initially delivered
across existing switched telecommunications networks. As the number of I-Link
customers grows and reaches targeted customer-base size in the geographic area,
customer traffic is moved from the traditional switched telecommunications
networks to the network of dedicated lines I-Link has established and over
which its proprietary technology is deployed (the "I-Link Intranet"). The move
from the traditional switched telecommunications network to the I-Link Intranet
is transparent to the customer and permits I-Link to make available to the
customer an array of enhanced communications services. It also and results in
a significant reduction in the cost of delivering the services, both increasing
profitability and permitting I-Link to offer increased savings to its customers,
as well as differentiating I-Link and its services in a highly commoditized
market. I-Link believes this strategy of building customer bases in geographic
areas on traditional switched networks and transitioning the traffic to the
I-Link Intranet as the size of the customer base increases will result in the
most cost effective nationwide deployment of the I-Link Intranet.
With the acquisition of MiBridge, Inc. ("MiBridge"), a New Jersey-based
communications technology company, I-Link is able to develop and offer further
communications capability to its customers. MiBridge is engaged in the design,
development, integration and marketing of a range of software telecommunication
products that support multimedia communications over the public switched
telephone network (PSTN), local area networks (LAN), and the Internet.
Historically, MiBridge has concentrated its development efforts in compression
systems such
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as voice and fax over IP. MiBridge has developed patent-pending technologies
which combine sophisticated compression capabilities with IP telephony
technology. The acquisition of MiBridge has permitted I-Link to accelerate the
development and deployment of its own IP technology and add strength and depth
to its research and development team, and provides I-Link with the opportunity
to generate income and develop industry alliances through the strategic
licensing of its technologies to other companies within the industry, such as
Lucent Technologies and others.
I-Link's technology enables the user to employ its existing telephone, fax
machine, pager or modem (hereafter referred to as "conventional communications
equipment") to achieve high-quality communications with other conventional
communications equipment, while exploiting and advancing the capabilities of
IP technology. Transmission takes place on I-Link's V-Link Network, which is
comprised of traditional telecommunication facilities integrated with I-Link's
private Intranet. The Intranet portion of the V-Link Network is comprised of
leased data lines routing TCP/IP packets. Gateways comprised of sophisticated
communications equipment and proprietary software, which I-Link calls
Communication Engines[TM], are used to integrate the traditional segments of
the V-Link Network with the Intranet segments. The resulting network allows for
customers to send and receive communication via the V-Link Network at reduced
rates and with much greater capabilities.
I-Link uses a multi-tiered infrastructure strategy. In some cases, I-Link
has and will continue to establish its own local equipment to route
communications traffic over the switched public telephone network ("switched
facilities"). In others, I-Link will partner with nationally recognized
telephone service resellers and Internet Service Providers ("ISPs") to provide
the needed local switched facilities consistent with I-Link's service
requirements. I-Link will continue to establish its own local switched
facilities incrementally as growth in customer base and business needs dictate.
Establishment of local switched facility sites is a relatively simple process
involving pre-configured Communication Engines (consisting of computer and
networking hardware and proprietary software) and communications lines.
The Communication Engine represents I-Link's patent-pending technology.
This technology provides the method which enables conventional communication
equipment to communicate with other conventional communication devices via
I-Link's combination of traditional switched network and dedicated Intranet.
The unique combination of traditional switched network facilities with new
data facilities is called the V-Link Network. The V-Link Network receives
traffic from the public switched telephone network ("PSTN") as a TDM stream
(time division multiplexing) and converts it to IP (internet/intranet protocol)
data packets. The data is converted from the PCM (pulse code modulation) format
standard to traditional telephony to an I-Link proprietary coding. The I-Link
proprietary coding can distinguish among and handles voice, fax and modem
communications differently. Voice is compressed using a voice coder or codec,
fax and modem traffic are demodulated/modulated. The data can then be stored
(such as recording a message), altered (as in changing a fax call from 14400
BPS to 9600 BPS) or redistributed to multiple recipients (as in the case of
conferencing).
The data portion of the V-Link network is called an Intranet. Unlike the
traditional telecommunication network, the Intranet uses TCP/IP as its
communication protocol. This is the same protocol used by the Internet for
computer-to-computer communication. I-Link utilizes TCP/IP because of the
potential for interoperability between diverse technologies. This provides the
potential for the V-Link Network to integrate fax, voice, e-mail, websites,
video conferencing, speech recognition servers, intelligent call processing
servers, Internet Information servers, and other technologies in an efficient
way. Not all of these technologies are currently implemented within the V-Link
network. However, because communication is being carried over a TCP/IP protocol
these solutions can be integrated into I-Link's offerings at a fraction of the
cost of traditional telecommunication implementations. The advantage of
communication via the TCP/IP protocol is that it allows for efficient
integration of many enhanced information services as noted above. I-Link doesn't
need to build all of the services which are presented to the user; it can easily
integrate additional services because the communication protocol offers
interoperability between all types of conventional communication equipment.
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The other advantage to TCP/IP is that the cost of integration is substantially
less as a result of network design. New services, enhancements and updates can
be enabled at a central location and linked automatically to a subscriber's
packet of services, thus eliminating the costs and time restrictions of
installing the enhancement at each physical facility. The result of these
benefits is lower cost with higher capabilities.
Customers take advantage of the V-Link network benefits by subscribing to
V-Link. The following two scenarios illustrate V-Link's enhanced communication
environment:
* Caller making a call off-net, or from an area in which I-Link's
Intranet is not fully deployed
* Caller making a call on-net, or from an area in which I-Link's
Intranet is fully deployed
In both cases the caller is attached to V-Link, I-Link's enhanced
communications environment. Connecting to V-Link can be done via a local call
or a toll-free (800) number. Establishing a connection can be done automatically
and transparently via NetLink1+ (an I-Link product which provides intelligent
accesses to the V-Link network) or manually by dialing the local number or
(800) number. Once inside the V-Link communication environment, the same
functionality is obtained for both on-net and off-net calls. Long distance
calls are routed either through the Intranet, or through the traditional
network, transparent to the user. In addition to long distance calling
capability, entering the V-Link communications environment allows a multitude
of enhanced capabilities to the user without the need of any special equipment
by the user. Once the communications session is established, a subscriber has
the ability to perform multiple operations within the session. Following is a
short list of capabilities currently available in the V-Link Communications
Environment.
Enhanced Local or Long Distance Service. Long distance calls can be made at
significantly lower rates. The user is provided the ability to multi-task
multiple operations within the session. Options include fax, voice, conference
call, paging, fax to e-mail conversion, information retrieval, e-mail.
Single Number Service. Set up to ring a subscriber's office phone, home
office phone, cellular phone (or any phone number the subscriber specifies)
and pager simultaneously so that he may be reached wherever he is, and without
the caller having to try multiple numbers or know his party's current location.
Call Screening. The subscriber can hear the name of the person calling
before deciding to accept the call or send it to voice mail.
The Personal PBX. Enables the type of services used by a large business
PBX, such as putting a caller on hold, music on hold, etc.
Conference Calling. Provides the ability to conference in up to 9 people
at one time.
Portable Fax. The subscriber receives a fax to his Single Number Service,
he is notified that there is a fax in his mailbox, and he can choose to route
the fax to any fax machine, or to his e-mail through a fax-to-e-mail gateway.
Local LEC Services. Services such as voice mail, call waiting, etc.
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Other Features. Other features are possible as I-Link continues to
integrate services which it designs and builds as well as those which other
providers design and build. One of the key strengths of the V-Link environment
is the ability to integrate services from other providers. This integration
typically results in systems which are easier to learn and use. Examples of
current integration include news services, stock quotes, directory services,
and address books.
Other Customer Options. Some users elect to interface with V-Link via
I-Link's V-Phone. The I-Link V-Phone Communication Center[TM] simplifies the use
of all V-link services by providing a user-friendly phone, integrated keyboard,
information screen, and preset function keys. This makes sending and receiving
e-mail much easier for those not familiar with Internet e-mail. It also
simplifies the sending of pages and the reception of informational services
such as news updates and stock quotes.
Market Opportunities
Virtually every home and business in the United States today uses long
distance telephone services. Even though competition between the various
providers of long distance telephone services is intense, I-Link believes the
significant cost savings and the increased capabilities that are achieved
through the utilization of the V-Link Network and technology make I-Link
highly competitive in this marketplace. I-Link targets residential and small-
business customers for its "I-Link" branded services through I-Link Worldwide,
L.L.C., a nationwide network marketing and sales program. Marketing and sales
of the "I-Link" branded products to larger business users will be carried out
by traditional sales agents. I-Link wholesales its services on a non-branded
basis to various distributors, aggregators, resellers and member organizations
that then resell the products to both residential and business end-users.
Opportunity to Provide Substantial Savings to Users. Use of I-Link services
afford the opportunity to substantially reduce the long distance telephone and
data transmission charges presently borne by the current user of long distance
telephone services. Charges for the use of land-line networks traditionally
used in long distance telecommunications are generally based on time and
distance, often resulting in substantial long distance charges. In contrast,
the charges associated with the new data communications networks (such as
I-Link's Intranet and the Internet) are generally fixed.
Integration of Distinct Networks. There are currently a number of distinct
information-transmission networks. Telephone, cable, wireless, and private and
public networks are primary examples. Technologies supporting these networks
will continue to integrate and evolve, allowing for previously unavailable
opportunities for information distribution and access. The current business
infrastructure presents impediments to the easy use of those networks. For
example, in the fax industry there is a proliferation of fax or fax-like
communication technologies, including fax machines, fax servers, fax software
and e-mail. But these technologies are not well integrated; a party wishing to
send information to others may have to format and send the data several
different ways depending on the messaging equipment and systems available to
the recipients. I-Link's V-Link Network leverages TCP/IP to integrate these
networks and deliver these services to its users.
Opportunity to Deliver Enhanced Capabilities. The TCP/IP networking
protocol and new transmission media such as are often associated with a data
communications network such as I-Link's Intranet or the Internet ("Data
Communications Network") offer substantially reduced cost and improved data
communication capabilities. However, as highlighted above, telephones and fax
machines are not TCP/IP-enabled. In the past, in order to take full advantage
of the TCP/IP protocol and the Data Communications Network, users first must
own or have access to a computer, and then obtain access to the Data
Communications Network. Therefore, telephones and fax machines have used
traditional land-line telecommunications networks to transmit their voice and
data. Charges for the use of those traditional networks are generally based
on time and distance,
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often resulting in high long distance charges. In contrast, the charges
associated with the new Data Communications Networks are generally fixed.
Market Response. Many of the responses seen in the marketplace to the
opportunities discussed above are problematic in that they are often computer-
oriented. Solutions typically require that a user (i) own a personal computer;
(ii) have access to a Data Communications Network; and (iii) have software
compatible with software other users own and use. This significantly limits
the market for the solution. Moreover, the responses often follow a product
approach rather than a service approach. The product approach, usually modeled
after the same approach followed by computer software vendors, imposes further
requirements on the user. This approach requires version management, with users
required to ensure that their software is current; it requires training and re-
training as procedures change; and gives a customer an interface-driven product
that often has more capacity than a user needs. I-Link's strategic response to
the market is to provide, above all, a true service-based approach, providing
customers access to a Data Communications Network via their existing
conventional communications equipment and offering an array of enhanced
services.
Another important limitation associated with current Internet telephony
solutions is the problem of poor voice quality. I-Link's technology manages
and compresses voice, fax, and modem traffic in such a way that calls made via
the I-Link V-Link Network retain traditional telephone landline quality.
Also problematic in the market s current response to new internet
protocol opportunities is that products and services are impeded by the delays,
down times and intermittent slowness of the traditional Internet. By managing
and controlling its Intranet, I-Link can ensure that communication is as "real-
time" as customers have become dependant upon.
The Residential Market
I-Link, through I-Link Worldwide, L.L.C., has targeted all residential
users, initially throughout the United States, through the establishment and
implementation of a Network Marketing sales program, providing individuals the
opportunity to earn commissions on the sale of the I-Link Services to their
neighbors and acquaintances. A large amount of interest in I-Link has been
generated throughout the network marketing industry, and I-Link believes a
significant market opportunity exists through the exploitation of this
marketing and sales channel to reach a large number of potential residential
customers. I-Link formally launched its Network Marketing sales operation and
began marketing in this channel in June 1997.
The Business Market
The management of I-Link categorizes its domestic and international target
business users as follows: (i) small office/home office (SOHO -- up to 10
employees); (ii) small and medium sized businesses (less than 500 employees);
(iii) large businesses (500 or more employees); and (iv) vertical markets.
I-Link's current primary target market is composed of the residential and SOHO
customers. The advantages of I-Link's technology will over time be beneficial
to the other markets. As I-Link grows and matures as a company it will pursue
channels which target the other market segments.
Small and medium-sized businesses often have a difficult time obtaining and
using technology. Typically, they lack the resources and/or expertise needed to
obtain strategic advantage from state-of-the-art technology. Although I-Link
defines small and medium-sized businesses as businesses with less than 500
employees, it is also important to note that departments or offices within
larger businesses may also be placed in this category. Larger businesses can
dedicate resources and/or funds to technology customization or even technology
development. Smaller businesses often must accept off-the-shelf solutions
designed for general use. I-Link believes that its services are of significant
strategic advantage to small and medium-sized businesses.
5
Without having to adopt new technology or procedures, small and medium-sized
businesses can immediately improve their profitability. Large businesses and
high-end national accounts have significant long distance telephone and fax
traffic. Management believes those businesses could also realize substantial
savings from I-Link's services.
Distribution Plan
I-Link targets the following distribution methods: (i) Network Marketing
sales program; (ii) direct sales using independent sales agents; (iii) selling
through independent telephone company or "Telco" resellers; (iv) acquisition of
smaller carriers with established customer bases; (v) selling through Internet
service providers ("ISPs"); (vi) selling through cable/broadcasting companies;
(vii) selling through direct sales organizations; (viii) direct sales to top
national accounts and vertical market resellers ("VMRs"); (ix) selling through
established channels of distribution in the retail computer/technology markets;
(x) leveraging OEM channels; and (xi) telemarketing/telesales. Distribution
methods currently used by the Company are discussed below.
Network Marketing Sales Program. I-Link, through I-Link Worldwide, L.L.C.,
has targeted all residential and small-business users, initially throughout the
United States, through the establishment and implementation of a Network
Marketing sales program, providing individuals the opportunity to earn
commissions on the sale of the products to their neighbors and acquaintances.
A large amount of interest in I-Link has been generated throughout the network
marketing industry, and I-Link believes a significant market opportunity exists
through the exploitation of this marketing and sales channel to reach a large
number of potential residential customers. I-Link formally launched its Network
Marketing sales operation and commenced marketing in this channel in June 1997.
Direct Sales. I-Link intends to use independent sales agents for direct
sales of I-Link's products on a commission basis.
Reselling. It is I-Link's intention to offer telephone service resellers,
cable and broadcast companies, ISPs and direct sales organizations significant
partnering opportunities. By adding I-Link enabling services to their current
list of services, these potential partners enhance their competitive position
in highly competitive and increasingly fragmented markets.
Acquisition of Smaller Carriers. In January 1997, the Company acquired
Family Telecommunications Incorporated (now renamed I-Link Communications, Inc.
and referred to herein as "ILC"), a regional long distance carrier with over
17,000 established customers. This acquisition brought to I-Link an existing
customer base, useful facilities and established industry relationships, and
afforded ILC the means to differentiate and enhance the products and services
it could offer to existing and potential customers in a highly competitive
marketplace. I-Link believes that there exist numerous other local and regional
carriers with established customer bases and facilities that could be acquired
in the same manner. I-Link intends to continue to seek out these opportunities
provided it is able to negotiate terms that are in the Company's best interest.
OEM Channels. I-Link currently sells MiBridge software and services
through an OEM ("original equipment manufacturer") channel. MiBridge customers
buy enabling technology which augment their existing or future offerings. These
customers pay I-Link an up-front development fee and a recurring royalty. Over
time some of the V-Link services will be delivered through this channel.
Telemarketing. I-Link will use the telemarketing and telesales channels
employed by many service providers. As in the example of current business
communications providers, I-Link will directly contact customers in strategic
markets, stressing the significant cost benefits associated with I-Link services
while fielding sales inquiries derived from advertising.
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Technology Issues
I-Link has established Communication Engines at strategic locations in
the United States to allow subscribers to access I-Link's network locally, and
intends to continue to establish Communication Engines in other strategic
locations both in North America and worldwide as the customer base warrants.
The I-Link Intranet is a high-speed interconnected network of Communication
Engines. I-Link has created this network by leasing high-speed data lines and/or
partnering with existing communications and ISPs that currently provide access
to such lines.
Capacity. Capacity, or lack thereof, is a frequently discussed topic with
regard to data transmission via Data Communications Networks such as the
Internet. "Slow service" resulting from inadequate capacity is one of the
common complaints among Internet users. Capacity is a function of "bandwidth"
on the network or the ability of the infrastructure to carry potentially large
amounts of data to and from large numbers of users.
The I-Link Intranet is comprised of dedicated telecommunications lines
leased from large interexchange carriers ("IXCs") with rigorous performance
standards and managed by I-Link. In some cases, parts of the network may be
contractually provided by other entities in the future. Management believes
I-Link has the ability to monitor and manage all of its network capacity.
I-Link Communication Engines monitor and store statistical capacity-related
data. Transmission locations, transmission size, and transmission times are
easily stored and accessed by the I-Link Intranet. A Network Operations Center
monitors data and can immediately detect when utilization levels are high.
I-Link can then add capacity as needed. Because I-Link data is associated with
specific capabilities (e.g., faxes) and is transmitted between (and encoded and
decoded by) I-Link Communication Engines, the type and purpose of the data is
well understood and "overhead" bandwidth needs are better addressed. Data
segmentation gives the Communication Engines additional ability to maximize
capacity. As a result I-Link uses bandwidth up to twelve times as efficiently
as traditional telephony and fax systems do over the same medium.
Security. Security is a major concern associated with data transmission
across Data Communications Networks. I-Link controls the routing of data from
one Communication Engine to another. Management believes that I-Link's system
provides a measure of security that actually makes phone, fax and modem
transmission more secure than using traditional methods.
Competition
The market for business communications services is extremely competitive.
I-Link believes that its ability to compete in I-Link's business successfully
will depend upon a number of factors, including the pricing policies of
competitors and suppliers; the capacity, reliability, availability and security
of the I-Link Intranet infrastructure; market presence and channel development;
the timing of introductions of new products and services into the marketplace;
ease of access to and navigation of the Internet or other such Data
Communication Networks; I-Link's ability in the future to support existing and
emerging industry standards; I-Link's ability to balance network demand with
the fixed expenses associated with network capacity; and industry and general
economic trends.
While I-Link believes there is currently no competitor in the North
American market providing the same capabilities in the same manner as I-Link
will offer using the I-Link Intranet, there are many companies that offer
communications services, and therefore compete with I-Link at some level. These
range from large telecommunications companies and carriers such as AT&T, MCI,
Sprint, LDDS/WorldCom, Excel, and Qwest, to smaller, regional resellers of
telephone line access, and to companies providing Internet telephony.
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These companies, as well as others, including manufacturers of hardware and
software used in the business communications industry, which could in the future
develop products and services that compete with those of I-Link on a more direct
basis. These entities may be far better capitalized than I-Link and control
significant market share in their respective industry segments. In addition,
there may be other businesses that are attempting to introduce products similar
to I-Link's for the transmission of business information over the Internet.
There is no assurance that I-Link will be able to successfully compete with
these market participants.
Government Regulation
General. Traditionally, the Federal Communications Commission (the "FCC")
has sought to encourage the development of enhanced services as well as
Internet-based services by keeping such activities free of unnecessary
regulation and government influence. Specifically in the area of tele-
communications policy and the use of the Internet, the FCC has refused to
regulate most online information services under the rules that apply to
telephone companies. This approach is consistent with the passage of the
Telecommunications Act of 1996 ("1996 Act") which expresses a Congressional
intent "to preserve the vibrant and competitive free market that presently
exists for the Internet and other interactive computer services, unfettered
by Federal or State regulation."
Federal. Since 1980, the FCC has refrained from regulating value-added
networks ("VANs"), software or computer equipment that offer customers the
ability to transport data over telecommunications facilities. By definition,
VAN operators purchase transmission facilities from "facilities-based" carriers
and resell them packaged with packet transmission and protocol conversion
services. Under current rules, such operators are excluded from regulation that
applies to "telecommunications carriers" under Title II of the Communications
Act.
In the wake of the 1996 Act, however, the FCC is revisiting many of its
past decisions and could impose common carrier regulation on some of the
transport and resold telecommunications facilities used to provide
telecommunications services as a part of an enhanced or information service
package. The FCC also may conclude that I-Link's protocol conversions, computer
processing and interaction with customer-supplied information are insufficient
to afford the Company the benefits of the "enhanced service" classification, and
thereby may seek to regulate some of the Company's operations as common carrier/
telecommunications services. The FCC could conclude that such decisions are
within its statutory discretion, especially with respect to voice services.
I-Link has been moving its customers off the facilities of existing long
distance carriers, and has increased its reliance on a proprietary Internet
protocol network for transmission in the hope of enjoying minimal federal
regulation under current rules. Historically, the FCC has not regulated
companies that provide the software and hardware for Internet telephony, or
other Internet data functions, as common carriers or telecommunications service
providers. Moreover, in May 1997 the FCC concluded that information and enhanced
service providers are not required to contribute to federal universal service
funding mechanisms.
Notwithstanding the current state of the rules, the FCC's potential
jurisdiction over the Internet is broad because the Internet relies on wire and
radio communications facilities and services over which the FCC has long-
standing authority. The FCC's framework for "enhanced services" confirms that
the FCC has authority to regulate computer-enriched services, but provides that
carrier-type regulation would not serve the public interest. Only recently has
this general approach been questioned within the industry.
In March 1996, for instance, America's Carriers Telecommunications
Association ("ACTA"), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking that
the FCC regulate Internet telephony. ACTA argued that providers of software
that enable real-time
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voice communications over the Internet should be treated as common carriers and
subject to the regulatory requirements of Title II of the Communications Act.
The FCC sought comment on the request and has not yet issued its decision.
Congress directed the FCC to submit a report by April 10, 1998, describing
how its classification of information and telecommunications services is
affecting contributions to universal service charge funds. U.S. Senators from
several states with large rural areas have expressed concern that migration of
voice services to the Internet could erode the contribution base for universal
service subsidies. There will likely be continuing pressure from those Senators
to classify Internet telephony as a telecommunications service, rather than an
information service, so that it can be subjected to a regulatory assessment for
universal service contributions.
Any FCC determination that Internet-based service providers should be
subject to some level of Title II regulation could affect the manner in which
I-Link operates, to the extent it uses the Internet to provide facsimile or
voice capabilities, as well as the costs of complying with federal common
carrier requirements. With the passage of the 1996 Act, the precise dividing
line or overlap between "telecommunications" and "information" services as
applied
to Internet-based service providers is uncertain. Consequently, I-Link's
activities may be subject to evolving rules as the FCC addresses novel questions
presented by the increased use of the Internet to offer services that appear
functionally similar to traditionally-regulated telecommunications services. At
this time, it is impossible to determine what effect, if any, such regulations
may have on the future operation of the Company.
State. While states generally have declined to regulate enhanced services,
their ability to regulate the provision of intrastate enhanced services remains
uncertain. The FCC originally intended to preempt state regulation of enhanced
service providers, but intervening case law has cast doubt on the earlier
decision. Moreover, some states have continued to regulate particular aspects
of enhanced services in limited circumstances, e.g., to the extent they are
provided by incumbent local exchange carriers.
Whether the states within which I-Link makes its Intranet services
capabilities available will seek to regulate I-Link's activities as a tele-
communications carrier will depend largely on whether the states determine
that there is a need for or other public benefits of such regulation. The
staff of the Nebraska Public Service Commission, for example, recently
informally concluded that an Internet telephony gateway service operated by
a Nebraska Internet Service Provider was required to obtain state authority to
operate as a telecommunications carrier. The FCC has authority to preempt state
regulation that impedes competition; it has not, however, had occasion to
consider this or similar decisions. Under certain circumstances, the FCC may
have occasion to preempt state regulation. This issue has not yet been squarely
placed before the FCC for resolution.
Delivery of Services Over Existing Switched Telecommunications Networks
A portion of I-Link's communications services are currently delivered over
existing switched telecommunications networks through I-Link Communications,
Inc. (formerly named Family Telecommunications Incorporated, and referred to
herein as "ILC"). ILC is a long distance telecommunications carrier that
provides long distance service to all states of the United States except
Alaska. In January 1997 ILC was acquired by the Company in a share exchange
transaction. Through this acquisition, ILC provided the Company, through ILC's
contractual agreements with other primary carriers and utilization of telephone
facilities and equipment owned and operated by ILC, access to the switched
telephone network at favorable rates. Access to the switched telephone network
is a necessary component of the I-Link Intranet in order for phone and fax
transmissions to be routed to destinations in lesser populated geographic areas
that are not serviced by one of I-Link's Communication Engines. In addition,
the access to the switched telephone network at favorable pricing permits
I-Link to develop and expand its customer bases in given geographic areas
9
across the switched telephone network until such time as management determines
the size of the customer base and the capacity and timing of the deployment of
the I-Link Intranet in the area can support the transfer of the customers from
the switched telephone network to the I-Link Intranet.
ILC was incorporated under the laws of the state of Utah in 1996, and
maintains its principal place of business in Phoenix, Arizona. ILC also
maintains facilities in Salt Lake City, Utah. Through its Carrier Agreement
with Sprint, I-Link provides 1-plus long distance service, 800/888 service,
worldwide calling card service, worldwide prepaid phone card service, long
distance cellular phone service, data line service and T-span service.
Customers using Bell South, Bell Atlantic, Ameritech, GTE Corp., NYNEX Corp.,
Pacific Telesis Group, US West, Southwestern Bell, Sprint, SNET, ALLTEL Corp.,
Rochester Telephone Corp., Cincinnati Bell Telephone, and Citizens as their
local telephone company are being offered I-Link's long distance programs. This
represents approximately 97% of all telephone lines in the United States;
however, there can be no assurance the Company will be successful in
attracting new customers or increasing its market share of long distance
services.
ILC currently maintains switch facilities in twelve states. This equipment
allows I-Link to offer additional services in the geographic areas in its home
state and surrounding states, and to offer specialized services, including a
variety of customized 800/888 service, voice mail, voice inter-active services,
debit cards, travel cards and other customized services to its entire customer
base.
Telephony Industry Description & History
The telecommunications industry today is an interconnected network
consisting of four corporations (AT&T, MCI, Sprint and LDDS/WorldCom) that
together control a significant majority of the interexchange market, and
hundreds of smaller companies. In recent years, the industry has changed
dramatically due to divestiture, deregulation, and technological innovation.
For most of this century, the industry was divided between the Bell System,
companies owned by or affiliated with AT&T, and the 1,600 or so local telephone
independents, companies not affiliated with AT&T, but often components of large
non-Bell holding companies. Although the independents served more geographic
areas, the Bell System accounted for more than 80% of the telephones and
provided most of the intermediate long distance toll lines. In the 1970's, the
picture began to change when several smaller companies began to offer long
distance services to customers in direct competition with AT&T, usually at
lower prices. Due to this competition, the projected growth of the markets,
and rapid technological changes, among other factors, the Department of Justice
in 1974 filed an antitrust suit against AT&T alleging monopolistic practices.
The settlement of the suit that occurred in January 1982 mandated that AT&T
spin-off the local telephone companies into seven regional independent
operating companies (the "Baby Bells") that would remain monopolies in their
respective territories, but would be prohibited from selling long distance
services that crossed geographic boundaries, and permitted AT&T to keep its
manufacturing, research and development, and interexchange assets. Beginning
In 1984, the Baby Bells were required under the settlement to provide access to
all long distance carriers "equal in type, quality and price" to that provided
to AT&T.
The AT&T spin-off and the equal access regulation has enabled the long
distance telephone industry to experience significant growth. The telephone
system that has been developed is referred to as a "switched network." In a
switched network the phone call first goes from the terminal (the telephone,
computer or printer) over local lines to a local switch (the local exchange).
The telephone number dialed tells the switch whether the destination is inside
or outside the exchange. If the call is directed to a phone within the exchange,
the switch will send an electronic signal to the number being called. Once the
phone is picked up, the connection is made. If the called number is outside the
exchange, the switch will send the call signal over a trunk line to the switch
in the correct exchange and that switch will signal the phone at the destination
in order
10
to make the connection. The central office is owned by the local phone company
and contains switching equipment that is hardwired to every telephone in its
area. In addition, it has trunk cables that connect the central office to other
central offices. In a seven-digit telephone exchange number, the first three
digits of every phone number designates the local area served by the central
office. Several central offices, and, therefore, several exchange numbers, are
grouped together to form calling areas serviced by the local phone company.
Often the telephone call is a destination number that crosses a boundary
between groups of central offices, known as the Local Access and Transport Area
(LATA). There are well over a hundred LATAs in the U.S. The area code dialed
signals the local switch that an interexchange or inter-LATA or toll or long
distance call is to be terminated. The local switch then sends the call to a
toll switch, which directs the call over toll, long distance, or interexchange
network lines to the toll switch at the destination city. That switch, in turn,
directs the call to the proper local exchange switch which signals the phone at
the number dialed. At present, most transmission on the local level is by means
of copper wires, coaxial cable or fiber optics, but long distance communication
also takes place by means of wire cable, terrestrial or satellite radio, or by
a combination of transmission media. The trend is to replace these other media
with fiber optics for more flexible services.
The most common method of making long distance calls is to first dial a
"1" plus the number to be called. The number includes an area code destination
comprised of three digits, followed by the three digit telephone exchange and
then the four digit location. The call goes first to the local phone company
central office and then it is handed off to the long distance carrier chosen
by the customer. At the terminating end of the call, it is passed back to the
local phone company in the terminating area code for completion. Both local
telephone companies collect access charges from the long distance carrier for
these services. Whenever an interstate call is preceded by a "1" and an area
code, the local phone company hands the call off to a long distance carrier,
who will complete the call. The local telephone company knows that a long
distance call must be handed off when the number dialed has ten digits.
Although the telecommunications industry was originally developed to send
electronic analog signals representing the speech pattern of the person talking,
the industry is evolving from the analog pattern to a digital network. Digital
lines provide higher quality service and, because of the computer technology,
make it possible for switches and lines to handle many times more calls at one
time than they could previously. The only significant part of the telephone
system that is still analog today is from the phone to the central telephone
office.
While a monumental step, the AT&T breakup and the creation of the
independent Regional Bell Operating Companies ("RBOCs") originally did nothing
more than reshape the existing ownership. Initially, the breakup left AT&T with
a near monopoly on long distance service. It was the requirement of "equal
access" that led to the birth of a competitive long distance market in the U.S.
As part of the settlement, the Department of Justice required that the Bell
Operating Companies (BOCs) offer their customers access to all long distance
or IXCs, not just AT&T. Under "equal access," the phone subscribers were given
the opportunity to preselect the "long line" carrier of their choice and,
thereafter, to obtain from their BOC automatic access to that preselected IXC.
With deregulation and its concomitant "equal access" requirement, the
number of independent long distance carriers in the United States has grown
from the handful existing ten years ago to over 600 IXCs today, which control
close to one-half the market share in terms of long distance or interexchange
minutes. The bulk of the market capture was accomplished by MCI, Sprint and
LDDS/WorldCom through extensive and mass advertising campaigns and the ability
to offer service throughout the entire U.S. These three carriers have priced
their product at approximately the same price or just below that of AT&T. The
smaller carriers
11
have captured only a small portion of this new market. Management believes this
is largely due to two factors. The first is the inability to offer service
throughout the U.S. Instead, most small carriers can only offer service to a
small geographic location and thus have a limited number of customers from which
to draw. The second reason is the lack of resources to commit to large
advertising campaigns. The smaller carriers have captured market share
basically by offering prices that are substantially below those of the largest
four carriers.
The FCC has extensive authority to regulate long distance carriers and
has the power to review requests for interstate rate changes and other aspects
of a carrier's operations. It has generally not exercised this power to review
changes in the domestic charges of the smaller carriers that compete with the
big four. The FCC has generally allowed competition to be the determinant of
the prices these small competitors charge. Moreover, except in certain
circumstances, the FCC increasingly has sought to reduce the level of
regulation on all interstate service providers, including AT&T.
In recent years, the European Commission has opened Europe's nationalized
telecommunications industry to free market competition. Much like the AT&T
breakup, the operation of basic local telephone services has been left to each
country's current national carrier, with "deregulation" focused on the more
lucrative long distance and value-added (e.g. data transmission) markets.
Competition in the Switched Network Market
I-Link's competition in the switched network market is all other long
distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom and
local regional Bell companies. With these carriers controlling the vast
majority of the market share throughout the U.S., the majority of the potential
customers to which I-Link's products and services are marketed are customers of
one of these carriers. The competitive advantages these four largest carriers
have are primarily pervasive nationwide networks, name recognition, operating
histories, and substantial advertising resources.
Federal Regulation
I-Link competes in an industry that, to a large degree, continues to be
regulated by federal and state governmental agencies. At approximately the
same time as the required divestiture of the BOCs from AT&T in 1984, the FCC
announced rules that were created to foster a self-regulating interstate tele-
communications industry, relying upon competitive forces to keep rates and
services in check.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including ILC. Since 1981, the FCC has
sought to deregulate substantially the interstate activities of non-dominant
interexchange carriers such as ILC. For instance, in addition to subjecting
non-dominant carriers to streamlined regulation, on numerous occasions the FCC
has attempted to exempt non-dominant carriers from federal tariffing
requirements altogether. Most recently, the FCC sought to forebear from
imposing tariffing requirements on the domestic telecommunications offerings
of non-dominant carriers pursuant to Section 10 of the 1996 Act. The FCC's
order taking this action, however, was stayed by the United States Court of
Appeals for the District of Columbia Circuit on February 13, 1997. FCC rules,
therefore, continue to require interstate service providers to tariff their
service offerings at the FCC.
In addition to various annual filing requirements, interstate common
carriers also are required by federal law to ensure that their rates are
reasonable and do not discriminate unreasonably among and between similarly-
situated customers. Moreover, facilities-based interstate carriers are
subjected to additional reporting requirements not imposed on interstate
service resellers.
12
Interstate Access Transport Proceeding
In an effort to encourage competition in the provision of interstate access
services, the FCC granted increased pricing flexibility to its local exchange
carriers for "access transport" services. Access transport refers to the
connection provided by local exchange carriers between long distance carriers'
long distance facilities and the customer's telephone. These rate structures
previously were designed such that local telephone companies assessed an equal
charge per unit of access to all long distance carriers, regardless of the
volume of local access that these long distance carriers independently
generated. Under the new FCC pricing plan, adopted in the fall of 1993, local
telephone companies were allowed to offer more cost effective access to those
long distance carriers with very high access volumes in a particular local
market. Accordingly, long distance carriers with lesser access requirements,
such as ILC, could experience increases in their overall average access cost
relative to larger competitors.
The FCC pricing plan implemented in the fall of 1993 was set to expire in
November 1995. In principle, the plan has been extended pending implementation
of the 1996 Act. Consideration of these issues has been delayed as the FCC has
sought to meet tight statutory deadlines imposed by the 1996 Act on other
matters. The FCC, however, is in the process of reconsidering the federal
access charge regime in a pending rulemaking proceeding. The Company is unable
to predict the course and effect of the FCC's actions on this issue at this
time.
Recent Legislation
In February 1996, the Telecommunications Act of 1996 (the "1996 Act") was
signed into law. The purpose of the 1996 Act is to promote competition in all
aspects of telecommunications. The 1996 Act requires telecommunications
carriers to interconnect with other carriers and to provide for resale, number
portability, dialing parity, access to rights-of-way and compensation for
reciprocal traffic. Additionally, incumbent local exchange companies ("ILECs")
are required to provide nondiscriminatory unbundled access, resale at wholesale
rates and notice of changes that would affect interoperability of facilities
and networks.
In August 1996, the FCC adopted a national regulatory framework for
implementing the local competition provisions of the 1996 Act, including
adoption of rules delineating interconnection obligations of ILECs, unbundling
requirements for ILEC network elements, requirements for access to local rights
of way, dialing parity and telephone numbering and requirements for resale of
and nondiscriminatory access to ILEC services. In many instances, the FCC
left the task of implementing the FCC's regulatory standards to the individual
states. Numerous states and ILECs have appealed the FCC's decisions and a
judicial determination of the legality of the FCC's interconnections rules is
pending at the United States Court of Appeals of the Eighth Circuit and there
is currently a stay in place on many of the FCC's interconnection rules
promulgated under the 1996 Act. A reversal of the legality of the FCC's
decisions could affect the development of local competition in the markets in
which I-Link operates, as well as the pricing of services of interest to I-Link.
It also could affect I-Link's future plans to expand into new markets to the
extent efficient interconnection to local facilities is required for
competitive market entry.
Pursuant to Section 254 of the 1996 Act, the FCC also recently initiated
a rulemaking to establish a new federal universal service mechanism, and state
authorities are revisiting the method by which universal service is funded.
The proceeding will determine the extent to which interstate carriers will be
required to contribute to federal universal service funds, as well as their
ability to draw universal service support. Resolution of the issues raised in
this proceeding will affect the cost of providing interstate service and the
way I-Link conducts its business.
13
The 1996 Act also provides that RBOCs may provide long distance service
upon enactment that is out-of-region or incidental to: (1) audio/video
programming; (2) Internet for schools; (3) mobile services; (4) information or
alarm services; and (5) telecommunications signaling. In order for a BOC to
provide in-region long distance service, the 1996 Act requires the BOC to comply
with a comprehensive competitive checklist and expands the role of the U.S.
Department of Justice in the FCC's determination of whether the entry of a BOC
into the competitive long distance market is in the public interest.
Additionally, there must be a real facilities-based competitor for residential
and business local telephone service (or the failure of the potential providers
to request access) prior to a BOC providing in-region long distance service.
BOCs must provide long distance services through a separate subsidiary of at
least three years. Until the BOCs are allowed into long distance or three years
have passed, long distance carriers with more than five (5) percent of the
nation's access lines may not jointly market BOC resold local telephone service,
and states may not require the BOCs to provide intraLATA dialing parity.
Telecommunications companies also may provide video programming and cable
operators may provide telephone service in the same service area. The 1996 Act
prohibits telecommunications carriers and cable operators from acquiring more
than ten percent of each other, except in rural and other specified areas.
The impact of the 1996 Act on I-Link is unknown because a number of
important implementation issues (such as the nature and extent of continued
subsidiaries for local rates) still need to be decided by state or federal
regulators. However, the 1996 Act offers opportunities as well as risks. The
new competitive environment should lead to a reduction in local access fees, the
largest single cost in providing long distance service today. For instance, as
discussed above, the FCC has initiated a rulemaking to reform its system of
interstate access charges to make the pricing of interstate access more
compatible with the pricing principles of the 1996 Act and with federal and
state actions to open local networks to competition. The FCC proceeding will
affect the current pricing relationships between interstate carriers, such as
ILC, and ILECs. Specifically, it will determine what is paid to the ILECs for
access to their facilities and how it will be paid. While it is generally
expected that access charges will decrease under the new rules, it is
impossible to predict how the proposals may affect existing pricing
relationships.
Moreover, the removal of the long distance restrictions on the BOCs is not
anticipated to have an immediate significant impact on I-Link because of the
substantial preconditions that must be met before the BOCs can provide most
in-region long distance services. Nevertheless, the entry of these local
telephone companies into long distance telecommunications services could result
in new competition and there is a possibility that the local telephone
companies will be able to use local access to gain a competitive advantage
over other long distance providers such as I-Link.
State Regulation
The 1996 Act bars states from applying any restrictions that have the
legal or practical effect of prohibiting the competitive provision of local
or long distance telecommunications services, and the FCC has exercised its
authority under the 1996 Act to preempt such restrictions. In most states, ILC
is required to obtain state regulatory certification prior to commencing
operations. As of December 31, 1997, ILC had received authorization to
provide telecommunications services to its customers in all of the states with
the exception of Alaska, and is in the process of applying for authorization
to provide telecommunications services to customers in Alaska. In addition,
ILC is required to maintain on file at the state regulatory commissions in
those states a tariff or schedule of its intrastate rates and charges. As
I-Link expands the geographic scope of its direct dial long distance business,
ILC may be required to obtain additional state regulatory approvals to provide
intrastate long distance services.
14
Various state legislatures and public utility commissions are considering
a variety of regulatory policy questions which could adversely affect I-Link.
At this time, however, it is impossible to determine what effect, if any, such
regulations, including the cost of compliance with such regulations, may have
on I-Link's operations.
Medical Imaging Division
The majority of the Company's revenue in 1996 and 1995 was derived from
owning and operating outpatient diagnostic imaging facilities in Florida. This
revenue was primarily generated from two subsidiaries operating magnetic
resonance imaging ("MRI") facilities. Effective December 31, 1997, the
Company made the decision to sell its Medical Imaging Division. The Board of
Directors approved the plan of disposal on March 23, 1998. Consequently, the
Medical Imaging Division has been accounted for as a discontinued operation in
the financial statements included herein. For a full discussion of the Medical
Imaging Division, see the discussion entitled "Business of the Medical Imaging
Division" in the Company's Registration Statement on Form SB-2 (File No.
333-17861), as amended, which is incorporated herein by this reference. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 2. Description of Property.
In September 1996, I-Link entered into a lease for 14,000 square feet of
space for its offices and other facilities in Draper, Utah pursuant to a
commercial lease dated September 11, 1996. The term of the lease is seven years
commencing November 5, 1996, subject to the right to extend for an additional
five years. The initial base rent is approximately $11,650 per month. I-Link
has delivered $162,000 in certificates of deposit to the landlord as a security
deposit under the lease. I-Link also leases several other spaces to house its
Communication Engines throughout the United States. Such spaces vary in size
and are rented on a month-to-month basis.
The Company currently occupies approximately 3,400 square feet on a month-
to-month basis for its Medical Imaging Division offices located in St.
Petersburg, Florida. The Company leases approximately 2,400 square feet for
its outpatient MRI center located in Tampa, Florida. The lease for the medical
facility expires May 31, 1998. The Company has the option to extend the medical
facility lease an additional two years.
ILC currently leases and occupies approximately 3,600 square feet of
office space in Phoenix, Arizona, pursuant to a commercial lease dated March
18, 1996. The lease term is four years and two months commencing March 18,
1996 beginning with a base rent of $3,598 per month and escalating to $4,498
per month at the end of the lease. ILC also currently leases and occupies
approximately 5,100 square feet of office space in Salt Lake City, Utah,
pursuant to a commercial lease dated July 1, 1996. The lease term is five
years commencing July 1, 1996 beginning with a base rent of $5,313 per month
and escalating to $5,843 per month at the end of the lease.
MiBridge rents 1,800 square feet of office space in Eatontown, New Jersey
under a one-year lease effective May 1, 1997 at a cost of $2,000 per month.
After the initial term of the lease, MiBridge may continue occupancy of its
space on a month-to-month basis. MiBridge may cancel such lease without
penalty upon 30 days notice to the lessor.
Item 3. Legal Proceedings.
On November 14, 1997, the Company filed a Notice of Claim commencing an
arbitration proceeding against MCI Telecommunications, Inc. ("MCI"). In the
past, the Company purchased from MCI long distance telecommunications capacity
on lines operated by MCI in order to provide long distance telecommunications
services to the Company's
15
customers who resided in geographic areas not yet serviced by the Company's
dedicated telecommunications network ("off-net" traffic). The arbitration
proceeding was commenced by the Company pursuant to the provisions of the
Carrier Agreement between the Company and MCI, and pursuant to the arbitration
rules set forth in MCI's FCC Tariff No. 1. In its Notice of Claim the Company
seeks (1) to have the arbitrator declare that MCI has materially breached its
Carrier Agreement with the Company, (2) to have the arbitrator declare that due
to MCI's material breach the Carrier Agreement is terminated without the Company
being held liable for the early termination payment provided for under the
Carrier Agreement, and (3) to recover damages from MCI in an as yet undetermined
amount. MCI has submitted a counterclaim against the Company in the arbitration
proceeding seeking $4,431,290 for claimed services rendered and under-usage
penalties, and has reserved the right to amend its counterclaim to potentially
include claims for early termination penalties and claimed services rendered in
November and December 1997. Management believes the Company has valid defenses
against MCI's counterclaim, and will vigorously contest all such claims.
Subsequent to the Company's commencement of the MCI arbitration proceeding, the
Company made arrangements with an alternative national provider of long distance
tele-communications capacity to replace all of the capacity provided by MCI.
At the present time Management cannot determine the impact, if any, this
arbitration proceeding may have on the Company.
Information relating to a claim brought against the Company by JW Charles
Financial Services, Inc. ("JW Charles") is incorporated herein by this reference
to the discussion entitled "Legal Proceedings" in the Company's Registration
Statement on Form SB-2 (File No. 333-17861), as amended. Such claim was
settled.
The Company is also involved in litigation relating to claims arising out
of its operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 4. Submission of Matters to a Vote of Securityholders.
The 1997 Annual Meeting of Stockholders of the Company was held on October
7, 1997. A total of 7,244,732 shares of the Company's Common Stock (out of a
total of 11,627,597 such shares outstanding on the record date and entitled to
vote at such meeting) were duly represented in person or by proxy at the
meeting. The following is a description of the matters submitted to
stockholders of the Company at the meeting, including a recital of the number
of votes cast for, the number of votes cast against (or withheld), the number
of abstentions and the number of broker non-votes:
1. To elect two class III directors to serve for three years and until
their successors have been duly elected and shall qualify.
John W. Edwards:
For: 7,242,809 Against: 1,923 Abstain: -0- Broker non-votes: -0-
R. Huston Babcock:
For: 7,242,994 Against: 1,738 Abstain: -0- Broker non-votes: -0-
Messrs. Edwards and Babcock will serve for three year terms, and thereafter
until their successors are elected. Mr. Clay Wilkes was a Class I director; he
resigned effective March 10, 1998. Messrs. Joseph A Cohen and Henry Y.L. Toh are
Class II directors. Their terms as directors will expire at the second
succeeding annual meeting of stockholders.
16
2. To approve and adopt an amendment of the Company's Articles of
Incorporation to change the Company's name to I-Link Incorporated.
For: 7,242,404 Against: 116 Abstain: 2,212 Broker non-votes: -0-
3. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Preferred Stock
from 500,000 shares of Preferred Stock, $10.00 par value, to 10,000,000 shares
of Preferred Stock, $10.00 par value, to permit the conversion of convertible
notes issued in September 1996, the issuance of Series D Preferred Stock and
Series M Preferred Stock and for other general corporate purposes.
For: 7,180,916 Against: 56,513 Abstain: 7,303 Broker non-votes: -0-
4. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock from
20 million shares of Common Stock, $.007 par value, to 75 million shares of
Common Stock, $.007 par value, to permit the issuance of shares in connection
with the Company's acquisition of Family Telecommunications Incorporated, the
issuance of options and warrants and for other general corporate purposes.
For: 7,175,831 Against: 61,723 Abstain: 7,178 Broker non-votes: -0-
5. To approve the adoption of the 1997 Recruitment Stock Option Plan
which provides for the issuance of incentive stock options, non-qualified stock
options and stock appreciation rights.
For: 7,163,848 Against: 72,677 Abstain: 8,207 Broker non-votes: -0-
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq SmallCap Market
("Nasdaq") tier of the Nasdaq Stock Market under the symbol "ILNK." Prior to
March 8, 1996, the Common Stock was traded on Nasdaq under the symbol "MDCR."
Although the Common Stock is currently listed for quotation on Nasdaq, there
can be no assurance given that the Company will be able to continue to satisfy
the requirements for maintaining quotation of such securities on Nasdaq or that
such quotation will otherwise continue. The Company has no current plans to
apply for listing of any of the shares of Class C, Class D or Class M
Preferred Stock, the Commonwealth Warrants or any of its other securities
for quotation on Nasdaq.
The range of high and low bid information for the Common Stock for each
full quarterly period during the 1997 and 1996 calendar years, is as follows:
Quarter Ended High Bid Low Bid
------------------ -------- --------
March 31, 1996 $ 7.63 $1.00
June 30, 1996 9.75 6.13
September 30, 1996 7.50 4.06
December 31, 1996 6.00 4.00
17
Quarter Ended High Bid Low Bid
------------------ -------- -------
March 31, 1997 $ 7.50 $3.63
June 30, 1997 15.50 4.00
September 30, 1997 10.56 4.00
December 31, 1997 10.00 4.19
These quotations reflect interdealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
As of March 31, 1998, there were approximately 403 stockholders of Common
Stock of record and in excess of 5,700 beneficial owners.
On March 31, 1998, the closing price for a share of Common Stock was $7.31.
Item 6. Selected Financial Data.
The selected financial data set forth below for the Company as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 are derived from the audited financial statements included elsewhere
herein. The selected financial data set forth below for the Company as of
December 31, 1995, 1994 and 1993 and for each of the two years in the period
ended December 31, 1994 are derived from the financial statements not included
elsewhere herein. The data set forth below should be read in conjunction with
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company,
set forth in full elsewhere in this report.
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Revenues:
Telecommunications services $ 11,081,007 $ - $ - $ - $ -
Marketing services 2,637,331 - - - -
Other 346,875 170,532 - - -
------------- ------------- ------------- ------------- -------------
Total revenues 14,065,213 170,532 - - -
------------- ------------- ------------- ------------- -------------
Operating expenses:
Telecommunications
network expenses 14,634,999 1,120,779 - - -
Marketing services costs 4,294,014 - - - -
Selling, general,
administrative and other 20,997,262 18,536,090 - - -
------------- ------------- ------------- ------------- -------------
Total operating expenses 39,926,275 19,656,869 - - -
------------- ------------- ------------- ------------- -------------
Operating loss (25,861,062) (19,486,337) - - -
Other income (expense) ( 2,806,630) ( 2,677,640) - - -
------------- ------------- ------------- ------------- ------------
Loss from continuing operations (28,667,692) (22,163,977) - - -
18
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Income (loss) from discontinued
operations ( 1,191,009) ( 900,263) ( 551,909) ( 715,434) 11,415
------------- ------------- ------------- ------------- -------------
Net income (loss) $(29,858,701) $(23,064,240) $( 551,909) $( 715,434) $ 11,415
============= ============= ============= ============= =============
Basic and diluted net income
(loss) per common share $( 10.17) $( 6.53) $( 0.39) $( 0.55) $ 0.00
============= ============= ============= ============= =============
Balance Sheet Data:
Working capital $( 2,955,180) $ 1,305,814 $ - $ - $ -
Property and equipment, net 3,551,917 1,575,769 - - -
Net assets of discontinued
operations 595,377 1,668,223 2,124,965 2,461,170 3,148,526
Total assets 24,252,876 9,864,696 2,124,965 2,461,170 5,582,299
Long-term obligations 1,921,500 236,705 669,799 525,380 -
Stockholders' equity 12,549,196 6,298,617 1,455,166 1,935,790 2,623,146
In January 1997, the Company acquired I-Link Communications (formerly
Family Telecommunications, Inc.), an FCC-licensed long distance carrier. With
the acquisition, the Company began its telecommunications services operations.
Effective December 31, 1997 the Company made the decision to discontinue the
operations of its Medical Imaging Division. The plan of disposal was approved
by the Company's Board of Directors on March 23, 1998. The net operating
activities and net assets from the Medical Imaging Division are presented
separately as discontinued operations in the above table.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Information
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When used
in this document, the words "anticipate," "believe," "estimate," "expect," and
"intended" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events
and are subject to certain risks and uncertainties as noted below. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
Among many factors that could cause actual results to differ materially
are the following: the Company's ability to finance and manage expected rapid
growth; the Company's ability to attract support and motivate a rapidly growing
number of independent representatives; competition in the long distance tele-
communications and ancillary industries; the Company's ongoing relationship with
its long distance carriers and vendors; dependence upon key personnel;
subscriber attrition; the adoption of new, or changes in, accounting policies,
litigation, federal and state governmental regulation of the long distance
telecommunications and internet industries; the Company's ability to maintain,
operate and upgrade its information systems and network; the Company's success
in deploying it's Communication Engine network in internet telephony and the
Company's success in the offering of other enhanced service products.
19
Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements. The
Company's ability to consummate such transactions and achieve such results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance
of the Company's products and services, regulatory approvals and developments,
economic conditions, the impact of competition and pricing, results of the
Company's financing efforts and other factors affecting the Company's business
that are beyond the Company's control. The Company undertakes no obligation and
does not intend to update, revise or otherwise publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
future events or circumstances.
Results of Operation
Operating results for 1997, 1996 and 1995 are not comparable due to
changes in the operations of the Company. The operations of the Company in
1995 were related to diagnostic and clinical services to healthcare facilities
and sales of medical equipment through several subsidiaries of I-Link
Incorporated (formerly Medcross, Inc.). In February 1996 I-Link Incorporated
acquired I-Link Systems, Inc. (formerly I-Link Worldwide Inc). In January 1997
the Company acquired I-Link Communications (formerly Family Telecommunications,
Inc. and referred to herein as "ILC") and in August 1997 the Company acquired
MiBridge, Inc. In 1997, the Company launched operations of a network marketing
program through I-Link Worldwide, L.L.C., to market its products. In December
1997, the Company made the decision to dispose of the operations of the
subsidiaries of the Company operating in the healthcare industry in order to
concentrate on its telecommunications and technology sectors. Accordingly, the
healthcare operation during the three years ended December 31, 1997 has been
reported as discontinued operations. Therefore 1995 has no revenue or expense
from continuing operations, 1996 includes the operations of I-Link Systems and
1997 includes the operations of I-Link Communications Inc., I-Link Systems
Inc., I-Link Worldwide, L.L.C. and MiBridge Inc.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues
Net operating revenue of the Company in 1997 included three new sources of
revenue which were: (1) telecommunication service revenues of $11,081,007 which
is a result of the acquisition of ILC in January 1997; (2) marketing services of
$2,637,331 which began in June 1997 and includes revenues from the Network
Marketing channel, including revenues from independent representatives
for training, promotional and presentation materials; and (3) technology
licensing and development revenues of $346,875 which began in August 1997 upon
the acquisition of MiBridge, Inc. which develops and licenses communications
software that support multimedia communications over the public switched and
local area networks and the Internet. In 1996 the Company had other revenue of
$170,532 which was associated with internet service provider services the
Company did not offer in 1997.
Operating costs and expenses
Telecommunications network expenses increased $13,514,220 to $14,634,999
in 1997 as compared to $1,120,779 in 1996. The increase is related to the costs
of continuing development and deployment of the Company's communication network
and expenses related to the telecommunication service revenue that began in 1997
with the acquisition of ILC.
20
Marketing services costs were $4,294,014 in 1997 and $0 in 1996. These
costs directly relate to the Company's marketing services revenue that began
late in the second quarter of 1997 and include commissions and the costs of
providing training, promotional and presentation materials and ongoing
administrative support of the Network Marketing channel.
Selling, general and administrative expenses increased $9,044,840 to
$11,948,568 in 1997 as compared to $2,903,728 in 1996. The increase was
primarily due to increased administrative expense associated with the launch
of the Network Marketing channel and an increase in overhead and personnel
expenses associated with growing the Company's telecommunication and technology
licensing and development businesses.
Provision for doubtful accounts increased $1,369,004 to $1,385,000 in 1997
as compared to $15,996 in 1996. The increase is related directly to the growth
in telecommunication service revenues, and, specifically, one marketer of the
Company's services, which relationship will be terminated in the first half of
1998.
Depreciation and amortization increased $1,858,362 to $2,549,282 in 1997
as compared to $690,920 in 1996. The increase is primarily due to increased
amortization ($1,566,500) of intangible assets acquired in the acquisition of
ILC and MiBridge in 1997 and the issuance in 1997 of the final one million
shares of common stock associated with the acquisition of I-Link Worldwide
Inc. in 1996. Depreciation expense also increased due to the acquisition of
telecommunication equipment in late 1996 and throughout 1997.
Acquired in-process research and development decreased $10,342,112 to
$4,235,830 in 1997 as compared to $14,577,942 in 1996. The $4,235,830 in 1997
was related to the acquisition of MiBridge in 1997 whereas the $14,577,942 in
1996 was related to the acquisition of I-Link Worldwide Inc. in February 1996.
These amounts were expensed because technological feasibility of the in-process
technology had not yet been established and the technology was deemed to have no
alternative future use. These expenses related to specific acquisition of other
companies and as such are not of a recurring nature other than as may occur if
the Company were to acquire other similar entities in the future.
Research and development increased $531,078 to $878,582 in 1997 as compared
to $347,504 in 1996. The increase is primarily associated with the Company's
continuing telecommunication network research and development efforts.
Other income (expense)
Interest expense increased $1,010,277 to $3,022,619 in 1997 as compared
to $2,012,342 in 1996. The increase is primarily due to the expensing of
$2,371,575 in debt discounts (non-cash) related to certain warrants granted
in connection with $5,000,000 in loans to the Company during the year and
interest of $103,000 on those loans. These loans were echanged for equity
during the year and accordingly all of the debt discount was immediately
expensed. The increase is also due to $320,000 (non-cash) of interest expense
associated with the issuance of convertible notes issued at a discount in 1996.
Litigation settlement expense of $821,000 occurred in 1996 only and was
associated with the Company's settlement of the JW Charles litigation. The
expense (non-cash) was directly related to issuance of 175,000 warrants
(related to the settlement) to purchase common stock at an exercise price less
than fair market value of the common stock at the date of issuance.
21
Interest and other income increased $60,287 to $215,989 in 1997 as compared
to $155,702 in 1996. The increase was primarily due to an increase in the
average balance of cash on hand during 1997 as compared to 1996.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
The operations of the Company in 1995 were related to diagnostic and
clinical services to healthcare facilities and sales of medical equipment
through several subsidiaries of I-Link Incorporated (formerly Medcross, Inc.).
The Company decided to dispose of the operations of these subsidiaries and
accordingly, these operations in 1995 and 1996 are reported as discontinued
operations. Therefore 1995 has no revenue or expense from continuing operations
to compare to the continuing operations of 1996.
The results of continuing operations in 1996 reflect only the operations
of I-Link Worldwide Inc., which was acquired in February 1996 and thus had no
comparable results of operation in 1995.
Liquidity and Capital Resources
Cash and cash equivalents as of December 31,1997 were $1,643,805, short
term certificates of deposits were $1,628,500 and working capital deficit was
$2,955,180. Cash used by operating activities during 1997 was $12,008,526 as
compared to $4,840,285 in 1996 and cash provided by operating activities of
$319,362 in 1995. The increase in cash used by operating activities in 1997
and 1996 was primarily due to increased operating losses as the Company
continued to developed its infrastructure and product base.
Net cash used by investing activities in 1997 was $1,387,526 as compared
to $2,573,486 in 1996 and to net cash provided of $4,283 in 1995. The increase
in cash used by investing activities in 1997 was primarily attributable to the
purchase of property and equipment of $1,948,857 which was offset by cash
received in connection with the acquisitions of ILC and MiBridge of $514,886
and $53,500 from maturity of a certificate of deposit. In 1996 the increase
in cash used by investing activities was due primarily to purchases of property
and equipment of $669,970 and certificates of deposit-restricted of $1,962,601
which uses were offset by $60,000 from maturity of a certificate of deposit.
Financing activities provided net cash of $10,623,680 in 1997 and
$11,834,681 in 1996. Cash provided in 1997 included $5,000,000 in long-term
debt, which was subsequently exchanged for equity, $6,618,888 of net proceeds
from the sale of preferred stock and $137,933 from the exercise of warrants and
options. During 1997 the Company repaid $1,079,585 of long-term debt and
capital lease obligations. Cash provided in 1996 included $2,502,333 from long-
term debt and $12,290,000 net proceeds from the sale of preferred stock. During
1996 the Company repaid $2,990,385 of long-term debt and capital lease
obligations.
The Company incurred a net loss from continuing operations of $28,667,692
for the year ended December 31, 1997 and as of December 31, 1997 had an
accumulated deficit of $56,984,247. The Company anticipates that revenues
generated from its continuing operations will not be sufficient during 1998 to
fund the continued expansion of its private telecommunications network
facilities and anticipated growth in subscriber base. In order to meet its
working captial needs, the Company has entered into two financing arrangements
as described below.
Current Position/Future Requirements
During 1998, the Company plans to use available cash to fund the
development and marketing of I-Link products and services. During the fourth
quarter of 1997 revenues from continued operations increased 38% primarily due
to an increase of 46% in telecommunications services. The Company anticipates
that revenues from all sources of continuing operations will grow dramatically
in 1998 and will increasingly contribute to the cash requirements of the
Company. The Company released several new products in late 1997 and early 1998
such as V-Link and has deployed several of its Communication Engines all of
which should increase revenues and profit margins in the future. The Company
also believes that revenues and cash flow from MiBridge will increase
in 1998 due to maturation of its products and royalty and
licensing agreements.
22
However, the Company anticipates that cash requirements for operations and
the continued development and marketing of I-Link services will be at
increasingly higher levels than those experienced in 1997 in preparation for
continued market penetration and deployment of I-Link products. The Company
also expects that expenditures for research and development will increase
significantly in 1998 as it continues development of new technology. In March
1998, the Company committed approximately $2.2 million to development of a new
internal information system that will encompass primarily all computer systems.
In early 1998, the Company determined that it would refocus the resources of the
Company to concentrate on the Network Marketing channel of distributing its
products. Accordingly, the Company agreed to terminate the relationship with
its single largest marketing group. That group accounted for approximately 30%
of the Company's monthly revenues in January 1998. While revenues from this
marketing group will end in the second quarter of 1998, it is anticipated that
growth in the Network Marketing and other wholesale channels will exceed the
lost revenues such that total revenues will continue to grow. The Company is
involved in an arbitration proceeding which in the event of an unfavorable
outcome could have a material impact on the financial resources of the Company
(see "Legal Proceedings").
In order to provide for capital expenditure and working capital needs from
January through March 1998 the Company obtained a total of $5.768 million
in new interim debt financing from Winter Harbor, L.L.C. Pursuant to the terms
of the loan agreement with Winter Harbor, the loan (which bears interest at
prime plus one) is payable upon demand by Winter Harbor no earlier than May
15, 1998 and is collateralized by essentially all of the assets of the Company's
subsidiaries. As consideration for Winter Harbor's commitment to make the loan,
the Company agreed to issue 5,000,000 warrants to purchase common stock of the
Company at exercise prices ranging from $5.50 to $7.22 based upon 110% of the
closing price of the common stock on the day loan funds are advanced. The
warrants expire on October 15, 2005. The Company also agreed to extend the
exercise period on all warrants previously issued to Winter Harbor (10,800,000)
to seven and one-half years. After May 15, 1998, if the loan has not been repaid
by the Company, Winter Harbor may elect (a) to continue the loan on a demand
basis with interest accruing at prime plus four, or (b) to convert the unpaid
balance of the loan into additional shares of the Company's Series M Preferred
Stock, reduce the exercise price of the 5,000,000 Loan Warrants to $2.50 per
share and receive an additional 5,000,000 warrants to purchase common stock
of the Company at an exercise price of $2.50 per share. The Company intends
to repay the loan from the credit facility described in the following paragraph.
In 1998 the Company will recognize interest expense on this loan related to the
interest paid and (non-cash) interest associated with the new warrants issued
and the change of the exercise period on prior warrants issued.
On March 31, 1998 the Company entered into a credit facility of up to
$20 million with a private investor group. The credit facility provides for an
initial borrowing of $10 million collateralized by a pledge of 3,226,000 newly
issued restricted shares of the Company's common stock. Upon approval by the
Company's shareholders the Company and lender intend to increase the borrowing
an additional $10 million on similar terms collateralized by a pledge of
additional newly issued restricted shares of the Company's common stock. Beyond
the pledged shares, the loan is non-recourse to the Company. In the event of a
decrease in the market price of the Company's publicly traded shares, the
Company may be required to pledge additional common shares to maintain a loan-to
- -value ratio in the security of 2:1 based upon the 30 day moving average of the
lowest bid price of the Company's publicly traded shares. The term of the credit
facility is two years, with an option exercisable by the Company to extend for
an additional third year. The credit facility may not be repaid until after the
first year. The credit facility may be repaid in cash or common stock at the
option of the lender. If repaid in common stock, the number of shares to be
retained by the lender in satisfaction of the credit facility will be based upon
the then current market price of the Company's publicly traded shares, less a
discount of 30%. The credit facility bears interest quarterly at prime plus one
percent. Interest-only payments are to be made on the first day of each quarter,
beginning the first quarter following the funding. It is anticipated that
borrowing under the Winter Harbor interim financing will be repaid from this
credit facility.
While the Company believes that the aforementioned sources of funds will
be sufficient to fund operations into 1999, the Company anticipates that
additional funds may be necessary from public or private financing markets to
successfully integrate and finance the planned expansion of the business
communications services and to discharge the financial obligations of the
Company. The availability of such capital sources will depend on prevailing
market conditions, interest rates, and financial position and results of
operations of the Company. There can be no assurance that such financing will
be available, that the Company will receive any proceeds from the exercise of
outstanding options and warrants or that the Company will not be required to
arrange for additional debt, equity or other type of financing.
23
Other Items
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices in general.
However, the Company's revenues will continue to be affected by competitive
forces in the market place.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires the prominent display of comprehensive income and its
components. The Company is required to comply with SFAS No. 130 during the year
ended December 31, 1998. The Company is currently evaluating the effect, if
any, of SFAS No. 130 on its financial statement disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements.
The Company is required to comply with SFAS No. 131 during the year ended
December 31, 1998. The Company is currently evaluating the effect, if any, of
SFAS No. 131 on its financial statement disclosures.
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current financial condition or results of operations.
The Company's current accounting and operating systems are year 2000 compliant
and will require that the information systems to be developed will address year
2000 issues as part of that development. Therefore no significant incremental
costs are anticipated in order to be year 2000 compliant.
Item 8. Financial Statements.
See Consolidated Financial Statements beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Name Age Title
- ------------------------ --- --------------------------------
John W. Edwards. . . . . 43 Chairman of the Board, President
and Chief Executive Officer
Karl S. Ryser, Jr. . . . 42 Treasurer and Chief Financial
Officer
24
Name Age Title
- ------------------------ --- --------------------------------
David E. Hardy . . . . . 45 Secretary
Henry Y.L. Toh . . . . . 40 Director and Assistant Secretary
Clay Wilkes. . . . . . . 37 Director (1)
R. Huston Babcock, M.D.. 68 Director
Joseph A. Cohen. . . . . 50 Director
_________
(1) Mr. Wilkes resigned from the Board of Directors effective March 10, 1998.
The Company's Articles of Incorporation provide that the number of
directors of the Company shall not be less than five or more than nine.
Currently, the Board of Directors has four members. The Company's Articles of
Incorporation provide that the Board of Directors is divided into three classes
and that each director shall serve a term of three years. Mr. Clay Wilkes,
who served on the Board of Directors until his resignation effective March 10,
1998, was the only Class I Director. Henry Y.L. Toh, a Class II Director, stood
for re-election at the annual meeting of shareholders in 1995. The terms of
office of Mr. Toh and Joseph A. Cohen, who was appointed a Class II Director
in September 1996 as the designee of Commonwealth Associates, will expire at
the 1999 annual meeting of shareholders. Dr. R. Huston Babcock and John W.
Edwards, Class III Directors, were re-elected at the October 1997 annual
meeting of shareholders. Commonwealth Associates has the right to approve the
Company's selection of another outside director in accordance with the terms
of the Sales Agency Agreement between the Company and Commonwealth entered into
in July 1996 in connection with the Company's private placement of Class C
Preferred Stock. In connection with the Winter Harbor equity investment, Winter
Harbor has the right to designate two members of the Board of Directors, which
right has not yet been exercised.
Biographical information with respect to the present executive officers,
directors, and key employees of the Company are set forth below. There are no
family relationships between any present executive officers and directors except
that John W. Edwards and Robert W. Edwards, the Company's Vice President of
Network Operations, are brothers.
John W. Edwards, Chairman of the Board, President and Chief Executive Officer of
the Company. Mr. Edwards was selected to fill a vacancy on the Board of
Directors as a Class III director in June 1996. He was elected Chairman of the
Board in August 1997. Mr. Edwards serves as the Chief Executive Officer of
I-Link and, as of September 30, 1996, serves as the President and Chief
Executive Officer of the Company. Mr. Edwards served as Acting Chief Financial
Officer of the Company from September 1996 to January 1997. Mr. Edwards served
as President and a director of Coresoft, Inc., a software company developing
object-oriented computer solutions for small businesses from September 1995 to
April 1996. During the period August 1988 through July 1995, Mr. Edwards served
in a number of executive positions with Novell, Inc., a software company
providing networking software, including Executive Vice President of Strategic
Marketing, Executive Vice President of the Appware and Desktop Systems Groups
and Vice President of Marketing of the NetWare Systems Group. Mr. Edwards was
involved in the development of the NetWare 386 product line. Until May 1996, he
was a visiting faculty member at the Marriott School of Management at Brigham
Young University. Mr. Edwards received a B.S. degree in Computer Science from
Brigham Young University and has taken graduate courses in Computer Science at
Brigham Young University. Mr. Edwards was re-elected to the Board of Directors
as a Class III Director at the 1997 Annual Meeting.
25
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company
and of I-Link. Mr. Ryser was elected Treasurer of the Company and Treasurer
and Chief Financial Officer of I-Link in September 1996, and Chief Financial
Officer of the Company in January 1997. Mr. Ryser was self-employed as a
corporate financial consultant from May 1995 until September 1996, when he
joined I-Link as its Treasurer. From July 1993 through April 1995, Mr. Ryser
served as Vice President of Finance and Treasurer of Megahertz Corporation, a
publicly-held manufacturer of data communication products, in which position he
served until Megahertz was acquired by U.S. Robotics Corporation. After earning
his MBA, Mr. Ryser's work experience was concentrated in the investment banking
field, working first with the Capital Markets Division of First Security
Corporation and later with Dain Bosworth, Inc. Mr. Ryser holds a B.S. degree
in Finance from the University of Utah in 1979, and an MBA from the University
of San Diego in 1982.
David E. Hardy, Secretary of the Company. Mr. Hardy was appointed Secretary
of the Company in December 1996. He is a founding partner of the law firm of
Hardy & Allen, in Salt Lake City. From February 1993 to April 1995, Mr. Hardy
served as Senior Vice President and General Counsel of Megahertz Corporation, a
publicly-held manufacturer of data communication products. Prior to his
association with Megahertz Corporation, Mr. Hardy was a senior partner of the
law firm of Allen, Hardy, Rasmussen & Christensen which was founded in 1982.
Mr. Hardy holds a Bachelor of Arts degree from the University of Utah and a
Juris Doctor degree from the University of Utah School of Law.
Henry Y.L. Toh, Director of the Company. Mr. Toh was elected by the Board
of Directors as a Class II Director and as Vice Chairman of the Board of
Directors in March 1992. Mr. Toh was elected President of the Company in May
1993, Acting Chief Financial Officer in September 1995 and Chairman of the Board
in May 1996, and served as such through September 1996. He was appointed
Assistant
Secretary of the Company in May 1997. Mr. Toh is a Director of Four M. Mr. Toh
served as a senior tax manager in international taxation and mergers and
acquisitions with KPMG Peat Marwick from March 1980 to February 17, 1992. He is
a graduate of Rice University.
Clay Wilkes, Director of the Company (resigned effective March 10, 1998).
Mr. Wilkes served as Chairman of the Board of the Company from September 1996 to
August 1997. Mr. Wilkes was elected by the Board of Directors of the Company as
a Class I Director in April 1996. Mr. Wilkes served as President and Chief
Executive Officer of I-Link from inception to April 1996, Chief Technology
Officer of I-Link until January 1997 and was a director of I-Link. Mr. Wilkes
has served as President of GNet Enterprises, Inc., the general partner of
I-Link, Ltd., since its inception. From February 1993 through June 1994, Mr.
Wilkes has served as a consultant to IBM in Austin, Texas on the PowerPC
project. From August 1990 through September 1992, he was responsible for UNIX
product development at Novell, Inc. in Provo, Utah, where he managed the
networking server and client development groups. Mr. Wilkes has spent many
years in the management and development of computer communications software.
Mr. Wilkes attended the University of Oregon and Brigham Young University and
course work in Computer Science at Utah State University.
R. Huston Babcock, M.D., Neurosurgeon and Director of the Company since
April 1983. Dr. Babcock served as Chairman of the Board of Directors of the
Company from its inception in April 1983 until March 1992. He was President of
the Company from inception until November 1987. He was Medical Director of the
Company from November 1987 to February 1993. Dr. Babcock is a neurosurgeon and
has been engaged in the full-time private practice of medicine on the West Coast
of Florida since 1960. Dr. Babcock was re-elected to the Board of Directors as
a Class III Director at the 1997 Annual Meeting.
Joseph A. Cohen, President of an investment firm and Director of the
Company. Mr. Cohen was appointed a Class II Director of the Company in September
1996 as the designee of Commonwealth Associates. He has been the Chairman, Chief
Executive Officer and Director of New Frontier Entertainment, Inc. ("New
Frontier") since its formation in May 1995 and held the same positions since
January 1993
26
in New Frontier's predecessor company, The Frondelle Company, Inc. He is also
President of Leslie Group, Inc., a diversified company with holdings primarily
in the music, film, home video and other entertainment-oriented businesses. He
is also a Founder and President of Leslie/Linton Entertainment Inc., a merchant
banking company that provides investment funds and assists in raising capital
and debt for companies. Mr. Cohen also serves as President of Pickwick
Communications, Inc., an independent music publishing company. From 1977 to
1986, Mr. Cohen served as Executive Vice President of the National Association
of Recording Merchandisers, Inc. and Founder and Executive Vice President of
Video Software Dealers Association, Inc., trade associations representing all
segments of the recorded music and home video industries, respectively.
Each officer of the Company is chosen by the Board of Directors and holds
his or her office until his or her successor shall have been duly chosen and
qualified or until his or her death or until he or she shall resign or be
removed as provided by the Bylaws.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company or any of its subsidiaries.
Committees of the Board of Directors
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning the
selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Henry Y.L. Toh, chairman of the Audit Committee, Clay Wilkes and
Joseph A. Cohen were members of the Audit Committee. The Audit Committee held
four meetings during the last fiscal year. Subsequent to the fiscal year end,
the Audit Committee was reconstituted such that its membership currently is
comprised of Joseph A. Cohen (chairman) and Dr. Huston Babcock.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Dr. R. Huston Babcock, chairman of the Compensation Committee,
John W. Edwards, and Joseph A. Cohen are members of the Compensation Committee.
The Compensation Committee held two meetings during the last fiscal year.
Subsequent to the fiscal year end, the Compensation Committee was reconstituted
such that its membership currently is comprised of Henry Y.L. Toh (chairman),
Joseph A. Cohen and John W. Edwards.
Finance Committee. The Company's finance committee (the "Finance
Committee") is responsible for reviewing and evaluating financing, strategic
business development and acquisition opportunities. Joseph A. Cohen, chairman
of the Finance Committee, Clay Wilkes and John W. Edwards were members of the
Finance Committee. The Finance Committee held one meeting during the last fiscal
year. Subsequent to the fiscal year end Mr. Wilkes resigned from the Board of
Directors.
The Company has no nominating committee or any committee serving a similar
function.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the
27
Company's equity securities, to file reports of ownership and changes in
ownership of equity securities of the Company with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than ten percent
shareholders are required by the SEC regulation to furnish the Company with
copies of all Section 16(a) forms that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the Company
pursuant to Rule 16a-3 under the Exchange Act during its most recent fiscal year
and Forms 5 with respect to its most recent fiscal year, the Company believes
that all such forms required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed, as necessary, by the officers, directors, and
security holders required to file the same during the fiscal year ended
December 31, 1997, except that reports and transactions were filed late by the
following persons: Robert W. Edwards, 1 report; I-Link, Ltd., 3 reports, 3
transactions; Clay Wilkes, 3 reports, 6 transactions; Four M International,
Inc., 1 report, 15 transactions; Henry Y.L Toh, 1 report, 2 transactions; R.
Huston Babcock, 1 report, 16 transactions. In addition, the Company has
received no copies of Forms 3, 4, or 5 for the following persons who were or
became reporting persons during 1997: Winter Harbor, L.L.C., Commonwealth
Associates, and Benchmark Equity Group, Inc.
Item 11. Executive Compensation
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three years by each person
serving as the Company s Chief Executive Officer during the last year and the
Company's five most highly compensated executive officers serving as such at
the end of the year ended December 31, 1997, whose compensation was in excess
of $100,000.
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------- ----------------------- ----------
Securities
Other Annual Restricted Underlying All Other
Name and Compensa- Stock Options/ LTIP Compensa-
Principal Position Year Salary($) Bonus($) tion($) Awards($) SARs(#) Payouts($) tion($)
- ------------------ ------ --------- -------- ------------- ---------- ---------- ---------- ---------
John W. Edwards 1997 98,292 0 0 0 520,000 0 N/A
President and CEO 1996 101,663(1) 0 0 0 1,250,000(2) 0 N/A
1995 - - - - - - -
Karl S. Ryser, Jr. 1997 125,000 0 0 0 550,000 0 N/A
Treasurer and CFO 1996 41,665(3) 0 0 - 250,000 0 N/A
1995 - - - - - - -
_________________
(1) Mr. Edwards began his employment with I-Link in April 1996 and was
appointed President and CEO as of September 30, 1996; his annual salary
was $175,000 from April to August 21, 1996 and was voluntarily reduced
to $96,000 for the balance of 1996. Mr. Edwards' annual salary continued
at $96,000 in 1997 until August, when it was increased to an annual
salary of $150,000. In November 1997 Mr. Edwards again voluntarily
reduced his annual salary to $35,000, for the balance of 1997 and until
the Company's financial restraints are reduced. See "-- Employment
Agreements."
28
(2) Excludes warrants to purchase 25,000 shares of Common Stock at an exercise
price of $4.875 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
(3) Mr. Ryser began his employment with I-Link in September 1996; his annual
salary during the 1996 and 1997 fiscal years was $125,000. See
"-- Employment Agreements."
Option/SAR Grants in Last Fiscal Year (1997)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1997, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
Number of Securities Percent of Total Exercise
Underlying Options/SARs Granted To or Base
Name Options/SARs Granted (#) Employees in Fiscal Year Price ($/Sh) Expiration Date
- ---------------- ------------------------- ------------------------ ------------- ---------------
John W. Edwards(1) 10,000 * $4.875 1/2/2007
10,000 * 5.375 2/6/2007
500,000 16.5% 5.188 8/29/2007
1,000,000 23.1% 7.000 4/8/2006
250,000 5.8% 4.875 8/21/2006
Karl S. Ryser, Jr. 550,000 18.2% $5.188 8/29/2007
250,000 5.8% 4.410 10/15/2006
____________________
* Less than 1%.
(1) Does not include warrants to purchase 25,000 shares of Common Stock at
an exercise price of $4.875 issued in connection with a bridge loan.
See "Certain Relationships and Related Transactions."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to options
exercised during 1997 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of 1997.
Shares Number of Securities Value of Unexercised in
Acquired On Value Underlying Unexercised the Money Options/SARs at
Name Exercise(#) Realized($) Options/SARs at FY-End(#) FY-End ($)(1)
- ------------------ ----------- ----------- -------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
John W. Edwards 0 0 796,564 973,436 $ 765,292 $1,041,333
Karl S. Ryser, Jr. 0 0 528,788 271,212 $1,219,100 $ 575,000
29
_________________
(1) The calculations of the value of unexercised options are based on the
difference between the closing bid price on Nasdaq of the Common Stock
on December 31, 1997, and the exercise price of each option,
multiplied by the number of shares covered by the option.
Director Compensation
During 1997, Directors of the Company then serving received options to
purchase 10,000 shares of Common Stock on the first business day of January at
an exercise price equal to the fair market value of the Common Stock on the
date of grant. Effective February 6, 1997 and the first business day of January
of each year thereafter, each Director then serving will receive options, to
purchase 10,000 shares (20,000 shares effective January 1, 1998) of Common
Stock and, for each committee on which the Director serves, options to purchase
5,000 shares of Common Stock. The exercise price of such options shall be equal
to the fair market value of the Common Stock on the date of grant. The Directors
are also eligible to receive options under the Company's stock option plans at
the discretion of the Board of Directors. In addition to the above options,
Mr. Cohen received options to purchase 64,000 shares of Common Stock upon his
appointment to the Board. On August 29, 1997 Mr. Cohen was also granted 150,000
options to purchase Common Stock, 50,000 of such options vested upon closing of
the Winter Harbor equity investment in October 1997, 50,000 will vest when the
Company reaches the break even point, and the balance will vest at such time as
the Company has attained $50 million in annual sales. Mr. Cohen also has a
consulting agreement with the Company in the amount of $4,000 per month for a
36-month period commencing September 1996.
Employment Agreements
In February 1996, the Company entered into two-year employment agreements
with Henry Y.L. Toh, Dorothy Michon and Stephanie Giallourakis. The Employment
Agreements are each for an initial period ending on December 31, 1997 and are
automatically renewable for successive one-year periods unless written notice
to the contrary is given by the Company not less than 120 days prior to
expiration of the term. Pursuant to the terms of the employment agreements,
each such officer is required to devote such of his or her time to the business
and affairs of the Company as is required to fulfill the duties and
responsibilities of his or her office. Mr. Toh is entitled under his employment
agreement to receive compensation at the rate of $54,000 per year. Ms. Michon is
entitled to compensation at the rate of $63,000, and Ms. Giallourakis is
entitled to compensation at the rate of $53,000 per year. Each such officer is
entitled to an annual bonus at the discretion of the Board of Directors and may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. In the event of termination of his employment by the
Company other than for "cause" (as defined in the agreement) or by Mr. Toh upon
"good reason" (as defined in the agreement), the Company is required to pay Mr.
Toh, as liquidated damages or severance pay, monthly termination payments equal
to the base salary in effect for a period of six months after such termination
and, with respect to Ms. Michon and Ms. Giallourakis, each such officer is
entitled to monthly termination payments equal to the base salary for periods
of three months after any such termination. Each of the employment agreements
contains confidentiality and non-solicitation provisions.
I-Link entered into three-year employment agreements on February 21, 1996
with each of Clay Wilkes and Alex Radulovic, Senior Engineer of I-Link. Under
his employment agreement, Mr. Wilkes is employed at a salary of $95,000 per
annum, subject to adjustment upon satisfaction of performance criteria. Under
his employment agreement, Mr. Radulovic is employed at a salary of $90,000 per
annum, subject to adjustment upon satisfaction of performance criteria. In the
event of termination by the Company not involving just cause (as defined in the
agreement), or upon a material breach by the Company which is unremedied for 30
days after written notice, each of Mr. Wilkes and Mr. Radulovic is entitled to
receive, as liquidated damages or severance pay, an amount equal to the Monthly
Compensation (as defined in the agreement) for
30
the remaining term of the Agreement and, in addition, all options shall vest.
Each of the agreements contain non-competition and confidentiality provisions.
On July 1, 1996, the Company approved the grant of options to purchase 1,500,000
and 500,000 shares of Common Stock at $7.00 per share for five years, to Messrs.
Wilkes and Radulovic, respectively. To the extent vested, the options may be
exercised commencing June 30, 1997. The options vest on June 30, 2001; provided
however, that vesting will accelerate in 25% increments at such time as the
average closing bid price of a share of Common Stock equals or exceeds $10, $15,
$20 and $25, respectively.
On April 8, 1996, I-Link entered into a three-year employment agreement
with John W. Edwards, President, Chief Executive Officer and Director of the
Company. Pursuant to the terms of the employment agreement, Mr. Edwards is
employed as the Chief Executive Officer and a Director of I-Link, and is
required to devote substantially all of his working time to the business and
affairs of I-Link. Mr. Edwards is entitled under his employment agreement to
receive compensation at the rate of $175,000 per year and is entitled to a
profitability bonus in the discretion of the I-Link Board of Directors and to
participate in fringe benefits of the Company as are generally provided to
executive officers. In addition, Mr. Edwards is entitled to receive an option
to purchase one million shares of Common Stock of the Company at an exercise
price of $7.00 per share. Of such options, 83,333 vested immediately and 83,333
vest and become exercisable on the first calendar day of each quarter after
April 8, 1996. In the event of termination by I-Link or in the event of a
violation of a material provision of the agreement by I-Link which is unremedied
for thirty (30) days and after written notice or in the event of a "change in
control" (as defined in the agreement), Mr. Edwards is entitled to receive, as
liquidated damages or severance pay, an amount equal to the Monthly Compensation
(as defined in the agreement) for the remaining term of the agreement and all
options shall thereupon be fully vested and immediately exercisable. The
agreement contains non-competition and confidentiality provisions. Mr. Edwards
agreed to amend his contract, effective August 21, 1996, to reduce his annual
salary from $175,000 to $96,000; and in consideration of the salary reduction,
the Company has agreed to grant him options to purchase 250,000 shares of
Common Stock at an exercise price of $4.875 per share.
In October 1996, I-Link entered into three-year employment agreements
with Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company,
and with William H. Flury, I-Link's Vice President, Sales and Marketing.
Pursuant to the terms of the employment agreements, each such officer is
required to devote all of his time to the business and affairs of the Company
except for vacations, illness or incapacity. Mr. Ryser is entitled under his
employment agreement to receive compensation at the rate of $125,000 per year
and a bonus in the sole discretion of the Chief Executive Officer and Mr. Flury
is entitled to compensation at the rate of $137,500 per year and a bonus
commensurate with his performance and that of I-Link. Each such employee may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. In addition, each of Mr. Ryser and Mr. Flury is entitled
to options to purchase 250,000 shares of Common Stock exercisable at an exercise
price equal to the closing bid price on the date of the employment agreement.
Options issuable to Mr. Ryser to purchase 25,000 shares vested immediately and
the remaining options were to vest in quarterly increments of 20,455 commencing
January 1, 1997. Upon settlement of the JW Charles litigation, the Company
modified the original vesting schedule of the 250,000 options in the employment
agreement allowing for the immediate vesting of 100,000 of the non-vested
options and the balance of the non-vested to vest evenly over four quarters.
Options issuable to Mr. Flury to purchase 41,666 shares vest six months from
the date of the employment agreement and the remaining options will vest in
quarterly increments of 20,833. In the event of a change of control or upon
termination of the employment agreement by the Company without cause all options
shall thereupon be fully vested and immediately exercisable. In the event of
termination by the Company other than for "cause" (as defined in the agreement),
the Company is required to pay Mr. Ryser or Mr. Flury, as the case may be, a
lump sum severance payment equal to one year's then current salary. Each of
the employment agreements contains confidentiality and non-competition
provisions.
31
In August 1997 I-Link entered into a three-year employment contract with
Jon McKillip, Vice President of I-Link Worldwide L.L.C. Pursuant to the terms of
the employment contract, Mr. McKillip is required to devote all his time to the
business and affairs of the Company except vacations, illness or incapacity.
Mr. McKillip is entitled under his employment agreement to receive compensation
at the rate of $120,000 per year and a bonus commensurate with his performance
and that of I-Link. In addition, Mr. McKillip is entitled to options to
purchase 150,000 shares of Common Stock at an exercise price equal to the
closing bid price on the date of employment agreement and vesting over 12
quarters. Mr. McKillip may participate in fringe benefits, deferred
compensation, and stock benefits and option plans of the Company.
In September 1997, the Company entered into a two-year employment
agreement with Dror Nahumi as Vice President of Emerging Technologies of the
Company to manage the operations of MiBridge, Inc. Pursuant to the terms
of the employment agreement, Mr. Nahumi is required to devote all of his time
to the business and affairs of MiBridge, Inc. and is entitled to receive
compensation at the rate of $100,000 per year, and a bonus to the extent
bonuses are declared by the Company's Board of Directors. Mr. Nahumi may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. Mr. Nahumi's employment agreement contains non-competition
and confidentiality provisions, and provides for the assignment by Mr. Nahumi to
the Company of all of his rights, title, interest and intellectual property in
and to his employment inventions (as such terms are defined in the employment
agreement).
In February 1998, I-Link entered into a two year employment contract with
Rami Shmueli, General Manager of Vianet Technologies Ltd., an Israeli company
formed in 1998 and a subsidiary of I-Link. Pursuant to the terms of the
employment contract, he is required to devote all his time to the business and
affairs of the Company except vacations, illness or incapacity. Mr. Shmueli is
entitled under his employment agreement to receive compensation at the rate of
approximately $90,000 per year and a bonus commensurate with his performance and
that of I-Link. In addition, Mr. Shmueli is entitled to options to purchase
60,000 shares of Common Stock at an exercise price equal to the closing bid
price on the date of employment agreement and vesting over 12 quarters. Mr.
Shmueli may participate in fringe benefits, deferred compensation, stock
benefits and option plans of the Company. Mr. Shmueli is entitled to receive
customary benefits dictated by Israeli law.
Consulting Agreements
The Company entered into a Consulting Agreement with David E. Hardy
effective February 6, 1997 and for a term of 36 months thereafter. Pursuant to
the Agreement, Mr. Hardy shall provide legal services to the Company in
exchange for compensation at the rate of $10,417 per month for the term of the
Agreement. In addition, in the event the Company increases the salary of its
senior-level vice presidents, the consulting fee shall be equally increased and
in the event the Company shall pay any company performance-based bonuses to its
senior level vice presidents, the Company shall pay an equal amount to Mr.
Hardy. In addition, Mr. Hardy was granted options to purchase 250,000 shares of
the Company's Common Stock at an exercise price equal to the closing price of
the Company's publicly traded shares as of the effective date of the Agreement
($5.375 per share). The options vest as to 47,500 shares upon the execution of
the Agreement and options relating to 20,250 shares were to vest at the
commencement of each calendar quarter for ten quarters, with the first quarterly
vesting to occur on April 1, 1997 and the final quarterly vesting to occur July
1, 1999. Upon settlement of the JW Charles litigation, the Company modified the
original vesting schedule of the 250,000 options in the employment agreement
allowing for the immediate vesting of 100,000 of the non-vested options and the
balance of the non-vested to vest evenly over four quarters. In the event of the
termination of the Agreement prior to the expiration of the full term for any
reason other than as a result of a material, unremedied breach by Mr. Hardy
which remains uncured following 30 days written notice, Mr. Hardy is entitled
to a lump sum payment equal to the lesser of the monthly consulting fee payable
through the end of the term of the Agreement or the monthly consulting fee
payable over 12 months and all unvested options shall accelerate and immediately
become fully vested and exercisable.
32
Information relating to a consulting agreement between the Company and
Windy City, Inc. is incorporated herein by this reference to the Company's
Registration Statement on Form SB-2 (File No. 333-17861), as amended.
Director Stock Option Plan
The Company's Director Stock Option Plan (the "DSOP") authorizes the
grant of stock options to directors of the Company. Options granted under the
DSOP are non-qualified stock options exercisable at a price equal to the fair
market value per share of Common Stock on the date of any such grant. Options
granted under the DSOP are exercisable not less than six (6) months nor more
than ten (10) years after the date of grant.
As of December 31, 1997, options for the purchase of 8,169 shares of
Common Stock at prices ranging from $.875 to $3.875 per share were outstanding.
As of December 31, 1997, options to purchase 15,228 shares of Common Stock have
been exercised. In connection with adoption of the 1995 Director Plans (as
hereinafter defined) the Board of Directors authorized the termination of
future grants of options under the DSOP; however, outstanding options granted
under the DSOP will continue to be governed by the terms thereof until exercise
or expiration of such options.
Stock Purchase Plan
In accordance with the Employee Qualified Stock Purchase Plan (the
"Purchase Plan"), employees may contribute up to ten percent of their base
wages toward the purchase of Common Stock. The exercise price of options granted
under the Purchase Plan is the lesser of 85% of the market value on the first
business day of the payment period (September 1) or the last business day of
the payment period (August 31). As of December 31, 1997, the Company had 34,376
shares of Common Stock reserved for issuance on exercise of the purchase rights
granted under the Purchase Plan.
1995 Director Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Director Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary grants of
stock options which qualify as incentive stock options (the "Incentive Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as options which do not so qualify (the "Non-Qualified Options") to be
issued to directors. In addition, stock appreciation rights (the "SARs") may be
granted in conjunction with the grant of Incentive Options and Non-Qualified
Options. No SARs have been granted to date.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 250,000 shares of Common Stock
(subject to adjustment in the event of stock dividends, stock splits and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of Common Stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employees.
The shares of Common Stock subject to the 1995 Director Plan may be made
available from either authorized but unissued shares, treasury shares, or both.
33
The 1995 Director Plan also provides for the grant of Non-Qualified
Options on a non-discretionary basis pursuant to the following formula: each
member of the Board of Directors then serving shall receive a Non-Qualified
Option to purchase 10,000 shares of Common Stock at an exercise price equal to
the fair market value per share of the Common Stock on that date. Pursuant to
such formula, directors received options to purchase 10,000 shares of Common
Stock as of October 17, 1995, options to purchase 10,000 shares of Common Stock
on January 2, 1996, and will receive options to purchase 10,000 shares of Common
Stock on the first business day of each January. Each option is immediately
exercisable for a period of ten years from the date of grant. The Company has
190,000 shares of Common Stock reserved for issuance under the 1995 Director
Plan. As of December 31, 1997, options exercisable to purchase 170,000 shares
of Common Stock at prices ranging from $1.00 to $1.25 per share are outstanding
under the 1995 Director Plan. As of December 31, 1997, options to purchase
60,000 shares have been exercised under the 1995 Director Plan.
1995 Employee Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options,
Non-Qualified Options and SARs.
Directors of the Company are not eligible to participate in the 1995
Employee Plan. The 1995 Employee Plan provides for the grant of stock options
which qualify as Incentive Stock Options under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as Non-
Qualified Options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of Incentive
Options and Non-Qualified Options. No SARs have been granted to date.
The 1995 Employee Plan provides for the grant of Incentive Options, Non-
Qualified Options and SARs of up to 400,000 shares of Common Stock (subject to
adjustment in the event of stock dividends, stock splits and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of Common Stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company
has 400,000 shares of Common Stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1997, options to purchase 375,000 shares of Common
Stock with exercise prices of $1.125 to $6.75 per share have been granted under
the 1995 Employee Plan. As of December 31, 1997, 25,000 options have been
exercised under the 1995 Employee Plan.
1997 Recruitment Stock Option Plan
In October 1997, the stockholders of the Company approved adoption of the
Company's 1997 Recruitment Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1997 Plan").
The 1997 Plan provides for automatic and discretionary grants of stock
options which qualify as incentive stock options (the "Incentive Options")
under Section 422 of the Code, as well as options which do not so qualify (the
"Non-Qualified Options") to be issued to directors. In addition, stock
appreciation rights (the "SARs" ) may be granted in conjunction with the grant
of Incentive Options and Non-Qualified Options. No SARs have been granted to
date.
34
The 1997 Plan provides for the grant of Incentive Options, Non-Qualified
Options and SARs to purchase up to 4,400,000 shares of Common Stock (subject to
adjustment in the event of stock dividends, stock splits and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1997 Plan, the shares of Common Stock as to which such option or right was
not exercised will become available under the 1997 Plan for the grant of
additional options or rights to any eligible employees. The shares of Common
Stock subject to the 1997 Plan may be made available from either authorized but
unissued shares, treasury shares, or both. As of December 31, 1997, options to
purchase 950,500 shares of Common Stock, with exercise prices of $4.375 to
$8.625 per share have been granted under the 1997 Plan. As of December 31, 1997,
no options have been exercised under the 1997 Plan.
Compensation Committee Interlocks and Insider Participation
John Edwards is Chairman of the Board and an executive officer of the
Company. Huston Babcock and Joseph A. Cohen are non-employee directors of the
Company. See "Executive Compensation" generally, and "Executive Compensation
- Employment Agreements" and "Executive Compensation - Director Compensation"
as well as "Security Ownership of Certain Beneficial Owners and
Management."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Other than the Series M Preferred Stock issued on October 10, 1997, the
Common Stock constitutes the only voting securities of the Company. As of March
31, 1998, each share of Class C Preferred Stock is convertible, at the option of
the holder thereof, into 24 shares of Common Stock, each share of Class M
Preferred Stock is convertible, at the option of the holder thereof, into 1,000
shares of Common Stock, and each share of Class D Preferred Stock is
convertible, at the option of the holder thereof, into such number of shares of
Common Stock as shall equal 6,250 divided by the lower of $9.25 or the average
of the closing bid price of the Common Stock for the five trading days
immediately preceding the conversion date. The table below sets forth
information, to the best of the Company's knowledge, with respect to the total
number of shares of the Company's Common Stock, Class C Preferred Stock, Class
D
Preferred Stock or Class M Preferred Stock beneficially owned by each director,
the Named Executive Officers, each beneficial owner of more than five percent of
the Common Stock, and all directors and executive officers as a group, as of
March 31, 1998. On that date, there were 16,717,705 shares of the Company's
Common Stock issued and outstanding, no shares of the Company's 12% Preferred
Stock, Class A Preferred Stock or Class B Preferred Stock issued or outstanding,
94,429 shares of the Company's Class C Preferred Stock issued and outstanding,
567 shares of the Company's Class D Preferred Stock issued and outstanding, and
4,400 shares of the Company's Class M Preferred Stock issued and outstanding.
Number of Shares % of Outstanding
Name and Address Beneficially Shares of Common Stock
of Beneficial Owner (1) Title of Class Owned Beneficially Owned(2)
- ----------------------- -------------- ----------------- ----------------------
R. Huston Babcock, M.D. Common Stock 686,005(3) 4.1%
741 12th Street North
St. Petersburg, FL 33705
Joseph A. Cohen Common Stock 229,332(2) 1.4%
1370 Avenue of the Americas Class C Preferred 3,000
New York, NY 10019 Stock
John W. Edwards Common Stock 1,035,828(5) 5.8%
13751 S. Wadsworth Park Drive
Draper, UT 84020
35
Number of Shares % of Outstanding
Name and Address Beneficially Shares of Common Stock
of Beneficial Owners (1) Title of Class Owned Beneficially Owned(2)
- ------------------------ -------------- ----------------- ----------------------
David E. Hardy Common Stock 795,937(6) 4.5%
60 East South Temple
Salt Lake City, UT 84111
Karl S. Ryser, Jr. Common Stock 623,428(7) 3.6%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Henry Y.L. Toh Common Stock 184,333(8) 1.1%
3227 Bennet Street North
St. Petersburg, FL 33713
Commonwealth Associates Common Stock 973,544(9) 5.6%
733 Third Avenue, Suite 700
New York, NY 10017
Alex Radulovic Common Stock 859,824(10) 5.1%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Clay Wilkes Common Stock 2,425,600(11) 14.2%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Winter Harbor, L.L.C. Common Stock 20,200,000(12) 54.7%
c/o First Media, L.P. Serier M 4,400
11400 Skipwith Lane Preferred Stock
Potomac, MD 20854
All Executive Officers and Common Stock 3,554,863(13) 18.1%
Directors as a Group Class C Preferred 3,000
(6 Persons) Stock
________________
(1) Unless noted, all of such shares of Common Stock are owned of record
by each person or entity named as beneficial owner and such person or
entity has sole voting and dispositive power with respect to the
shares of Common Stock owned by each of them.
(2) As to each person or entity named as beneficial owners, such person
or entity's percentage of ownership is determined by assuming that
any options or convertible securities held by such person or entity
which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted, as the case may be.
(3) Includes 14,333 shares of Common Stock issuable pursuant to options.
36
(4) Includes 157,332 shares of Common Stock issuable pursuant to options
and 72,000 shares of Common Stock issuable to the Leslie Group, Inc.
upon conversion of 3,000 shares of Class C Preferred Stock held of
record by Leslie Group, Inc., of which Mr. Cohen is President.
(5) Represents 666,664 shares of Common Stock subject to the vested
portion of Mr. Edwards option to purchase 1,000,000 shares of Common
Stock and 369,164 shares of Common Stock subject to warrants and
other options. See Executive Compensation--Employment Agreements and
Certain Relationships and Related Transactions.
(6) Includes 791,937 shares of Common Stock issuable pursuant to options
and warrants.
(7) Represents shares of Common Stock issuable pursuant to options and
warrants.
(8) Represents shares of Common Stock issuable pursuant to options. Mr.
Toh, one of two directors of Four M International, Ltd., has
disclaimed beneficial ownership of 200,480 shares of Common Stock
owned by Four M International, Ltd.
(9) Includes 750,000 shares of Common Stock subject to warrants. Does
not include shares of Common Stock which may be held by
Commonwealth from time to time in its trading account in connection
with ordinary market-making activities.
(10) Includes 125,000 shares of Common Stock which represents the
exercisable portion of an option to purchase 500,000 shares of Common
Stock.
(11) Includes 284,854 shares of Common Stock issued to I-Link, Ltd. in
connection with the acquisition of that entity by the Company. GNet
Enterprises, Inc. ("GNet") is the General Partner of I-Link, Ltd.
and Mr. Wilkes is the sole shareholder of GNet. Mr. Wilkes may be
deemed to indirectly beneficially own the 284,854 shares of Common
Stock owned by I-Link, Ltd. Also includes 10,832 shares of Common
Stock issuable upon exercise of options, and 375,000 shares of
Common Stock which represents the exercisable portion of an option
to purchase 1,500,000 shares of Common Stock.
(12) Includes 4,400,000 shares of Common Stock issuable upon conversion of
Series M Preferred Stock and 10,800,000 shares of Common Stock
issuable upon exercise of warrants. For the purposes hereof, the
Company relied upon information set forth in a Schedule 13D filed
with the SEC by the named shareholder; in addition, the Company
includes herein 5,000,000 warrants to purchase Common Stock which the
Company has agreed to issue but has not yet issued to the named
shareholder.
(13) Represents 675,672 shares of Common Stock issued, 2,807,191 shares
of Common Stock which may be obtained pursuant to options and
warrants exercisable within 60 days of the date hereof and 72,000
shares of Common Stock into which 3,000 shares of Class C Preferred
Stock are convertible.
Item 13. Certain Relationships and Related Transactions.
During the first quarter of fiscal year 1995, the Company received
advances totaling $218,000 from Mortgage Network International ("MNI"). Henry
Y.L. Toh, a Director of the Company, has management control over MNI. Such
advances were previously payable upon demand. Subsequent to the extension of
such advances, the Board of Directors approved delivery of a promissory note
representing the aggregate amount of such advances, which promissory note
matured by its terms on October 1, 1995 and bears interest at one percent over
the prime rate of interest established by Southwest Bank of Texas, N.A.
Subsequently, the Company and MNI modified the note such that: (i) interest
thereon is payable monthly at the rate of 10.5%; and (ii) the remaining
principal amount of $218,000 (including a principal payment previously due on
December 31, 1996) with interest thereon at the rate of 10.5% will be paid in
21 equal monthly payments of approximately $4,600.
Information relating to a claim brought against the Company by JW Charles
Financial Services, Inc. ("JW Charles") is incorporated herein by this reference
to the Company's Registration Statement on Form SB-2 (File No. 333-17861), as
amended. Such claim was subsequently settled.
The Company's management has been informed that Winter Harbor holds an
ownership interest in the consulting company which is developing the Company's
new internal information system. The Company's referral to the consulting firm
did not come through Winter Harbor, and Winter Harbor played no part in the
negotiation of such consulting arrangement.
See Item 11 hereof for descriptions of the terms of employment and
consulting agreements between the Company or I-Link and certain officers,
directors and other related parties.
37
Transactions With Winter Harbor, L.L.C.; Series M Preferred Stock
On June 5, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with Winter Harbor, L.L.C. ("Winter
Harbor") pursuant to which Winter Harbor agreed to loan to the Company the
principal sum of $2,000,000 (the "Loan") for capital expenditures and working
capital purposes. As further consideration for Winter Harbor's commitment to
make the Loan, the Company granted to Winter Harbor a warrant ("Loan Warrant")
to purchase up to 500,000 shares of Common Stock at a purchase price of $4.97
per share, subject to adjustment, pursuant to the terms of a Warrant Agreement
between the parties. The Loan Warrant expires on March 11, 2002, and contains
demand and piggyback registration rights and customary anti-dilution terms. The
maturity date of the Note is October 15, 1998; however, the Loan Agreement
anticipates an equity investment in the Company by Winter Harbor (the
"Investment"). Upon closing of the Investment, all principal and accrued
interest then due under the Note may, at the option of Winter Harbor, be
credited toward payment of Winter Harbor's purchase price for the Investment
and the Note shall be cancelled. The loan from Winter Harbor has an interest
rate of prime plus 2%. In addition to the stated interest rate, the Company
will recognize the debt discount attributable to the warrants as interest
expense over the life of the loan (maturity date is October 15, 1998). The
Company expended significant time and effort pursuing various financing
alternatives and determined that the Winter Harbor proposal was the best
alternative available to the Company.
In August 1997, the Company and Winter Harbor amended their agreement to
provide that the Company would be allowed to borrow up to an additional
$3,000,000 (thus revising the maximum amount of the Loan to $5,000,000). The
Company initially borrowed $2,000,000 and issued to Winter Harbor warrants to
purchase 500,000 shares of Common Stock. On August 18, 1997, the Company
borrowed an additional $3,000,000 pursuant to such arrangement, bringing the
total principal amount due under the Note to $5,000,000, and issued an
additional 300,000 warrants to Winter Harbor in connection therewith.
Winter Harbor is owned by First Media, L.P., a private media and
communications company which is a private investment principally of Richard E.
Marriott and his family. The Company's general counsel, David E. Hardy, is a
brother of Ralph W. Hardy, Jr. who is general counsel and a minority equity
holder in Winter Harbor. David E. Hardy has no ownership or association with
Winter Harbor. As a result of this relationship, as well as personal
relationships of David E. Hardy with the principals of Winter Harbor,
discussions were initiated which led to Winter Harbor's investment in the
Company.
The Company and Winter Harbor executed a Sales Purchase Agreement, dated
as of September 30, 1997, and closed on October 10, 1997, pursuant to which
Winter Harbor invested $12,100,000 in a new series of the Company's convertible
preferred stock (the "Series M Preferred Stock"). Winter Harbor purchased
approximately 2,545 shares of Series M Preferred Stock (convertible into
2,545,000 shares of Common Stock) for an aggregate cash consideration of
approximately $7,000,000 (equivalent to $2.75 per share of Common Stock).
The agreement with Winter Harbor provided for purchase of approximately 1,855
additional shares of Series M Preferred Stock (convertible into 1,855,000 shares
of Common Stock). Such additional shares of Series M Preferred Stock were paid
for by exchanging the $5,000,000 outstanding principal balance plus
approximately $100,000 accrued interest due under the Note. As additional
consideration for its equity financing commitments, Winter Harbor was issued
additional warrants by the Company to acquire (a) 2,500,000 shares of Common
Stock at an exercise price of $2.75 per share (the "Series A Warrants"),
(b) 2,500,000 shares of Common Stock at an exercise price of $4.00 per share
(the "Series B Warrants") and (c) 5,000,000 shares of Common Stock at an
exercise price of $4.69 per share (the "Series C Warrants"). The respective
exercise prices for the Series A Warrants, the Series B Warrants and the Series
C Warrants (collectively, the "Investment Warrants"), shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment
38
Warrants (i) have demand registration rights and anti-dilution rights and (ii)
contain cashless exercise provisions.
The Series M Preferred Stock is entitled to receive cumulative dividends
in the amount of 10% per annum before any other class of preferred or common
stock receives any dividends. Thereafter, the Series M Preferred Stock will
participate with the Common Stock in the issuance of any dividends on a per
share basis. Moreover, the Series M Preferred Stock will have the right to veto
the payment of dividends on any other class of stock, except for cumulative
dividends which accrue pursuant to the terms of the Class C Preferred Stock
outstanding prior to the Winter Harbor investment. The Series M Preferred Stock
shall be convertible at any time prior to the fifth anniversary of its issuance,
at the sole option of Winter Harbor, into shares of Common Stock on a one
thousand-for-one basis; provided, however, that the Series M Preferred Stock
shall be automatically converted to Common Stock on the fifth anniversary of
its issuance at no cost to Winter Harbor. The conversion price shall be, in the
case of discretionary conversion, $2.75 per share of Common Stock, or, in the
case of automatic conversion, the lesser of $2.75 per share or 50% of the
average closing bid price of the Common Stock for the ten trading days
immediately preceding the fifth anniversary of issuance. The basis for
discretionary conversion, or the conversion price for automatic conversion,
shall be adjusted upon the occurrence of certain events, including without
limitation, issuance of stock dividends, recapitalization of the Company, or the
issuance of stock by the Company at less than the fair market value thereof.
Upon completion of the Winter Harbor Investment, the Company included in
its earnings per share calculation a (non-cash) preferred stock dividend in the
fourth quarter of 1997 in the amount of $88,553,450. This amount was calculated
as the difference between the exercise or conversion price per common share per
the agreement as compared to the market price of the Common Stock on the date of
the closing, plus the value of the warrants issuable in connection with the
Investment.
In the first quarter of 1998, Winter Harbor made an additional loan to
the Company in an aggregate of $5,768,000 for capital expenditures and working
capital purposes. This loan is payable no earlier than May 15, 1998. As
consideration for Winter Harbor's commitment to make the loan, the Company
issued to Winter Harbor warrants to purchase 5,000,000 Common shares, at
exercise prices ranging from $5.50 to $7.22 based upon 110% of the closing price
of the Company's publicly traded shares on the day incremental loan funds were
advanced. The warrants expire on October 15, 2005. The Company also agreed to
extend the exercise period on all 10,800,000 warrants previously issued to
Winter Harbor from five years to seven and one-half years. See "Management's
Discussiona and Analysis of Financial Condition and Results of Operations -
Current Position/Future Repayments."
MiBridge Acquisition; Series D Preferred Stock
On August 12, 1997 the Company entered into an agreement with MiBridge,
Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the principal
shareholder of MiBridge, pursuant to which the Company acquired all of the
issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
owner of patent-pending audio-conferencing technology and is a leader in
creating speech-encoding and compression algorithms designed to produce superior
audio quality and lower delay over low-band networks. The Company will pay the
stockholders of MiBridge (the "MiBridge Stockholders") consideration consisting
of (i) an aggregate $2,000,000 in cash, payable in quarterly installments over
two years, and (ii) an aggregate 1,000 shares of a series of the Company's
convertible preferred stock (the "Series D Preferred Stock"). The 1,000 shares
of Series D Preferred Stock are convertible at the option of the MiBridge
Stockholders, at any time during the nine months following the closing of the
MiBridge Acquisition, into such number of shares of Common Stock as shall equal
the sum of $6,250,000 divided by $9.25 (the "Series D Conversion Price"), which
price was the closing bid price of the Company's Common Stock on June 5, 1997
(the date that the first letter agreement relating to the transaction was
executed). As of December 31, 1997, the balance payable in cash to MiBridge
39
stockholders was $1,500,000 and there remained 537 shares of Series D Preferred
Stock outstanding. On the nine-month anniversary of the closing of the MiBridge
Acquisition, any unconverted Series D Preferred Stock shall automatically
convert to Common Stock. In either case, the Series D Preferred Stock shall be
converted at the lower of the Series D Conversion Price or the average closing
bid price for the five trading days immediately preceding the date the Company
receives notice of conversion or the automatic conversion date, as the case may
be.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following financial statements and those financial statement
schedules required by Item 8 hereof are filed as part of this report:
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets for the years ended December
31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statment Schedules:
Schedules are omitted because of the absence of conditions
under which they required or because the required
information is presented in the Financial Statements or
Notes thereto.
(b) Reports on Form 8-K.
On October 8, 1997 the Company filed a Current Report on Form
8-K, dated September 30, 1997, relating to the Company's
transactions with Winter Harbor, L.L.C.
40
(c) The following exhibits are filed as part of this Registration
Statement:
Number Title of Exhibit
- ------ ----------------
2.1(5) Joint Venture Interest Purchase Agreement, effective October 1, 1994
between Medcross, Inc. and Urology Ultrasound, Inc.
2.2(7) Stock Purchase Agreement, dated February 13, 1996, by and among
Medcross, Inc, I-Link, Ltd., and GNet Enterprises, Inc.
2.3(11) Share Exchange Agreement for the Acquisition of Family
Telecommunications Incorporated by Medcross, Inc., effective as of
January 1, 1997.
3.1(10) Composite copy of the Amended and Restated Articles of Incorporation
of the Company, as amended through the date hereof.
3.2(3) Bylaws of the Company, as amended.
3.3(8) Articles of Incorporation of I-Link Worldwide Inc.
3.4(8) Bylaws of I-Link Worldwide Inc.
3.5(12) Articles of Incorporation of Family Telecommunications Incorporated
and Articles of Amendment to the Articles of Incorporation.
3.6(12) Bylaws of Family Telecommunications Incorporated.
4.1(1) Specimen Common Stock Certificate.
4.2(6) Common Stock Purchase Option to Purchase Common Shares of Medcross,
Inc., issued to Jason H. Pollak, dated October 18, 1995.
4.3(8) Common Stock Purchase Option to Purchase Common Shares of Medcross,
Inc., issued to Scott Cook, dated October 18, 1995.
4.4(12) Placement Agent's Common Stock Warrant Agreement and Certificate.
4.5(12) Consultant s Common Stock Warrant Agreement and Certificate.
4.6(13) Option to purchase 7,500 shares of Class B Convertible Preferred
Stock of Medcross, Inc., granted by R. Huston Babcock to Benchmark
Equity Group, Inc., dated February 14, 1996.
4.7(13) Option to purchase 160,000 shares of Class A Convertible Preferred
Stock of Medcross, Inc., granted by Four M International, Ltd. to
Commonwealth Associates, dated February 21, 1996.
4.8(17) Form of Hardy Group Warrant to purchase 175,000 shares of Common
Stock.
4.9(16) Securities Purchase Agreement by and between the Company and
Winter Harbor, L.L.C., dated as of September 30, 1997.
4.10(16) Form of Registration Rights Agreement by and between the Company
and Winter Harbor, L.L.C., which constitutes Exhibit C to the
Purchase Agreement.
4.11(16) Form of Shareholders Agreement by and among the Company and Winter
Harbor, L.L.C. and certain holders of the Company's securities,
which constitutes Exhibit D to the Purchase Agreement.
4.12(16) Form of Warrant Agreement by and between Medcross, Inc. and Winter
Harbor, L.L.C., which constitutes Exhibit F to the Purchase
Agreement.
4.13(14) Warrant Agreement dated as of June 6, 1997, by and between the
Company and Winter Harbor, L.L.C.; and related Warrant Certificate.
10.1(4) * Director Stock Option Plan.
10.2(2) * Executive Stock Option Plan.
10.3(8) * Employment Agreement, dated February 4, 1996, between Medcross, Inc.
and Henry Y.L. Toh.
10.4(8) * Employment Agreement, dated January 1, 1996, between Medcross, Inc.
and Dorothy L. Michon.
10.5(8) * Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Clay Wilkes.
10.6(8) * Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Alex Radulovic.
41
10.7(8) * Employment Agreement, dated January 1, 1996, between Medcross, Inc.
and Stephanie E. Giallourakis.
10.8(8) * 1995 Director Stock Option and Appreciation Rights Plan.
10.9(8) * 1995 Employee Stock Option and Appreciation Rights Plan.
10.10(8)* Employment Agreement, dated April 8, 1996, between I-Link Worldwide
Inc. and John W. Edwards.
10.11(9) Consulting Agreement, effective January 1, 1996, by and between
Windy City, Inc. and the Company.
10.12(10) Agreement for Terminal Facility Collocation Space, dated June 21,
1996, by and between I-Link Worldwide Inc. and MFS Telecom, Inc.
10.13(12) Consulting Agreement dated August 21, 1996 between the Company and
Commonwealth Associates.
10.14(12) Sales Agency Agreement dated July 1, 1996 between the Company and
Commonwealth Associates and Amendment No. 1 thereto.
10.15(12) Commercial Lease dated May 21, 1996 between I-Link Worldwide Inc.
and Draper Land Partnership II and First Amendment dated July 22,
1996.
10.16(17) Commercial Lease dated September 11, 1996 between I-Link Worldwide
Inc. and Draper Land Partnership II.
10.17(17)* Employment Agreement dated October 15, 1996, between I-Link
Worldwide Inc. and Karl S. Ryser, Jr.
10.18(12) Term Lease Master Agreement dated May 19, 1996 by and between IBM
Credit Corporation and I-Link Worldwide Inc.
10.19(12)* 1997 Recruitment Stock Option Plan.
10.20(12) Lease Agreement dated July 1, 1996 between Broadway Associates and
FTI Communications.
10.21(12) Lease Between Phoenix City Square Partnership and Robert W. Edwards
and Denise A. Edwards dated March 18, 1996.
10.22(12) Carrier Agreement between MCI Telecommunications Corporation and FTI,
Inc. dated August 26, 1996.
10.23(12) Strategic Member Reseller Agreement between I-Link Worldwide Inc.
and WealthNet Incorporated dated January 31, 1997.
10.24(12) Settlement Agreement between WealthNet Incorporated and Family
Telecommunications Incorporated dated January 29, 1997.
10.25(17)* Employment Agreement, dated as of September 2, 1997, between
Medcross, Inc. and Dror Nahumi.
10.26(17) Plan and Agreement of Merger of MiBridge, Inc. with and into I-Link
Mergerco, Inc., a wholly-owned subsidiary of Medcross, Inc., dated
as of August 12, 1997, by and among Medcross, Inc., I-Link Mergerco,
Inc., MiBridge, Inc. and the stockholders of MiBridge, Inc.
10.27 *# Employment Agreement dated August 29, 1997, between I-Link Worldwide,
L.L.C. and Jon McKillip.
21(15) Subsidiaries of the registrant.
27.1 # Financial Data Schedule.
________________________
(1) Incorporated by reference to the Company's Registration Statement on
Form S-18 file number 33-27978-A.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990, file number 0-17973.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, file number 0-17973.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, file number 0-17973.
42
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994, file number 0-17973.
(6) Incorporated by reference to the Company's Registration Statement filed
on Form S-8, file number 333-01525.
(7) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 23, 1995, file number 0-17973.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, file number 0-17973.
(9) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 23, 1996, file number 0-17973.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996, file number 0-17973.
(11) Incorporated by reference to the Company's Current Report on Form 8-K,
dated January 13, 1997, file number 0-17973.
(12) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, file number 0-17973.
(13) Incorporated by reference to the Company's Registration Statement on Form
SB-2, file number 333-17861.
(14) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 5, 1997, file number 0-17973.
(15) Incorporated by reference to the Company's Pre-Effective Amendment No. 1
to Registration Statement on Form SB-2, file number 333-17861.
(16) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 30, 1997, file number 0-17973.
(17) Incorporated by reference to the Company's Pre-Effective Amendment No. 3
to Registration Statement on Form SB-2, file number 333-17861.
* Indicates a management contract or compensatory plan or arrangement
required to be filed.
# Filed herewith.
43
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Title of Document Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
I-Link Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of I-Link
Incorporated and Subsidiaries ("the Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of I-Link
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Salt Lake City, Utah
April 9, 1998
F-1
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
ASSETS 1997 1996
-------------- --------------
Current assets:
Cash and cash equivalents $ 1,643,805 $ 4,407,465
Accounts receivable, less allowance for doubtful accounts of
$1,385,000 and $0 as of December 31, 1997 and 1996, respectively 3,233,207 7,812
Certificates of deposit - restricted 1,628,500 208,500
Other current assets 321,488 11,411
---------- ----------
Total current assets 6,827,000 4,635,188
---------- ----------
Furniture, fixtures and equipment, net 3,551,917 1,575,769
Other assets:
Intangible assets, net 12,314,080 7,320
Certificates of deposit - restricted 259,000 1,761,312
Other assets 705,502 216,884
Net assets of discontinued operations 595,377 1,668,223
---------- ----------
Total assets $ 24,252,876 $ 9,864,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,833,452 $ 1,086,103
Accrued liabilities 2,770,997 1,339,224
Current portion of long-term debt 2,008,416 717,000
Current portion of obligations under capital leases 169,315 187,047
---------- ----------
Total current liabilities 9,782,180 3,329,374
Long-term debt 1,854,341 -
Obligations under capital leases 67,159 236,705
---------- ----------
Total liabilities 11,703,680 3,566,079
---------- ----------
Commitments and contingencies (notes 8, 11 and 15)
Stockholders' equity:
Preferred stock, $10 par value, authorized 10,000,000 shares,
issued and outstanding 119,926 and 247,500 at December 31, 1997 and
1996, respectively, liquidation preference of $23,903,456 at
December 31, 1997 1,199,260 2,475,000
Common stock, $.007 par value, authorized 75,000,000 shares,
issued and outstanding 16,036,085 and 10,607,597 at December 31, 1997
and 1996, respectively 112,251 74,253
Additional paid-in capital 70,511,697 30,874,910
Deferred compensation ( 2,289,765) -
Accumulated deficit (56,984,247) (27,125,546)
---------- ----------
Total stockholders' equity 12,549,196 6,298,617
---------- ----------
Total liabilities and stockholders' equity $ 24,252,876 $ 9,864,696
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Revenues:
Telecommunication services $ 11,081,007 $ - $ -
Marketing services, net 2,637,331 - -
Technology licensing and development 346,875 - -
Other - 170,532 -
---------- ---------- ----------
Total revenues 14,065,213 170,532 -
---------- ---------- ----------
Operating costs and expenses:
Telecommunication network expenses 14,634,999 1,120,779 -
Marketing services costs 4,294,014 - -
Selling, general and administrative 11,948,568 2,903,728 -
Provision for doubtful accounts 1,385,000 15,996 -
Depreciation and amortization 2,549,282 690,920 -
Acquired in-process research and development 4,235,830 14,577,942 -
Research and development 878,582 347,504 -
---------- ---------- ----------
Total operating costs and expenses 39,926,275 19,656,869 -
---------- ---------- ----------
Operating loss (25,861,062) (19,486,337) -
---------- ---------- ----------
Other income (expense):
Interest expense ( 3,022,619) ( 2,012,342) -
Interest and other income 215,989 155,702 -
Accrued litigation settlement - ( 821,000) -
---------- ---------- ----------
Total other expense ( 2,806,630) ( 2,677,640) -
---------- ---------- ----------
Loss from continuing operations (28,667,692) (22,163,977) -
---------- ---------- ----------
Discontinued operations:
Loss from discontinued operations (less
applicable income tax provision of $0 in
1997, 1996 and 1995) ( 183,556) ( 900,263) ( 551,909)
Loss on disposal of discontinued operations,
including provision of $222,000 for operating
losses during phase-out period (less applicable
income tax provision of $0 in 1997) ( 1,007,453) - -
---------- ---------- ----------
Loss from discontinued operations ( 1,191,009) ( 900,263) ( 551,909)
---------- ---------- ----------
Net loss $(29,858,701) $(23,064,240) $( 551,909)
========== ========== ==========
Net loss per common share - basic and diluted:
Loss from continuing operations $( 10.07) $( 6.40) $( 0.07)
Loss from discontinued operations ( 0.10) ( 0.13) ( 0.32)
---------- ---------- ----------
Net loss per common share $( 10.17) $( 6.53) $( 0.39)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
Preferred Stock Common Stock
--------------------- ------------------ Additional
Deferred Paid-in Accumulated
Shares Amount Shares Amount Compensation Capital Deficit
--------- ----------- ---------- ------- ------------- ---------- -----------
Balance at December 31, 1994 216,805 $ 2,168,050 1,525,378 $10,665 $ - $3,270,047 $(3,509,401)
Conversion of preferred stock
into common stock ( 9,305) ( 93,050) 227,714 1,594 - 91,456 -
Common stock issued for
services - - 50,000 350 - 62,150 -
Conversion of convertible
promissory notes into common
stock - - - 13 - 5,201 -
Net loss - - - - - - ( 551,909)
------- --------- --------- ------ ------------ ---------- ----------
Balance at December 31, 1995 207,500 2,075,000 1,803,092 12,622 - 3,428,854 (4,061,310)
Conversion of preferred stock
into common stock (200,000) (2,000,000) 4,894,461 34,261 - 1,965,739 -
Exercise of stock options - - 189,637 1,327 - 354,686 -
Common stock issued for the
acquisition of I-Link
Worldwide, Inc. - - 3,000,000 21,000 - 12,579,000 -
Sale of Class C preferred stock
for cash, net of offering costs
of $2,110,000 240,000 2,400,000 - - - 9,890,000 -
Common stock issued for
cancellation of notes payable - - 720,407 5,043 - 699,756 -
Issuance of stock warrants below
market value of common stock - - - - - 11,875 -
Interest expense associated with
issuance of convertible notes - - - - - 1,945,000 -
Foreign currency translation
adjustment - - - - - - 4
Net loss - - - - - - (23,064,240)
------- --------- --------- ------ ------------ ---------- ----------
Balance at December 31, 1996 247,500 2,475,000 10,607,597 74,253 - 30,874,910 (27,125,546)
Continued
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
for the years ended December 31, 1997, 1996 and 1995
Preferred Stock Common Stock
--------------------- ------------------ Additional
Deferred Paid-in Accumulated
Shares Amount Shares Amount Compensation Capital Deficit
--------- ----------- ---------- ------- ------------- ---------- -----------
Balance at December 31,
1996 247,500 2,475,000 10,607,597 74,253 - 30,874,910 (27,125,546)
Conversion of preferred stock
into common stock (144,924) (1,449,240) 3,948,565 27,639 - 1,421,601 -
Conversion of convertible
promissory notes into Class C
preferred stock 11,950 119,500 - - - 597,500 -
Interest expense associated with
issuance of convertible notes - - - - - 320,000 -
Stock options issued for services - - - - (4,757,134) 4,757,134 -
Amortization of deferred compen-
sation on stock options issued
for services - - - - 2,467,369 - -
Exercise of stock options - - 79,923 559 - 137,374 -
Common stock issued for the
acquisition of Family
Telecommunications, Inc. - - 400,000 2,800 - 2,411,783 -
Class D preferred stock issued for
the acquisition of MiBridge, Inc. 1,000 10,000 - - - 6,240,000 -
Common stock issued for the
acquisition of I-Link Worldwide,
Inc. - - 1,000,000 7,000 - 8,868,000 -
Stock warrants issued to payoff
accrued litigation settlement - - - - - 821,000 -
Warrants issued in
connection with certain notes
payable - - - - - 2,371,575 -
Issuance of Class M preferred
stock, net of issuance costs of
$365,188 4,400 44,000 - - - 11,690,820 -
Net loss - - - - - -(29,858,701)
------- --------- ---------- ------- ---------- ---------- ----------
Balance at December 31, 1997 119,926 $1,199,260 16,036,085 $112,251 $(2,289,765)$70,511,697$(56,984,247)
======= ========= ========== ======= ========= ========== ==========
The accompanying notes are an integral part of these financial
statements.
F-5
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- ----------
Cash flows from operating
activities:
Net loss $(29,858,701) $(23,064,240) $(551,909)
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Depreciation and
amortization 2,549,282 690,920 -
Provision for doubtful
accounts 1,385,000 - -
Accrued litigation
settlement - 821,000 -
Amortization of discount
on notes payable 2,371,575 - -
Amortization of deferred
compensation on stock
options issued for
services 2,467,369 - -
Interest expense associated
with issuance of
convertible notes 320,000 1,945,000 -
Acquired in-process research
and development 4,235,830 14,577,942 -
Write-off of intangible
assets 860,305 - -
Loss on disposal of assets 351,288 - -
Other - 14,155 -
Increase (decrease) from changes
in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable ( 2,932,347) 19,490 -
Other assets ( 718,096) ( 294,067) -
Accounts payable and accrued
liabilities 5,769,611 ( 432,375) -
Discontinued operations -
noncash charges and working
capital changes 1,190,358 881,890 871,271
---------- ---------- -------
Net cash provided by
(used in) operating
activities (12,008,526) (4,840,285) 319,362
---------- --------- -------
Cash flows from investing
activities:
Purchases of furniture,
fixtures and equipment ( 1,948,857) ( 669,970) -
Cash received from the
purchase of MiBridge 79,574 - -
Cash received from the
purchase of Family
Telecommunications, Inc. 435,312 - -
Purchase of certificates
of deposit - restricted - (1,962,601) -
Proceeds from maturity of
certificate of deposit -
restricted 53,500 60,000 -
Investing activities of
discontinued operations ( 7,055) ( 915) 4,283
---------- --------- -------
Net cash provided by
(used in) investing
activities ( 1,387,526) (2,573,486) 4,283
---------- --------- -------
Continued
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
I-LINK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
long-term debt 5,000,000 2,502,333 -
Repayment of long-term debt ( 892,307) ( 2,860,086) -
Payment of capital lease
obligation ( 187,278) ( 130,299) -
Proceeds from issuance of
preferred stock, net of
offering costs 6,618,888 12,290,000 -
Proceeds from exercise of
common stock warrants and
options 137,933 - -
Financing activities of
discontinued operations ( 53,556) 32,733 ( 603,252)
---------- ---------- -------
Net cash provided by
(used in) financing
activities 10,623,680 11,834,681 ( 603,252)
---------- ---------- -------
Effect of foreign currency
translation on cash flows
of discontinued operations - 1 ( 2,234)
---------- ---------- -------
Increase (decrease) in cash
and cash equivalents ( 2,772,372) 4,420,911 ( 281,841)
Cash and cash equivalents at
beginning of year 4,500,227 79,316 361,157
---------- ---------- -------
Cash and cash equivalents at
end of year:
Continuing operations 1,643,805 4,407,465 -
Discontinued operations 84,050 92,762 79,316
---------- ---------- -------
Total cash and cash
equivalents at end of
year $ 1,727,855 $ 4,500,227 $ 79,316
========== ========== =======
Supplemental schedule of non-cash
investing and financing
Activities:
Preferred stock and note
payable issued in connection
with the acquisition of
MiBridge, Inc. $ 8,250,000 $ - $ -
Common stock issued in
connection with the
acquisition of Family
Telecommunications, Inc. 2,414,583 - -
Stock options issued for
services 4,757,134 - -
Conversion of preferred
stock into common stock 1,449,240 2,000,000 93,050
Common stock issued in
connection with the
acquisition of I-Link
Worldwide, Inc. 8,875,000 12,600,000 -
Preferred stock issued
in exchange of notes
payable and accrued
interest 5,115,932 - -
Conversion of convertible
promissory notes into
preferred stock 717,000 704,799 5,201
Fixed assets acquired
under capital lease
obligations - 605,609 -
Stock warrants issued
in connection with
litigation settlement 821,000 - -
Supplemental cash flow information:
Interest paid - continuing
operations $ 286,935 $ - $ -
Interest paid - discontinued
operations 93,625 189,107 129,859
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business, Principles of Consolidation and Liquidity
The consolidated financial statements include the accounts of I-Link
Incorporated (formerly Medcross, Inc.) and its subsidiaries (the "Company").
Effective October 7, 1997, the Company's shareholders approved the change of
the Company's name from Medcross, Inc. to "I-Link Incorporated". In addition,
the names of several of its wholly-owned subsidiaries were changed as discussed
below. The name changes are consistent with the Company's change in business
focus from providing healthcare facilities, diagnostic and clinical services to
providing worldwide telecommunication services. The Company's principal
operation is the development, sale and delivery of enhanced communications
products and services utilizing its own private intranet and both owned and
leased network switching and transmission facilities. The Company provides
unique communications solutions through its use of proprietary technology
acquired in the acquisitions of I-Link Worldwide, Inc. and MiBridge, Inc.
Telecommunications services are marketed primarily through independent
representatives to subscribers throughout the United States. The Company's
telecommunication services operations began primarily with the first quarter
of 1997 acquisition of I-Link Communications, Inc. (formerly Family
Telecommunications, Inc), an FCC licensed long-distance carrier (see Note 9).
During the second quarter of 1997, the Company formed a new wholly-owned
subsidiary, I-Link Worldwide, L.L.C., through which it launched a network
marketing channel to market its telecommunications services. Previously, all
marketing of telecommunications services was provided by third-party wholesale
distributors through the Company's wholly-owned subsidiary I-Link Systems,
Incorporated (formerly I-Link Worldwide, Inc.).
Through its wholly owned subsidiary, MiBridge, Inc. (MiBridge), the Company
develops and licenses communications software that supports multimedia
communications (voice, fax and audio) over the public switched network, local
area networks and the Internet. MiBridge was acquired during the third quarter
of 1997 (see Note 9).
Diagnostic and clinical service, consisting primarily of magnetic resonance
imaging (MRI) and ultrasounds, is provided through the Company's wholly-owned
subsidiaries Urological Ultrasound Services of Tampa Bay, Inc., Medcross Asia,
Ltd, and Waters Edge Scanning Associates, Inc. and partially owned subsidiaries
Medcross Imaging, Ltd. (81.75%) and Shenyang Medcross Huamei Medical Equipment
Company, Ltd. (51%). On March 23, 1998, the Company's Board of Directors
approved a plan to discontinue these operations (see Note 3).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company incurred a net loss from continuing operations of $28,667,692 for
the year ended December 31, 1997, and as of December 31, 1997 had an accumulated
deficit of $56,984,247 and negative working capital of $2,955,180. The Company
anticipates that revenues generated from its continuing operations will not be
sufficient during 1998 to fund the continued expansion of its private
telecommunications network facilities and anticipated growth in subscriber base.
In order to meet its working capital needs, the Company has entered into two
financing arrangements subsequent to year end (see Note 16). In the first
quarter of 1998, the Company signed a term loan agreement with Winter Harbor
providing aggregate borrowings of $5.768 million. On March 31, 1998, the
Company entered into a credit facility in the amount of $20,000,000 with a
private investor group. It is anticipated that proceeds from the credit
facility will be used to pay off the Winter Harbor term loan agreement which
is due on May 15, 1998.
Note 2 - Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company maintains its cash and
cash equivalents with financial institutions in Utah, Arizona, New Jersey and
Florida, and at times, may exceed federally insured limits. The Company has not
experienced any losses on such accounts.
F-8
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, continued
Furniture, fixtures and equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is
calculated using the declining balance method for medical equipment and the
straight-line method for all other assets over the following estimated useful
lives:
Telecommunications network equipment 4-6 years
Furniture, fixtures and office equipment 3-6 years
Medical equipment 6-10 years
Betterments and renewals that extend the life of the assets are capitalized;
other repairs and maintenance charges are expensed as incurred. The cost and
related accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in income.
Intangible assets
The Company regularly evaluates whether events or circumstances have occurred
that indicate the carrying value of the intangible assets may not be
recoverable. When factors indicate the asset may not be recoverable, the
Company compares the related undiscounted future net cash flows to the carrying
value of the asset to determine if an impairment exists. If the expected future
net cash flows are less than carrying value, impairment is recognized based on
the fair value of the asset. During 1997, the Company wrote off $860,305 in
unrecoverable intangible assets (see Note 16). The write off is included in
selling, general and administrative expense. There were no such write offs
for 1996 and 1995. Amortization of intangible assets is calculated using the
straight-line method over the following periods:
Acquired technology 3 years
Excess acquisition cost over fair value of net assets acquired 5-10 years
Other intangible assets 3-5 years
Reserve for returns
Certain marketing materials sold to independent representatives through the
Company's network marketing channel may be returned for credit, subject to
restrictions relating to passage of time and return of purchased materials.
The Company has recognized a reserve for returns based on management's estimate
of future refunds on expected product returns.
Revenue recognition
Long-distance and enhanced service revenue is recognized as service is provided
to subscribers.
During the second quarter of 1997 the Company launched a network marketing
channel to market its telecommunication services. Marketing services revenues
from the network marketing channel primarily include revenues recognized from
independent representatives ("IRs") for training, promotional and presentation
materials. Marketing services revenues are presented net of estimated refunds
on returns of network marketing training materials.
Technology licensing and development revenues are generally recognized as
products are shipped or services are performed. Revenues on long-term
development projects are recognized under the percentage of completion method
of accounting and are based upon the level of effort expended on the project,
compared to total costs related to the contract.
The Company recognizes revenue from health care services (discontinued
operations) at the time services are performed, net of contractual allowances
based on agreements with third party payers.
F-9
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, continued
Computer software costs
The Company recognizes as a current expense the costs associated with
developing computer software for internal use. Purchased computer software
for internal use is capitalized and amortized over the expected useful life,
usually three years.
Concentrations of Credit Risk
The Company's telecommunications subscribers are primarily residential
subscribers and are not concentrated in any specific geographic region of the
United States. As of December 31, 1997, approximately $3.1 million of the
Company's gross accounts receivable are from subscribers signed up by one third-
party wholesale agent (see Note 16).
Income taxes
The Company records deferred taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
statement requires recognition of deferred tax assets and liabilities for the
temporary differences between the tax bases of assets and liabilities and the
amounts at which they are carried in the financial statements based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Net loss per share
The Company has adopted SFAS No. 128, "Earnings per Share" for 1997, 1996 and
1995. The standard requires presentation of basic and diluted earnings per
share. Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. Options, warrants,
convertible preferred stock and convertible debt are included in the calculation
of diluted earnings per share, except when their effect would be anti-dilutive.
As the Company had a net loss from continuing operations for 1997, 1996 and
1995, basic and diluted loss per share are the same.
Basic and diluted loss per common share for 1997, 1996 and 1995 were calculated
as follows:
1997 1996 1995
------------- ------------- ------------
Loss from continuing operations $( 28,667,692) $( 22,163,977) $ -
Cumulative preferred stock
dividends not paid in current
year ( 1,159,589) ( 343,629) ( 128,669)
Deemed preferred stock dividend
on Class M convertible
cumulative redeemable preferred
stock ( 88,533,450) - -
Deemed preferred stock dividend
on Class C convertible
cumulative redeemable preferred
stock - ( 20,880,000) -
----------- ----------- ---------
Loss from continuing operations
applicable to common stock $(118,360,731) $(43,387,606) $( 128,669)
=========== ========== =========
Loss from discontinued operations $( 1,191,009) $( 900,263) $( 551,909)
========== ========== =========
Weighted average shares outstanding 11,756,249 6,780,352 1,756,540
=========== ========== =========
Loss from continuing operations $( 10.07) $( 6.40) $( 0.07)
Loss from discontinued operations ( 0.10) ( 0.13) ( 0.32)
---------- ---------- ---------
Net loss per common share $( 10.17) $( 6.53) $( 0.39)
========== ========== =========
F-10
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies, continued
The deemed preferred stock dividend on Class C convertible cumulative redeemable
preferred stock is calculated as the difference between the conversion price per
common share per the private offering memorandum and the market price for the
common stock on the date the preferred shares were sold. The deemed preferred
stock dividend on Class M convertible cumulative redeemable preferred stock is
calculated as the difference between the conversion price per common share per
the agreement and the market price of the common stock as of the date the
agreement was finalized, plus the fair value of the warrants issuable in
connection with the preferred stock investment. The deemed dividends are implied
only and do not represent obligations to pay a dividend.
Potential common shares that were not included in the computation of diluted EPS
because they would have been anti-dilutive are as follows as of December 31,
1997:
1997 1996 1995
------------- ------------- ------------
Assumed conversion of Class A
preferred stock - - 4,894,463
Assumed conversion of Class B
preferred stock - 183,542 411,257
Assumed conversion of Class C
preferred stock 2,759,016 5,760,000 -
Assumed conversion of Class D
preferred stock 383,108 - -
Assumed conversion of Class M
preferred stock 4,400,000 - -
Assumed exercise of options
and warrants to purchase
shares of common stock 20,998,872 5,761,295 850,169
---------- ---------- ---------
28,540,996 11,704,837 6,155,889
========== ========== =========
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently issued financial accounting standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires the prominent display of comprehensive income and its
components. The Company is required to comply with SFAS No. 130 for the year
ended December 31, 1998. Also in June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting information about operating segments in
annual and interim financial statements. The Company is required to comply with
SFAS No. 131 for the year ended December 31, 1998. The Company is currently
evaluating the effect, if any, that these new accounting standards may have on
its financial statements.
Reclassifications
Certain balances in the December 31, 1996 and 1995 financial statements have
been reclassified to conform to the current year presentation. These changes
had no effect on previously reported net loss, total assets, liabilities or
stockholders' equity.
F-11
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Discontinued operations
On March 23, 1998, the Company's Board of Directors approved a plan to dispose
of the Company's medical services businesses in order to focus its efforts on
the sale of telecommunication services and technology licensing. The Company
intends to sell all of the assets of the medical services subsidiaries, with
the proceeds being used to satisfy outstanding obligations of the medical
services subsidiaries.
The results of the medical services operations have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations. The assets and liabilities of the discontinued operations have
been classified in the Consolidated Balance Sheets as "Net assets - discontinued
operations". Discontinued operations have also been segregated for all periods
presented in the Consolidated Statements of Cash Flows.
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:
1997 1996
------------ ------------
Assets:
Current assets:
Cash and cash equivalents $ 84,050 $ 92,762
Accounts receivable 933,376 773,095
Inventory 362,243 557,036
Other 24,951 47,472
--------- ---------
Total current assets 1,404,620 1,470,365
Furniture, fixtures and
equipment, net 858,153 1,280,867
Other non-current assets 8,706 486,125
--------- ---------
Total assets 2,271,479 3,237,357
--------- ---------
Liabilities:
Current liabilities:
Accounts payable and
accrued liabilities 996,088 775,124
Notes payable 412,126 421,554
--------- ---------
Total current liabilities 1,408,214 1,196,678
Notes payable - 44,128
Other liabilities 267,888 328,328
--------- ---------
Total liabilities 1,676,102 1,569,134
--------- ---------
Net assets - discontinued
operations $ 595,377 $1,668,223
========== =========
The net furniture, fixtures and equipment, other assets, accounts receivable,
and inventory are presented in the table above net of the expected loss on the
sale of the discontinued operations.
Revenues of the discontinued operations were $2,309,099, $2,212,544 and
$3,122,953 for 1997, 1996 and 1995, respectively.
F-12
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Certificates of deposit - restricted
During 1996, the Company entered into a 24 month, $3.5 million operating lease.
As a condition of that lease, the Company obtained a $1.575 million letter of
credit. To collateralize the letter of credit the Company purchased a
restricted certificate of deposit (CD) in the same amount. The Company also
has a restricted CD totaling $132,000 used to collateralize letters of credit
in connection with certain capital leases, restricted CDs totaling $160,500 used
for a security deposit on the facilities which the Company occupied in early
1997, and $20,000 in restricted CDs used as collateral for the Company's
corporate credit cards. The CDs are held in escrow and bear interest which is
paid to the Company. Of the CDs held in escrow, $1,628,500 will be released to
the Company during 1998.
Note 5 - Furniture, fixtures and equipment
Continuing operations
Furniture, fixtures and equipment relating to continuing operations consisted
of the following at December 31:
1997 1996
----------- ------------
Telecommunications network equipment $ 2,628,422 $ 787,600
Furniture, fixtures and office
equipment 1,988,146 1,323,396
--------- ---------
4,616,568 2,110,996
Less accumulated depreciation (1,064,651) ( 535,227)
--------- ---------
$ 3,551,917 $ 1,575,769
========= =========
Discontinued operations
Furniture, fixtures and equipment relating to discontinued operations consisted
of the following at December 31:
1997 1996
----------- ------------
Medical services equipment $ 2,982,756 $ 2,975,701
Furniture, fixtures and office
equipment 388,191 388,191
--------- ---------
3,370,947 3,363,892
Less accumulated depreciation (2,512,794) (2,083,025)
--------- ---------
$ 858,153 $ 1,280,867
========= =========
Note 6 - Intangible Assets
Intangible assets consisted of the following at December 31:
1997 1996
----------- ------------
Acquired technology $ 1,450,000 $ -
Excess acquisition cost over fair
value of net assets acquired 11,072,138 -
Other intangible assets 1,203,200 7,320
---------- ---------
13,725,338 7,320
Less accumulated amortization ( 1,411,258) -
---------- ---------
$ 12,314,080 $ 7,320
========== =========
F-13
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Long-term debt
Continuing operations
Long-term debt relating to continuing operations, the carrying value of which
approximates market, consists of the following at December 31:
1997 1996
----------- ------------
Note payable to a vendor, interest
at 7.0%, payable in graduated
monthly installments of $50,000
(through March 1998), $75,000
(through September 1998) and
$150,000 (through February 1999),
remaining principal due March 1999 $2,358,757 $ -
Notes payable to prior owners of
MiBridge, interest at 8.0%, payable
in quarterly installments of
$250,000, collateralized by common
stock of MiBridge 1,500,000 -
Convertible promissory notes,
interest at 8%, payable quarterly - 717,000
Other 4,000 -
--------- --------
3,862,757 717,000
Less current portion (2,008,416) -
--------- -------
Long-term debt, less current
portion $ 1,854,341 $ 717,000
========= =======
Annual maturities of long-term debt are as follows:
1998 $2,008,416
1999 1,854,341
---------
$3,862,757
=========
Simultaneous with the closing of the Company's offering of Class C Preferred
Stock in September 1996, the Company issued an aggregate of $717,000 in
principal amount of convertible promissory notes. The Company recorded interest
expense (non-cash) of $320,000 and $1,000,000 related to these promissory notes
for the three months ended March 31, 1997 and for the year ending December 31,
1996, respectively. The interest expense was calculated as the difference
between the conversion price per common share per the promissory notes as
compared to the market price for the common stock on the date the notes were
issued. The interest expense was recognized over the period between the date
the promissory notes were issued and the date the promissory notes could first
be converted. In October 1997, the convertible promissory notes were
converted into 11,950 shares of Class C Preferred Stock.
On June 6, 1997, the Company entered into a term loan agreement (Loan
Agreement) and promissory note (Note) with Winter Harbor, LLC (Winter Harbor),
a shareholder of the Company, pursuant to which Winter Harbor agreed to loan
to the Company the principal sum of $2,000,000 (the Loan) for capital
expenditure and working capital purposes. As further consideration for Winter
Harbor's commitment to make the Loan, the Company granted to Winter Harbor a
warrant (Loan Warrant) to purchase up to 500,000 shares of common stock of the
Company (the Common Stock) at a purchase price of $4.97 per share, subject to
adjustment, pursuant to the terms of a Warrant Agreement between the parties.
The Loan Warrant expires on March 11, 2002, and contains demand and piggyback
registration rights and customary anti-dilution terms. The maturity date of
the note was October 15, 1998.
F-14
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Long-term debt, continued
In August 1997, the Company amended the existing Note allowing for additional
borrowings of up to $3,000,000, for an aggregate borrowing of $5,000,000.
The incremental borrowings under this amendment had a maturity date of February
15, 1998. The Company issued 300,000 warrants at the then current market price
($6.38 per share) in connection with the additional borrowings. All other
provisions of the additional borrowings are the same as the Note discussed
above.
The entire amount of these loans was exchanged for Series M Preferred Stock on
October 10, 1997 (see Note 12). A portion of the proceeds received was
allocatied based on the relative fair value of the warrants issued in
connection with these loans and reflected as a debt discount of $2,371,575 which
was amortized to expense in 1997.
Discontinued operations
Long-term debt relating to discontinued operations, the carrying value of which
approximates market, consists of the following at December 31:
1997 1996
----------- -----------
Note payable to a related party,
interest at 10.5%, payable on
demand $ 175,682 $ 175,682
Note payable to a bank, interest
payable at 3/4% above prime rate
(8.5% at December 31, 1997),
principal balance due June 30,
1996, collateralized by accounts
receivable and general assets of
the Company 236,444 290,000
------- -------
412,126 465,682
Less current portion (412,126) (421,554)
------- -------
Long-term debt, less current
portion $ - $ 44,128
======= =======
Subsequent to December 31, 1997, the Company refinanced its $236,444 note
payable to a bank. The new note bears interest at 12% and requires monthly
interest payments. The outstanding principal balance is due August 11, 1998.
The loan requires mandatory prepayment from net sales proceeds if the assets
of the medical division are sold before that date.
Note 8 - Commitments under long-term leases
The Company leases a variety of assets, fiber optics and facilities used in
its operations. The majority of these lease agreements are with one creditor.
Payments to this creditor are collateralized by letters of credit totaling
$1.707 million (see Note 4).
As of December 31, 1997 and 1996, the Company had $264,007 and $466,832,
respectively (net of accumulated amortization of $341,602 and $138,777,
respectively) of equipment acquired through capital leases.
Agreements classified as operating leases have terms ranging from one to six
years. The Company's rental expense for operating leases was approximately
$2,848,000, $1,316,000 and $41,000 for 1997, 1996 and 1995, respectively.
F-15
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments under long-term leases, continued
Future minimum rental payments required under non-cancelable capital and
operating leases with initial or remaining terms in excess of one year consist
of the following at December 31, 1997:
Capital Operating
Leases Leases
------------ -------------
Year ending December 31:
1998 $ 188,000 $2,713,000
1999 70,000 932,000
2000 - 903,000
2001 - 256,000
2002 - 219,000
Thereafter - 125,000
------- ---------
Total minimum payments 258,000 $5,148,000
=========
Less amount representing interest ( 21,526)
-------
Present value of net minimum
lease payments 236,474
Less current portion (169,315)
-------
Long-term obligations under
capital leases $ 67,159
=======
Note 9 - Acquisition of subsidiaries
I-Link Worldwide, Inc.
In February 1996, the Company closed its acquisition of all of the issued and
outstanding common stock of I-Link Worldwide Inc., a Utah corporation from
ILINK, Ltd., a Utah limited partnership, in exchange for the issuance of an
aggregate of 4,000,000 shares of common stock of the Company. The acquisition
was accounted for using the purchase method of accounting. The results of
operations of the acquired enterprise are included in the consolidated financial
statements beginning February 13, 1996. Pursuant to the terms of the stock
purchase agreement, 1,400,000 shares of the common stock were issued at the time
of acquisition. In August 1996, 1,600,000 shares of Common Stock were released
from escrow upon the receipt of proceeds from the completion of the Company's
offering of Class C Preferred Stock.
The acquisition cost relating to the first 3,000,000 shares issued of
$12,600,000 and the assumed net liabilities of $2,003,000 was allocated to
acquired in-process research and development and software costs acquired. These
were expensed as technological feasibility of the in-process technology had not
yet been established and the technology had no alternative future use.
The remaining 1,000,000 shares of common stock were released from escrow in the
second quarter of 1997 as the Company's annual revenues exceeded $1,000,000.
The value of the common stock issued was $8,875,000 (based on the closing market
price of the Company's common stock on June 30, 1997) and has been recorded in
the financial statements as an intangible asset representing the excess cost
over fair value of net assets acquired which is being amortized using the
straight-line method over five years.
F-16
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Acquisition of subsidiaries, continued
Family Telecommunications Incorporated
On January 13, 1997, pursuant to the terms of a Share Exchange Agreement the
Company acquired 100% of the outstanding stock of Family Telecommunications
Incorporated (FTI), a Utah corporation, from the stockholders of FTI, namely
Robert W. Edwards, Jr. and Jerald L. Nelson. John W. Edwards, President, a
Director and Chief Executive Officer of the Company, and Robert W. Edwards,
Jr., the principal shareholder of FTI, are brothers. The consideration
($2,415,000) for the transaction consisted of an aggregate of 400,000 shares
of the Company's common stock. The acquisition has been accounted for using
the purchase method of accounting. FTI is a FCC licensed long-distance carrier
and provider of telecommunications services. FTI has been renamed "I-Link
Communications, Inc."
The acquisition was allocated to the tangible net liabilities of $135,000 (based
on their fair market value) with the excess acquisition cost over fair value of
assets acquired of $2,550,000 allocated to intangible assets. The intangible
assets are being amortized over periods ranging between three and ten years.
The fair values of assets acquired and liabilities assumed in conjunction with
this acquisition were as follows:
Current assets (including cash of $435,312) $ 1,740,000
Tangible long-term assets 1,166,000
Intangible long-term assets 2,550,000
Current liabilities (1,330,000)
Long-term liabilities (1,711,000)
---------
Net purchase price $ 2,415,000
=========
MiBridge, Inc.
In the third quarter of 1997 the Company completed its acquisition of 100% of
the outstanding stock of MiBridge, Inc. (MiBridge). The consideration
($8,250,000) for the transaction consisted of: (1) an aggregate of 1,000 shares
of Series D Preferred stock, which preferred stock is convertible into such a
number of common shares as shall equal the sum of $6,250,000 divided by the
lower of $9.25 or the average closing bid price of the Company's common stock
for the five consecutive trading days immediately preceding the conversion date
and (2) a note payable in the amount of $2,000,000 payable in cash in quarterly
installments over two years. The acquisition was accounted for using the
purchase method of accounting. MiBridge is the owner of patent and patent-
pending audio-conferencing technology.
The acquisition cost of $8,250,000 (representing the fair value of the common
stock into which the 1,000 shares of Series D Preferred stock can be converted
and the $2,000,000 note payable) was allocated, based on their estimated fair
values, to tangible net assets ($552,760) to acquired technology ($1,450,000),
acquired in-process research and development ($4,235,830), employment contracts
for the assembled workforce ($606,000) and excess acquisition cost over fair
value of net assets acquired ($1,405,410). These assets are being amortized
over three years, with the exception of the excess acquisition cost over fair
value of net assets acquired which is being amortized over five years. Acquired
in-process research and development was expensed upon acquisition, as the
research and development had not reached the requirements for technological
feasibility at the closing date. The fair value of assets acquired in
conjunction with this acquisition were allocated as follows:
Current assets (including cash of $79,574) $ 534,074
Current liabilities ( 54,473)
Tangible long-term assets 73,159
Intangible long-term assets 3,461,410
In-process research and development 4,235,830
---------
Net purchase price $ 8,250,000
=========
F-17
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Acquisition of subsidiaries, continued
Proforma financial information
As discussed above, the Company acquired I-Link Worldwide during 1996 and FTI
and MiBridge during 1997. The acquisitions were accounted for using the
purchase method of accounting. The consolidated financial statements as
presented include the operating results of I-Link Worldwide, FTI and MiBridge
from the dates of acquisition. The following pro forma information presents a
summary of consolidated results of operations of the Company, I-Link Worldwide,
FTI and MiBridge as if the acquisitions had occurred at the beginning of 1996
(relative to I-Link Worldwide, Inc.), March 20, 1996 (date of inception of FTI)
and March 18, 1996 (date of inception of MiBridge), with pro forma adjustments
to give effect to amortization of intangible assets and expensing of acquired
in process research and development costs.
Years ended December 31: 1997 1996
------------ ------------
Operating revenue from continuing
operations $ 14,687,012 $ 4,870,189
Net loss from continuing
operations $(29,380,782) $(28,535,182)
Net loss per common share
from continuing operations $( 9.80) $( 6.93)
Note 10 - Income taxes
The Company recognized no income tax benefit from its losses in 1997, 1996 and
1995.
The reported benefit from income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to loss before
taxes for the following reasons:
1997 1996 1995
----------- ----------- ----------
Expected federal statutory
tax benefit $(10,151,960) $(7,841,842) $(187,649)
Increase (reduction) in
taxes resulting from:
State income taxes ( 1,017,678) ( 673,059) ( 30,355)
Non-deductible litigation
settlement expense - 279,140 -
Non-deductible interest
on certain notes 915,136 661,300 -
Change in valuation
allowance 10,242,303 7,559,551 108,484
Other 12,199 14,910 109,520
---------- --------- -------
$ - $ - $ -
========== ========= =======
F-18
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Income taxes, continued
At December 31, 1997 the Company had net operating loss carryforwards for both
federal and state income tax purposes of approximately $25,247,000. The net
operating loss carryforwards will expire between 2006 and 2012 if not used to
reduce future taxable income.
The components of the deferred tax assets and liability as of December 31, 1997
and 1996 are as follows:
1997 1996
---------- -----------
Deferred tax assets:
Tax net operating loss
carryforwards $ 9,424,087 $ 2,759,930
Excess book amortization
and depreciation 727,643 61,706
Acquired in-process research
and development 6,539,624 5,257,333
Amortization of deferred
compensation on stock options 920,329 -
Reserve for loss on disposal of
discontinued operations 375,780 -
Reserve for inventory valuation 96,992 -
Allowance for doubtful accounts 267,147 -
Other 71,267 117,953
Valuation allowance (18,058,069) ( 7,944,647)
---------- ----------
Total deferred tax asset 364,800 252,275
---------- ----------
Deferred tax liability:
Excess tax depreciation and
amortization ( 364,800) -
Other - ( 252,275)
---------- ----------
Total deferred tax liability ( 364,800) ( 252,275)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The valuation allowance at December 31, 1997 and 1996 has been provided to
reduce the total deferred tax assets to the amount which is considered more
likely than not to be realized, primarily because the Company has not generated
net income from its business communications services. The change in the
valuation allowance is due primarily to the increase in net operating loss
carryforwards and acquired in-process research and development costs which were
expensed for books and capitalized for tax purposes. It is at least reasonably
possible that a change in the valuation allowance may occur in the near term.
Note 11 - Legal proceedings
A complaint was filed on April 12, 1996 by JW Charles Financial Services, Inc.
(JWC) against the Company in which JWC alleged that the Company breached the
terms of a warrant to purchase 331,000 shares of the Company's common stock (JWC
Warrant) by failing to prepare and file with the Securities and Exchange
Commission (SEC) a registration statement covering the common stock underlying
the JWC Warrant. JWC was seeking specific performance, i.e. registering the
shares with the SEC, and monetary damages. On April 11, 1997 the Company
reached an agreement in principle relating to the settlement of the lawsuit.
The lawsuit was dismissed in the second quarter of 1997 upon payment of
$600,000 to JWC in consideration for the JWC Warrant. The JWC Warrant was
purchased by an investor group led by the Company's general counsel and its
treasurer and chief financial officer. The Company's funds were not utilized.
In connection with the purchase of the JWC Warrant, the Company granted certain
additional consideration to the investor group, including new warrants to
purchase 175,000 shares of common stock at an exercise price of $2.50 per share.
The new warrants have registration rights and anti-dilution provisions. The
Company recorded the settlement in 1996 as a charge against earnings in the
amount of $821,000, representing the fair value of the new warrants.
F-19
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Legal proceedings, continued
On November 14, 1997, the Company filed a Notice of Claim commencing an
arbitration proceeding against MCI Telecommunications, Inc. ("MCI"). In the
past, the Company purchased from MCI long-distance telecommunications capacity
on lines operated by MCI in order to provide long-distance telecommunications
services to the Company's customers who resided in geographic areas not yet
serviced by the Company's dedicated telecommunications network ("off-net"
traffic). The arbitration proceeding was commenced by the Company pursuant to
the provisions of the Carrier Agreement between the Company and MCI, and
pursuant to the arbitration rules set forth in MCI's FCC Tariff No. 1. In its
Notice of Claim the Company seeks (1) to have the arbitrator declare that MCI
has materially breached its Carrier Agreement with the Company, (2) to have the
arbitrator declare that due to MCI's material breach the Carrier Agreement is
terminated without the Company being held liable for the early termination
payment provided for under the Carrier Agreement, and (3) to recover damages
from MCI in an as yet undetermined amount. MCI has submitted a counterclaim
against the Company in the arbitration proceeding seeking $4,431,290 for claimed
services rendered and under-usage penalties, and has reserved the right to amend
its counterclaim to potentially include claims for early termination penalties
and claimed services rendered in November and December 1997. Management
believes the Company has valid defenses against MCI's counterclaim, and will
vigorously contest all such claims. Subsequent to the Company's commencement
of the MCI arbitration proceeding, the Company made arrangements with an
alternative national provider of long-distance telecommunications capacity to
replace all of the capacity provided by MCI. At the present time Management
cannot determine the impact, if any, this arbitration proceeding may have on
the Company's financial statements.
Note 12 - Stockholders' equity
Preferred stock
In 1992, the Board of Directors approved and filed with the state of Florida an
Amendment to the Articles of Incorporation designating 200,000 shares of
preferred stock as Class A Variable Rate Cumulative Convertible Preferred Stock
("Class A Preferred Stock") and 22,500 shares of preferred stock as Class B
Variable Rate Cumulative Convertible Preferred Stock ("Class B Preferred
Stock"). The Class A Preferred Stock and Class B Preferred Stock both have a
par value of $10 per share and are entitled to receive cumulative dividends at
a rate equal to 2% above the 30 day certificate of deposit rate in effect on
the first day of each month at the Texas Commerce Bank. Shares of Class A and
Class B Preferred Stock may be converted into such number of whole shares of
common stock as is determined by multiplying the number of shares of Class A
Preferred Stock by a fraction, the numerator of which is $10 and the denominator
is the conversion price ($.408625). In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Company, the holders of the Class
A Preferred Stock shall be entitled to distribution before any payments shall be
made in respect to the Class B Preferred Stock or common stock in amounts equal
to the par value per share plus all accrued and unpaid dividends and the holders
of Class B Preferred Stock shall be entitled to distribution before any payments
shall be made in the respect to common stock in an amount equal to the par value
per share plus all accrued and unpaid dividends. As of December 31, 1997, all
issued shares of Class A and Class B Preferred Stock had been converted into
Common Shares.
In August 1996, the Company filed with the State of Florida an Amendment to the
Articles of Incorporation amending the designation of 240,000 shares of
preferred stock as Class C Convertible Cumulative Preferred Stock (the "Class C
Preferred Stock"). The Class C Preferred Stock has a par value of $10 per share
and holders are entitled to receive cumulative preferential dividends equal to
8% per annum of the liquidation preference per share of $60.00. Unless
previously redeemed, the Class C Preferred Stock is convertible into shares of
the Company's Common Stock ("Conversion Shares"), at any time commencing
November 21, 1996, at the option of the holder, into such number of shares of
the Company's Common Stock as shall equal $60 divided by the lower of
(i) $2.50, or (ii) the closing bid price for any five consecutive trading days
during the period commencing on September 6, 1996 and ending on March 5, 1998
(subject to certain anti-dilution adjustments). The Class C Preferred Stock is
redeemable at any time prior to September 6, 2000, at the option of the Company
at a redemption price equal to $60 per share plus accrued and unpaid dividends,
provided (i) the Conversion Shares are covered by an effective registration
statement; and (ii) during the immediately preceding thirty (30) consecutive
trading days ending within fifteen (15) days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$8.00 per share. The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the
F-20
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stockholders' equity, continued
Company at a redemption price equal to $90 plus accrued and unpaid dividends,
provided the Conversion Shares are covered by an effective registration
statement or the Conversion Shares are otherwise exempt from registration.
During the years ending December 31, 1997 and 1996, 136,991 and 0 shares,
respectively, of Class C Preferred Stock had been converted into common shares.
At December 31, 1997 and 1996, 114,959 and 240,000 Class C Preferred Shares were
outstanding. In August 1997, the Company completed its acquisition of MiBridge.
As partial consideration for 100 percent of the outstanding stock of MiBridge,
the Company agreed to issue 1,000 shares of Series D Preferred Stock to the
prior owners of MiBridge. The Series D Preferred shares were issued in October
1997 after the October 7, 1997 annual meeting where the shareholders approved
and adopted an amendment to the Company's articles of incorporation increasing
the number of authorized shares of Preferred Stock from 500,000 to 10,000,000
and the number of authorized shares of Common Stock from 20,000,000 to
75,000,000. The preferred stock is convertible into such a number of common
shares as shall equal the sum of $6,250,000 divided by the lower of $9.25 or
the average closing bid price of the Company's common stock for the five
consecutive trading days immediately preceding the conversion date. On the
nine-month anniversary of the closing of the MiBridge acquisition, any
unconverted share of Series D Preferred Stock shall automatically convert to
Common Stock. The Series D Preferred shares are not entitled to dividends.
As of December 31, 1997, 567 shares of Class D Preferred Stock remained
unconverted and outstanding.
On October 10, 1997, the Company closed an agreement with Winter Harbor pursuant
to which Winter Harbor invested $12,100,000 in a new series of the Company's
convertible preferred stock (the "Series M Preferred Stock"). Winter Harbor
purchased approximately 2,545 shares of Series M Preferred Stock, convertible
into approximately 2,545,000 shares of Common Stock, for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provided for the purchase
of approximately 1,855 additional shares of Series M Preferred Stock,
convertible into approximately 1,855,000 share of Common Stock. Such additional
shares of Series M Preferred Stock were paid for by Winter Harbor exchanging
$5,000,000 in outstanding notes payable and accrued interest of approximately
$100,000. As additional consideration for its equity investment in Series M
Preferred Stock, Winter Harbor was issued additional warrants by the Company
to acquire (a) 2,500,000 shares of Common Stock at an exercise price of $2.75
per share (exercise period of 30 months), (b) 2,500,000 shares of Common Stock
at an exercise price of $4.00 per share (exercise period of 60 months), and
(c) 5,000,000 shares of Common Stock at an exercise price of $4.69 per share
(exercise period of 60 months). All of the warrants have demand registration
rights and anti-dilution rights and contain cashless exercise provisions.
The Series M Preferred Stock is entitled to receive cumulative dividends in the
amount of 10% per annum before any other class of preferred or common stock
receives any dividends. Thereafter, the Series M Preferred Stock participates
with the Common Stock in the issuance of any dividends on a per share basis.
The Series M Preferred Stock will have the right to veto the payment of
dividends on any other class of stock. The Series M Preferred stock is
convertible at any time prior to the fifth anniversary of its issuance, at the
sole option of Winter Harbor, and automatically converts at that date if not
converted previously. If automatically converted on the fifth anniversary, the
conversion price will be the lower of $2.75 per share or 50% of the average
closing bid price of the Common Stock for the ten trading days immediately
preceding the conversion date. The basis for discretionary conversion, or the
conversion price for automatic conversion, shall be adjusted upon the
occurrence of certain events, including without limitation, issuance of stock
dividends, recapitalization of the Company or the issuance of stock by the
Company at less than the fair market value thereof. The Series M Preferred
Stock will vote with the Common Stock on an as-converted basis on all matters
which are submitted to a vote of the stockholders, except as may otherwise be
provided by law or by the Company's Articles of Incorporation or By-Laws;
provided, however, that the Series M Preferred Stock will have the right to
appoint two members of the Company's board of directors. Furthermore, the
Series M Preferred stock shall have the right to be redeemed at fair market
value in the event of a change of control of the Company, shall have preemptive
rights to purchase securities sold by the Company, and shall have the right to
preclude the Company from engaging in a variety of business matters without the
concurrence of Winter Harbor, including without limitation: mergers,
acquisitions and disposition of corporate assets and businesses, hiring or
discharging key employees and auditors, transactions with affiliates,
commitments in excess of $500,000, the adoption or settlement of employee
benefit plans and filing for protection from creditors. As of December 31,
1997, all 4,400 shares of the Company's Class M Preferred Stock remain issued
and outstanding.
F-21
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Stockholders' equity, continued
At December 31, 1997, 9,512,650 of the 10,000,000 shares of preferred stock
authorized remain undesignated and unissued. Dividends in arrears at December
31, 1997 were $1,144,698 and $217,468 for Class C and M Preferred Stock,
respectively.
Note 13 - Stock-based compensation plans
At December 31, 1997 the Company has several stock based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the method
outlined by Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated as follows:
1997 1996 1995
------------- ------------- -------------
Net loss as reported $(29,858,701) $(23,064,240) $(551,909)
Net loss pro-forma $(37,753,358) (25,563,988) (587,001)
Basic and diluted loss per
share as reported $( 10.17) $( 6.53) $( 0.39)
Basic and diluted loss per
share pro-forma $( 10.84) $( 6.90) $( 0.41)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 100%, 103% and 103% in 1997, 1996, and 1995,
respectively, risk free rates ranging from 6.02% to 6.88%, 5.70% to 6.85%, and
5.08% to 6.96% in 1997, 1996, and 1995, respectively, expected lives of 3 years
for each year, and dividend yield of zero for each year.
1997 1996 1995
---------------------- ------------------ -------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
and Exercise and Exercise and Exercise
Warrants Price Warrants Price Warrants Price
--------------------- ------------------- -------------------
Outstanding at
beginning of year 5,761,295 $5.14 850,169 $1.78 615,381 $3.19
Granted 15,526,000 4.45 5,322,000 5.45 331,526 1.87
Exercised ( 79,923) 1.73 ( 188,724) 2.02 - 0.00
Expired ( 14,584) 6.75
Forfeited ( 193,916) 5.68 ( 222,150) 2.82 ( 96,738) 2.75
---------- ---- --------- ---- ------- ----
Outstanding at end
of year 20,998,872 $4.68 5,761,295 $5.14 850,169 $1.78
========== ==== ========= ==== ======= ====
Options exercisable
at year end 14,873,577 2,153,294 588,495
========== ========= =======
Weighted-average
fair value of
options and
warrants granted
during the year $5.78 $5.45 $1.87
==== ==== ====
F-22
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock-based compensation plans, continued
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1997.
Options and Weighted Weighted Weighted
Warrants Average Average Number Average
Outstanding at Remaining Exercise Exercisable Exercise
Exercise Price 12/31/97 Life Price at 12/31/97 Price
- -------------- -------------- ---------- --------- ----------- ----------
$0.875 to $2.500 4,007,038 5.74 $2.34 4,007,038 $2.34
$3.875 to $4.970 9,362,334 7.16 4.50 8,979,453 4.50
$5.000 to $6.500 4,187,000 9.28 5.32 1,252,835 5.49
$6.625 to $8.625 3,442,500 6.98 7.09 634,251 7.13
---------- ---- ---- --------- ----
20,998,872 7.28 $4.68 14,873,577 $4.12
========== ==== ==== ========== ====
1997 Recruitment stock option plan
In October of 1997, the shareholders of the Company approved the adoption of
the 1997 Recruitment Stock Option Plan which provides for the issuance of
incentive stock options, non-qualified stock options and stock appreciation
rights (SARs) up to an aggregate of 4,400,000 shares of Common Stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). The price at which shares of Common Stock covered by the option can
be purchased is determined by the Company's Board of Directors; however, in
all instances the exercise price is never less than the fair market value of the
Company's Common Stock on the date the option is granted.
As of December 31, 1997, there were incentive stock options to purchase 950,500
shares of the Company's Common Stock outstanding. The outstanding options vest
over three years at exercise prices of $4.375 to $8.625 per share. Options
issued under the plan must be exercised within ten years of grant and can only
be exercised while the option holder is an employee of the Company. The Company
has not awarded any SARs or non-qualified stock options under the plan.
Director stock option plan
The Company's Director Stock Option Plan authorizes the grant of stock options
to directors of the Company. Options granted under the Plan are non-qualified
stock options exercisable at a price equal to the fair market value per share
of common stock on the date of any such grant. Options granted under the Plan
are exercisable not less than six months or more than ten years after the date
of grant.
As of December 31, 1997, options for the purchase of 8,169 shares of common
stock at prices ranging from $0.875 to $3.875 per share were outstanding, all of
which are exercisable. In connection with the adoption of the 1995 Director
Plan the Board of Directors authorized the termination of future grants of
options under the plan; however, outstanding options granted under the plan
will continue to be governed by the terms thereof until exercise or expiration
of such options.
Stock purchase plan
In accordance with the Employee Qualified Stock Purchase Plan adopted in June
1990, employees may contribute up to 10 percent of their base wages towards the
purchase of the Company's common stock. The option price is the lesser of 85%
of the market value on the first business day of the Payment Period (September
1) or the last business day of the Payment Period (August 31). As of December
31, 1997 the Company had 34,376 shares of common stock reserved for issuance
on exercise of the purchase rights. On August 31, 1997, 770 shares of common
stock were issued at a price of $4.375 per share.
F-23
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock-based compensation plans, continued
1995 Director stock option plan
The 1995 Director Stock Option and Appreciation Rights Plan provides for the
issuance of incentive options, non-qualified options and stock appreciation
rights (the "1995 Director Plan") to directors of the Company. The 1995
Director Plan provides for the grant of incentive options, non-qualified
options, and SARs to purchase up to 250,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events).
The 1995 Director Plan also provides for the grant of non-qualified options on
a discretionary basis to each member of the Board of Directors then serving to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value per share of the common stock on that date. The number of shares
granted to each Board member was increased to 20,000 in 1998. In addition, the
Board member will receive 5,000 options for each committee membership. Each
option is immediately exercisable for a period of ten years from the date of
grant. The Company has 190,000 shares of common stock reserved for issuance
under the 1995 Director Plan. The Company granted 105,000 options to
purchase common shares under this plan in 1997. As of December 31, 1997,
options to purchase 170,000 shares of common stock at prices ranging from $1.00
to $1.25 per share are outstanding and exercisable. There were 20,000 options
exercised under this plan during 1997 and 40,000 options exercised during 1996.
1995 Employee stock option plan
The 1995 Employee Stock Option and Appreciation Rights Plan (the "1995 Employee
Plan") provides for the issuance of incentive options, non-qualified options,
and SARs.
Directors of the Company are not eligible to participate in the 1995 Employee
Plan. The 1995 Employee Plan provides for the grant of stock options which
qualify as incentive stock options under Section 422 of the Code, to be issued
to officers who are employees and other employees, as well as non-qualified
options to be issued to officers, employees, and consultants. In addition,
SARs may be granted in conjunction with the grant of incentive options and
non-qualified options.
The 1995 Employee Plan provides for the grant of incentive options, non-
qualified options, and SARs of up to 400,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an incentive option or non-qualified option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any incentive option, non-qualified
option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company
has 400,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1997, options to purchase 375,000 shares of common
stock with exercise prices ranging from $1.125 to $6.75 are outstanding under
the 1995 Employee Plan. During 1997, options to purchase 25,000 shares of
common stock were exercised.
Other warrants and options
Pursuant to the terms of a Financial Consulting Agreement dated as of November
3, 1994 between the Company and JW Charles Financial Services, Inc., the
Company issued a common stock purchase warrant (the "JWC Warrant") covering
250,000 (331,126 as adjusted) shares of common stock to JW Charles Financial
Services as partial consideration for its rendering financial consulting
services to the Company. The warrant is exercisable at a price of $1.51 per
share and expires on November 3, 1999.
F-24
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock-based compensation plans, continued
The JWC Warrant contains anti-dilution provisions providing for adjustments in
the exercise price. The JWC Warrant also contains anti-dilution provisions
providing for adjustments in the number of shares covered by the JWC Warrant.
The holder of the JWC Warrant has no voting, dividend, or other stockholder
rights or privileges unless and until the JWC Warrants have been exercised. The
holder of the JWC Warrant has been granted "piggy back" registration rights
under the Securities Act of 1933 with respect to the JWC Warrants and the
underlying shares of common stock.
Pursuant to the issuance of a $200,000 promissory note by I-Link to Scott Cook
in 1996, the Company issued a common stock purchase option covering 100,000
shares of the Company's common stock. The option is exercisable at a price of
$1.00 and expires on December 31, 1999.
In April 1996 the Company approved the issuance of 1,000,000 options to John
Edwards at an option price of $7.00 per share as part of his employment
agreement. The options vest over a three year period and expire in 2006.
On July 1, 1996 the Company approved the issuance of options to purchase
1,500,000 and 500,000 shares of common stock to Clay Wilkes and Alex Radulovic
respectively as part of their employment agreements. Each option has an
exercise price of $7.00 per share, vesting in 25% increments in the event that
the average closing bid price of a share of the Company's common stock for five
consecutive trading days exceeds $10, $15, $20 and $25, respectively. Each
option becomes exercisable (to the extent vested) on June 30, 1997, vests in
its entirety on June 30, 2001 and lapses on June 30, 2002.
In August 1996, Commonwealth Associates, the Placement Agent for the Company's
offering of Class C Preferred Stock and 8% Convertible Notes, designated Joseph
Cohen as its nominee for election to the Board of Directors. Commonwealth
Associates was also granted, in connection with such offering, the right to
approve the Company's selection of a second outside director to be nominated for
election at the next annual or special meeting of stockholders. Mr. Cohen
serves as a Class II Director of the Company and a member of the Finance,
Compensation and Audit Committees of the Board of Directors. The Company
issued options to purchase 64,000 shares of Common Stock to Mr. Cohen,
exercisable at the fair market value of the common stock on September 30,
1996 of $5.25. Of such options, 24,000 vested and became exercisable
immediately upon grant, 20,000 vested and became exercisable on the first
anniversary of the grant, and 20,000 shall vest and become exercisable on the
second anniversary of the grant.
In August 1996, William Flury, Vice President of Sales & Marketing of I-Link
loaned I-Link the sum of $100,000. The loan plus a loan origination fee of
$5,000 was repaid in September 1996. In connection with such loan, the Company
agreed to issue Mr. Flury a warrant to purchase 5,000 shares of Common Stock at
$2.50 per share, which expires in August of 1998.
In August 1996, John Edwards, President and Chief Executive Officer of I-Link
loaned I-Link the sum of $131,250 (including a $6,250 original issue discount),
which was repaid in August 1996. In connection with such loan, the Company
agreed to issue Mr. Edwards a warrant to purchase 25,000 shares of Common Stock
at $4.875 per share, which expires in August 1998.
In September 1996, the Company closed a private placement offering of Class C
Preferred Stock. As a result of this transaction, the Company issued a warrant
to purchase 750,000 shares of its Common Stock at an exercise price of $2.50
per share as compensation to the Placement Agent. These warrants expire on
August 20, 2001. During 1997, warrants to purchase 34,923 shares of common
stock were exercised.
John Edwards agreed to amend his employment contract on August 21, 1996, which
reduced his salary. In consideration of the salary reduction, the Company
granted to him options, which vested immediately, to purchase 250,000 shares of
common stock for 10 years at an exercise price of $4.875 per share which was
based on the closing price of the stock at grant date.
In October 1996 the Company agreed to issue 250,000 shares of common stock each
to William Flury and Karl Ryser Jr. pursuant to their employment agreements.
The options were issued at $4.41 based on the closing price of the stock at
grant date. The options vest quarterly over a three-year period and expire in
2000.
F-25
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock-based compensation plans, continued
During 1996, the Company issued 343,000 options to employees at a price equal
to the closing stock price on the grant date. The options vest quarterly over
a three-year period and expire in 10 years.
During 1996, the Company issued 120,000 warrants to non-employees at $4.00 per
share. The warrants expire in 1999.
During 1997, the Company issued options to purchase 1,210,000 shares of common
stock to non-employees at exercise prices ranging from $4.875 to $8.438, which
was based on the closing price of the stock at the grant date. The fair value
of the warrants issued was recorded as deferred compensation of $4,757,134 to
be amortized over the expected period the services were to be provided. During
1997, $2,467,369 of the deferred compensation was amortized to expense. The
warrants must be exercised within ten years of the grant date.
During 1997, the Company issued non-qualified options to purchase 2,200,000
share of common stock to certain executive employees at exercise prices ranging
from $4.875 to $5.188, which was based on the closing price of the stock at the
grant date. The options must be exercised within ten years of the grant date.
Note 14 - Segment of Business Reporting
The continuing operations of the Company are divided into the following
business segments for financial reporting purposes: telecommunications services
and technology licensing and development. Financial information by business
segment is as follows:
1997 1996 1995
----------- ------------- ------------
Revenues:
Telecommunications services $ 13,718,338 $ 170,532 $ -
Technology licensing and
development 346,875 - -
Operating loss:
Telecommunications services (24,076,626) (22,163,977) -
Technology licensing and
development ( 4,591,066) - -
Identifiable assets:
Telecommunications services 20,185,005 8,196,473 -
Technology licensing and
development 3,472,494 - -
Note 15 - Commitments
Employment and consulting agreements
The Company has entered into employment and consulting agreements with a
consultant and ten of its employees, primarily executive officers and management
personnel. These agreements generally continue over the entire term unless
terminated by the employee or consultant of the Company, and provide for salary
continuation for a specified number of months. Certain of the agreements
provide additional rights, including the vesting of unvested stock options in
the event a change of control of the Company occurs or termination of the
contract without cause. The agreements contain non-competition and
confidentiality provisions. As of December 31, 1997, if the contracts were to
be terminated by the Company, the Company's liability for salary continuation
would be approximately $1,980,000.
F-26
I-LINK INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments, continued
Purchase commitments
The Company has certain purchase commitments relative to its network
infrastructure. Under the terms of the agreements, the Company has a minimum
monthly usage commitment of $50,000, with a $225,000 penalty if the agreement
is cancelled prior to December 2000. In addition, the Company has commitments
to purchase long-distance telecommunications capacity on lines from a national
provider in order to provide long-distance telecommunications services to the
Company's customers who reside in areas not yet serviced by the Company's
dedicated telecommunications network. The Company's minimum monthly commitment
is approximately $500,000. If the agreement were terminated prior to October
1999, the Company would be obligated to pay 50% of the remaining monthly minimum
usage amounts.
Note 16 - Subsequent Events
Capital Financing
In the first quarter of 1998 the Company obtained a total of $5.768 million in
new interim debt financing from Winter Harbor, L.L.C. Pursuant to the terms of
the loan agreement with Winter Harbor, the Loan (which bears interest at prime
plus one) is payable upon demand by Winter Harbor no earlier than May 15, 1998,
and is collateralized by essentially all of the assets of the Company's
subsidiaries. As consideration for Winter Harbor's commitment to make the loan,
the Company agreed to issue 5,000,000 warrants to purchase common stock of the
Company at exercise prices ranging from $5.50 to $7.22 based upon 110% of the
closing price of the common stock on the day loan funds are advanced. The
warrants expire on October 15, 2005. The Company also agreed to extend the
exercise period on all warrants previously issued to Winter Harbor (10,800,000)
to seven and one-half years. After May 15, 1998, if the loan has not been
repaid by the Company, Winter Harbor may elect (a) to continue the loan on a
demand basis with interest accruing at prime plus four, or (b) to convert the
unpaid balance of the loan into additional shares of the Company's Series M
Preferred Stock, reduce the exercise price of the 5,000,000 Loan Warrants to
$2.50 per share, and receive an additional 5,000,000 warrants to purchase
common stock of the Company at an exercise price of $2.50 per share. The
Company intends to repay the loan from the credit facility described in the
following paragraph. In 1998 the Company will recognize interest expense on
this loan comprised of the interest paid and (non-cash) interest associated
with the new warrants issued and the change of the exercise period on prior
warrants issued.
On March 31, 1998 the Company entered into a credit facility of up to
$20 million with a private investor group. The credit facility provides for an
initial borrowing of $10 million collateralized by a pledge of 3,226,000 newly
issued restricted shares of the Company's common stock. Upon approval by the
Company's shareholders the Company and lender intend to increase the borrowing
an additional $10 million on similar terms collateralized by a pledge of
additional newly issued restricted shares of the Company's common stock. Beyond
the pledged shares, the loan is non-recourse to the Company. In the event of a
decrease in the market price of the Company's publicly traded shares, the
Company may be required to pledge additional common shares to maintain a loan-
to-value ratio in the security of 2:1 based upon the 30 day moving average of
the lowest bid price of the Company's publicly traded shares. The term of the
credit facility is two years, with an option exercisable by the Company to
extend for an additional third year. The credit facility may not be repaid
until after the first year. The credit facility may be repaid in cash or
common stock at the option of the lender. If repaid in common stock, the
number of shares to be retained by the lender in satisfaction of the credit
facility will be based upon the then current market price of the Company's
publicly traded shares, less a discount of 30%. The credit facility bears
interest quarterly at prime plus one percent. Interest-only payments are to
be made on the first day of each quarter, beginning the first quarter
following the funding. It is anticipated that borrowing under the Winter
Harbor interim financing will be repaid from this credit facility.
Termination of Marketing Agreement
Subsequent to year-end, the Company terminated its telecommunications marketing
agreement with one of its wholesale agents. This reflects a change in strategy
from marketing its telecommunications products primarily through wholesale
agents to marketing through independent representatives in the network marketing
channel. Revenues from subscribers signed up by this wholesale agent accounted
for approximately 56 percent of total telecommunications revenues for 1997. With
the growth in sales through the network marketing channel, management does not
anticipate that the loss of subscribers signed up by this wholesale agent will
have a significant impact on the revenues and cash flows of the Company.
As a result of the loss of customers from this wholesale agent, the Company
determined that the portion of the FTI purchase price allocated to the wholesale
agent customer lists and the related purchase price in excess of fair market
value of assets acquired should be written off. This resulted in an expense to
the Company of $860,305 for the year ending December 31, 1997.
F-25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
MEDCROSS, INC.
(Registrant)
Dated: April 15, 1998 By: /s/ John W. Edwards
John W. Edwards, Chairman of the
Board, President and Chief
Executive Officer
In accordance with Section 13 of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John W. Edwards Chairman of the Board, April 15, 1998
- --------------------------- President and Chief
John W. Edwards Executive Officer
/s/ Karl S. Ryser, Jr. Treasurer, Chief April 15, 1998
- --------------------------- Financial Officer
Karl S. Ryser, Jr. and Chief Accounting
Officer
/s/ David E. Hardy Secretary April 15, 1998
- ---------------------------
David E. Hardy
/s/ Henry Y.L. Toh Director April 15, 1998
- ---------------------------
Henry Y.L. Toh
/s/ R. Huston Babcock Director April 15, 1998
- ---------------------------
R. Huston Babcock
/s/ Joseph A. Cohen Director April 15, 1998
- ---------------------------
Joseph A. Cohen