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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%