-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NSvCGCTzQcN7nlExLOEfG6csVywwKLrakIkYoByqxwvO3EY9gk/cfMtGc3K6mmKm Rc9gmjsoobZcd8slG9Q7CQ== 0001019687-06-001568.txt : 20060629 0001019687-06-001568.hdr.sgml : 20060629 20060629160658 ACCESSION NUMBER: 0001019687-06-001568 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060629 DATE AS OF CHANGE: 20060629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILINC COMMUNICATIONS INC CENTRAL INDEX KEY: 0001042291 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 760545043 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13725 FILM NUMBER: 06933888 BUSINESS ADDRESS: STREET 1: 2999 NORTH 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 6029521200 MAIL ADDRESS: STREET 1: 2999 N 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 FORMER COMPANY: FORMER CONFORMED NAME: EDT LEARNING INC DATE OF NAME CHANGE: 20010814 FORMER COMPANY: FORMER CONFORMED NAME: E-DENTIST COM INC DATE OF NAME CHANGE: 20001114 FORMER COMPANY: FORMER CONFORMED NAME: PENTEGRA DENTAL GROUP INC DATE OF NAME CHANGE: 19970822 10-K 1 ilinc_10k-033106.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________ FORM 10-K For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2006. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to _________. Commission file number _________ ILINC COMMUNICATIONS, INC. (exact name of Registrant as specified in its charter) DELAWARE 76-0545043 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2999 N. 44TH STREET, SUITE 650 PHOENIX, ARIZONA 85018 (Address of principal executive offices) (Registrant's telephone number, including area code) (602) 952-1200 ______________ Securities registered pursuant to Name of Exchange on Which Registered Section 12(b) of the Act AMERICAN STOCK EXCHANGE COMMON, $0.001 PAR VALUE PER SHARE Securities registered pursuant to Section 12(g) of the Act NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ( ) No (X) Indicate by check mark whether the registrant is a small company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold on the American Stock Exchange as of March 31, 2006, was approximately 8,933,603 using a closing price of $0.41 per share. The number of shares of common stock of the registrant, par value $0.001 per share, outstanding at June 26, 2006 was 32,909,703, net of shares held in treasury. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement relating to the Annual Meeting of Stockholders of the registrant to be held on August 18, 2006 are incorporated by reference into Part III of this Report. ================================================================================ FORM 10-K REPORT INDEX PART I Item 1. Business...................................................................................4 Item 1A. Risk Factors...............................................................................9 Item 2. Properties.................................................................................13 Item 3. Legal Proceedings..........................................................................13 Item 4. Submission of Matters to a Vote of Security Holders........................................13 Item 4A. Executive Officers.........................................................................14 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.......................15 Item 6. Selected Financial Data....................................................................16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................34 Item 8. Financial Statements and Supplementary Data................................................35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......68 Item 9A. Controls and Procedures....................................................................68 Item 9B. Other......................................................................................69 PART III Item 10. Directors and Executive Officers of the Registrant.........................................69 Item 11. Executive Compensation ....................................................................69 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.....................................................................69 Item 13. Certain Relationships and Related Transactions.............................................69 Item 14. Principal Accountant Fees..................................................................70 PART IV Item 15. Exhibits and Financial Statement Schedules.................................................70
2 FORWARD-LOOKING STATEMENTS Unless the context requires otherwise, references in this document to "iLinc Communications," "iLinc" the "Company," "we," "us," and "our" refer to iLinc Communications, Inc. Statements contained in this Annual Report on Form 10-K that involve words like "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These are statements that relate to future periods and include, but are not limited to, statements as to our ability to: sell our products and services; improve the quality of our software; derive overall benefits of our products and services; introduce new products and versions of our existing products; sustain and increase revenue from existing products; integrate current and emerging technologies into our product offerings; control our expenses including those related to sales and marketing, research and development, and general and administrative expenses; control changes in our customer base; support our customers and provide sufficient technological infrastructure; obtain sales or increase revenues; impact the results of legal proceedings; control and implement changes in our employee headcount; obtain sufficient cash flow; manage liquidity and capital resources; realize positive cash flow from operations; or realize net earnings. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include, but are not limited to, our dependence on our products or services, market demand for our products and services, our ability to attract and retain customers and channel partners, our ability to expand our technological infrastructure to meet the demand from our customers, our ability to recruit and retain qualified employees, the ability of channel partners to successfully resell our products, the status of the overall economy, the strength of competitive offerings, the pricing pressures created by market forces, and the risks discussed herein (see "Managements Discussion and Analysis of Financial Condition and Results of Operations"). All forward-looking statements included in this report are based on information available to us as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations or in events, conditions or circumstances on which any such statement is based. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of certain risks and factors that may affect our business. Our reports are available free of charge as soon as reasonably practicable after such material is electronically filed with the SEC and may be obtained through our Web site located at www.ilinc.com. iLinc, iLinc Communications, iLinc Suite, MeetingLinc, LearnLinc, ConferenceLinc, SupportLinc, iLinc On-Demand, and their respective logo are trademarks or registered trademarks of iLinc Communications, Inc. All other company names and products may be trademarks of their respective companies. 3 PART I ITEM 1. BUSINESS COMPANY OVERVIEW Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a leading provider of Web conferencing, audio conferencing and collaboration software and services. We develop and sell software that provides real-time collaboration and training using Web-based tools. Our four-product iLinc Suite, comprised of LearnLinc, MeetingLinc, ConferenceLinc, and SupportLinc, is an award winning virtual classroom, Web conferencing and collaboration suite of software. With our Web collaboration, conferencing and virtual classroom products, we provide simple, reliable and cost-effective tools for remote presentations, meetings and online events. Our software is based on a proprietary architecture and code that finds its origins as far back as 1994, in what we believe to be the beginnings of the Web collaboration industry. Versions of the iLinc Suite have been translated into six languages, and it is currently available in version 8.01. Our customers may choose from several different pricing and licensing options for the iLinc Suite depending upon their needs. Uses for our four-product suite of Web collaboration software include online business meetings, sales presentations, training sessions, product demonstrations and technical support assistance. We sell our software solutions to large and medium-sized corporations inside and outside of the Fortune 1000. We market our products using a direct sales force and a distribution channel consisting of agents and value added resellers. We allow customers to choose between purchasing a perpetual license and subscribing to a term license, providing for flexibility in pricing and payment methods. Our revenues are a mixture of high margin perpetual licenses of software and monthly recurring revenues from annual maintenance, hosting and support agreements, and other products and services. PRODUCTS AND SERVICES WEB CONFERENCING AND WEB COLLABORATION The iLinc Suite is a four-product suite of software that addresses the most common business collaboration needs. LearnLinc is an Internet-based software that is designed for training and education of remote students. With LearnLinc, instructors and students can collaborate and learn remotely providing an enhanced learning environment that replicates and surpasses traditional instructor-led classes. Instructors can create courses and classes, add varied agenda items, enroll students, deliver live instruction, and deliver content that includes audio, video, and interactive multimedia. In combination with TestLinc, LearnLinc permits users to administer comprehensive tests, organize multiple simultaneous breakout sessions, and record, edit, play back, and archive entire sessions for future use. MeetingLinc is an online collaboration software designed to facilitate the sharing of documents, PowerPoint(TM) presentations, graphics, and applications between meeting participants without leaving their desks. MeetingLinc allows business professionals, government employees, and educators to communicate more effectively and economically through interactive online meetings using Voice-over IP technology to avoid the expense of travel and long distance charges. MeetingLinc allows remote participants to give presentations, demonstrate their products and services, annotate on virtual whiteboards, edit documents simultaneously, and take meeting participants on a Web tour. Like all of the Web collaboration products in the Suite, MeetingLinc includes integrated voice and video conferencing services. ConferenceLinc is a presentation software designed to deliver the message in a one-to-many format providing professional management of Web conferencing events. ConferenceLinc manages events such as earning announcements, press briefings, new product announcements, corporate internal mass communications and external marketing events. ConferenceLinc is built on the MeetingLinc software platform and code to combine the best interactive features with an easy-to-use interface providing meaningful and measurable results to presenters and participants alike. Its design includes features that take the hassle out of planning and supporting a hosted Web seminar. ConferenceLinc includes automatic email invitations, "one-click join" capabilities, online confirmations, update notifications, and customized attendee registration. With ConferenceLinc, presenters may not only present content, but may also gain audience feedback using real-time polling, live chat, question and answer sessions, and post-event assessments. The entire presentation is easily recordable for viewing offline and review after the show with the recorder capturing the content and the audio, video, and participant feedback. 4 SupportLinc is an online technical support and customer sales support software designed to give customer service organizations the ability to provide remote hands-on support for products, systems, or software applications. SupportLinc manages the support call volume and enhances the effectiveness of traditional telephone-based customer support systems. SupportLinc's custom interface is designed to be simple to use so as to improve the interaction and level of support for both customers and their technical support agents. Our Web collaboration software is sold on a perpetual license or periodic license basis. A customer may choose to acquire a one-time perpetual license (the "Purchase Model") or may rent our software on an annual basis on either a per seat or per minute basis (the "ASP Model"). Should they choose to acquire the software using the Purchase Model, then they may either elect to host our software behind their own firewall or they may choose to have iLinc host it for them, depending upon their preferences, budget and IT capabilities. Customers who select the Purchase Model, whether hosted by iLinc or the customer, may also subscribe for ongoing customer support and maintenance services, using a support and maintenance contract with terms from one to five years. iLinc launched the Enterprise Unlimited perpetual licensing model during fiscal 2006, which enables customers to pay a one-time up-front fee for unlimited, organization-wide Web conferencing. The maintenance and support fee charged is between 15% and 18% of the purchase license fee that is paid for the perpetual licenses and varies depending upon the length of the support agreement. If a customer chooses to have iLinc host their Purchase Model licenses, then the customer is charged a hosting fee equal to 10% of the purchase license fee that was paid for the perpetual license. Those customers who qualify for the iLinc Enterprise Unlimited site license may subscribe to an unlimited use license. The initial iLinc Enterprise Unlimited license fee is determined based upon the number of employees within the customer's organization, or other factors. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are then based upon a fixed rate per-seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement. Customers may expand the number of active seats available to them at any time with a corresponding increase in annual maintenance and hosting fees being charged. Customers choosing the ASP Model pay per seat (concurrent connection) on either a per month or per year basis depending upon the length and term of the subscription agreement. Hosting and maintenance are included as a part of the monthly or annual rental fees. Customers may also obtain Web conferencing and audio conferencing on a per minute basis using the iLinc On-Demand product. Those choosing the iLinc On-Demand product pay on a monthly basis typically without contractual commitment. AUDIO CONFERENCING Through its acquisition of substantially all of the assets of Glyphics Communications, Inc. ("Glyphics") in June 2004, the Company also delivers comprehensive audio conferencing solutions that help businesses provide virtual meetings, corporate events, distance learning programs, and daily conference calls. Our audio conferencing offering includes a wide array of services and products that include the following: o AUDIO ON-DEMAND (NO RESERVATIONS NEEDED): With pre-established calling accounts for each user, you can create or participate in conference calls with no advance notice, 24/7; o RESERVED AUTOMATED: The solution for recurring calls, each participant has a permanent number and passcode; o OPERATOR ASSISTED: For important calls, this service includes an iLinc conference operator to host, monitor, and coordinate the call; and, o ONLINE SEMINARS: High quality event services that include invitation and user management, scripting, presentation preparation, post show distribution, and dedicated operator assistance from iLinc. Customers may purchase our audio conferencing products and services, without an annual contract commitment, on a monthly recurring usage basis, and often subscribe for a fixed per-minute rate. 5 OTHER PRODUCTS AND SERVICES In addition to the iLinc Suite of products and services, we offer to our customers an array of e-Learning and training products and services. We offer training software products that, like iLinc, promote online collaboration with products that integrate with our LearnLinc software. These include: TestLinc which is an assessment and quizzing tool that allows for formal testing and evaluation of students and i-Canvas which is a training content development software that allows non-technical training professionals to create Web-based training courses without programming. i-Canvas is sold on an individual user perpetual license basis. We offer custom content development services through a subcontractor relationship. We also offer a library of online courses focused upon the training of executives on essential business topics. Our off-the-shelf online library of content includes an online mini-MBA program co-developed with the Tuck School of Business at Dartmouth College. MARKETING Marketing has developed a plan that incorporates public relations, tradeshows, Web events, Web marketing initiatives, and direct marketing (mail and email) efforts messaged in campaigns that speak to the needs of our specific target markets. The goal of our marketing strategy is to drive new business into our customer base and then cross sell our synergistic Web, audio, and event product and drive usage of all products to increase the propensity for our customers to make additional purchases. DIRECT SALES The direct sales team is organized by geographic territory and is broken down into distinct groups: Direct Sales sells to organizations that are not yet iLinc customers; Enterprise Sales sells into large existing accounts; and our Event Sales team sells our High-Touch Event Services offering to all sizes of organizations. All of these groups focus their outbound activity on our specific vertical markets of financial services, high technology, and professional service organizations. We believe that the target vertical markets have a commonality of meeting four criteria: we have an established customer base in the market; our product feature set is specifically appropriate to the needs of the market; analysts have identified a need within that market for increasing use of Web and audio conferencing; and we believe that we have the potential to capture a portion of the share of such markets. INDIRECT SALES iLinc has formed relationships with several organizations that market and sell our products and services through their sales distribution channels. The relationships can be categorized into those that act as agents which sell on behalf of iLinc and value added resellers (VAR's) that actively sell our products and provide product support typically to their own existing customer base. As of March 31, 2006, we had over 30 organizations selling our products providing indirect sales in North America and in countries outside North America, including the United Kingdom, Spain, Italy, Germany, Colombia, and Japan. Our value added resellers execute agreements to resell our products to their customers through direct sales and in some cases through integration of our products into their products or service offerings. Our distribution agreements typically have terms of one to three years and are automatically renewed for an additional like term unless either party terminates the agreement for breach or other financial reasons. In most of these agreements, the VAR licenses the product from us and resells the product to its customers. Under those VAR agreements, we record only the amount paid to us by the VAR as revenue and recognize revenue when all revenue recognition criteria have been met. CUSTOMERS Approximately 3,000 corporate, higher education, and government customers use iLinc inside of their organizations for their Web and audio conferencing needs, including 25 Fortune 500 companies. Our corporate customer list includes notable customers in financial services such as Aetna, Allianz Life, Guardian Life Insurance, JPMorgan Chase, St. Paul Travelers Insurance and Citigroup; high tech, with customers such as California Software Corporation, Qualcomm, Sabre Holdings, Inc., Sony and Xerox Corporation; and professional services organizations, such as EDS, Greenberg Traurig, and McKinsey & Company. We have more than 80 higher education organizations including Benedictine University, Creighton University, Kent State University, University of New Hampshire, National University, The State Universities of New York, Tulane and Villanova University. iLinc also has an impressive list of state and Federal Government clients such as the State of Louisiana, the State of Oregon, the U.S. Army, U.S. Navy, the Coast Guard and the Department of Defense. Our reach includes customers both within the United States, Canada, Mexico, and outside North America. 6 AWARDS AND ACKNOWLEDGEMENTS We are proud of the recognition received by the Company from leading industry experts including Forrester Research and Front & Sullivan. In June 2006, Forrester Research, an independent research firm, names iLinc as a "Strong Performer" in their report titled "The Forrester WaveTM: Web Conferencing Q2 2006." In January 2006, the Company received the 2006 Excellence in Technology Award from industry analyst Frost & Sullivan in which the firm noted that iLinc delivers "...breakthrough technology that addresses real issues facing organizations deploying Web conferencing enterprise-wide." Together with our predecessors, we have been honored with more than 60 awards from notable authorities such as the American Society for Training and Development ("ASTD"), analyst Brandon Hall, and e-Learning Magazine, which selected iLinc as a Best of e-Learning company in 2005. The list of awards includes four National Telly Awards, six Software Service Provider of the Year Awards, and two Gold Medals from e-Learning authority Brandon Hall. Software from our organization has taken first place in two Software Shootouts held at the Online Learning conference in which e-Learning professionals decided which products were best-of-class based on functionality and ease of use. Notably, in 2002 our Web conferencing software was voted first place at the synchronous software shootout held at Online Learning Expo besting industry leaders WebEx, Centra and PlaceWare (purchased by Microsoft and now Microsoft Live Meeting). In late 2005, Web conferencing Analysts Wainhouse Research noted "iLinc offers a licensing model that supports organizations that have made a strategic commitment to Web conferencing," and in a May 2005 report iLinc was noted to be the "1st virtual classroom product & still a technology leader" by the analyst firm Bersin and Associates. We continue to receive recognition from analysts and notable experts as we maintain a leadership position in the conferencing and collaboration market. TECHNOLOGY & INTELLECTUAL PROPERTY Our existing technology and intellectual property were originally developed by organizations that we have acquired, including the assets from the Mentergy and Glyphics transactions, (see public filings for further description of those transactions). We host our software and provide Internet connectivity from our dedicated servers in Los Angeles, California; Phoenix, Arizona; Springville, Utah; and Troy, New York. We maintain a network infrastructure on-premises in our Phoenix, Springville, and Troy offices, and through leased data centers in Los Angeles. Our data network is redundant in design and is secure from unauthorized access. Our Web collaboration software products are client/server applications that operate in a Windows environment. Our hosted Web conferencing product utilizes this Windows environment but also operates an extended front-end system that operates in a Linux environment using an Oracle database, with redundant load balancing hardware to ensure maximum system availability. RESEARCH & DEVELOPMENT The Company invested a substantial portion of its working capital and resources in the continued development of its software and technologies. We employ full-time engineers, programmers and developers that are located in Troy, New York and Phoenix, Arizona, who are constantly focused on developing new features and enhancements to our existing software offering and expanding that offering with new products and services. The primary focus of our research and development efforts is on improving the functionality and performance of the iLinc Suite as well as developing new features that meet changing market demands. In the 2005 fiscal year, we invested over $1.5 million in direct and indirect research and development activities and $1.4 million in the 2006 fiscal year. We expect to continue to make significant investments in research and development for the next several years. CUSTOMER SERVICE We employ full-time Tier 1 and Tier 2 customer support and technical support representatives, who are located in Troy, New York and Springville, Utah, and are constantly focused on the delivery of high-quality service and support to our existing customer base and channel partners. We offer varying levels of support, depending upon the maintenance and support agreement executed by the customer, that include telephone support through a toll-free number and an email support request system. We also offer access to self-help information that includes a database of frequently asked questions, quick reference and 7 advanced end-user guides, online tutorials, and access to a real-time searchable knowledge database. Our response times vary depending upon the issue, but the vast majority of our customer support questions are addressed during the initial support call. Customer issues and support tickets are tracked within our CRM database for use by our technical support teams and customers searching the knowledge database. COMPETITION We believe that our current Web conferencing software has specific and unique characteristics that match the needs of our customers and target markets. The Company intends to leverage these strengths as well as direct product development efforts to continue to enhance the software to meet the specific needs of these markets. With our emphasis on our Web collaboration four-product suite, we face competition from various Web conferencing and collaboration software companies including WebEx, Microsoft Live Meeting, and Centra, as well as providers of similar software such as Interwise and Breeze. The Web collaboration, virtual classroom, and Web conferencing industry continues to change and evolve rapidly, and we expect continued consolidation within the industry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, and other resources and greater name recognition than we have. We have identified what we believe to be the principal competitive factors in our markets, including: ease of use, breadth and depth of feature set, quality and reliability of products, pricing, security, and our ability to develop and support software license sales. Although we believe our products compete favorably, we may not be able to maintain a competitive position against current and potential competitors, especially those with greater financial resources. ACQUISITIONS As a part of our external growth strategy, we acquired the Web conferencing, audio conferencing, and several e-Learning companies providing the Company with expertise, tangible and intangible assets, technology, customer base, recurring revenues, and a global VAR network. November 2002 - Mentergy, Inc. ("Mentergy"), a provider of virtual classroom software. We acquired from Mentergy all assets associated with LearnLinc and TestLinc software, an existing customer base, a VAR network and a recurring maintenance revenue stream. June 2004 - Glyphics Communications, Inc., ("Glyphics") a provider of comprehensive audio conferencing products and services. On June 3, 2004, the Company executed an agreement to acquire substantially all of the assets of and assume certain liabilities of Glyphics Communications, Inc., a Utah based private company. The acquisition had a stated effective date of June 1, 2004 and was fully consummated on June 14, 2004. The purchase price was $5.349 million. The purchase price was paid with the assumption of $2.466 million in specific liabilities, with the balance paid using the Company's common stock, which included the issuance of 2,820,355 shares valued at $0.98 per share upon execution of the agreement, and 308,133 shares valued at $0.39 per share upon release of escrow pending the settlement of certain acquisition contingencies. Subsequent to March 31, 2006, 704,839 shares were released from escrow related to the acquisition of Glyphics. Of that amount, 396,706 shares were returned to iLinc Communications due to the Company assuming obligations of $377,815 greater than scheduled in the purchase agreement. The remaining 308,133 shares were issued to the Glyphics shareholders at $0.39 per share based on the closing price of the agreement date of April 18, 2006. These shares were recorded as outstanding on March 31, 2006 pursuant to the terms of the Escrow Agreement. EMPLOYEES As of March 31, 2006 we employed 78 employees (including seven part-time employees). This includes 30 employees at our corporate offices in Phoenix, Arizona and 36 employees in our Springville, Utah facility. We also have 9 employees located in our development office in Troy, New York and 3 employees who work remotely in other states. None of our employees are represented by collective bargaining agreements. The populations of our functional organizations on March 31, 2006 included 13 sales employees, three marketing employees, 18 programming and technical support employees, 34 audio conferencing operators and support employees, and 13 finance, executive and administrative employees. 8 LEGACY DENTAL PRACTICE MANAGEMENT BUSINESS TREATED AS DISCONTINUED OPERATIONS The Company began its operations in March of 1998, with the simultaneous roll-up of 50 dental practices (an "Affiliated Practice") and an initial public offering. The Company's initial goals were to provide training and practice enhancement services nationwide to our Affiliated Practices using our proprietary Web-based learning management and financial reporting system. Beginning in April of 2000, the Company modified its affiliated service agreements and commensurate with that change the Company recorded certain charges against earnings during the fiscal years ended March 31, 2002 and March 31, 2001. The Company modified its business plan moving away from its dental practice management business during its fiscal year ended March 31, 2002. Effective January 1, 2004, the Company was no longer engaged in the dental practice management business and has reflected such business segment as a discontinued operation. ITEM 1A. RISK FACTORS You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could be adversely affected. WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS. We have a limited operating history in the Web conferencing and audio conferencing business. While the organizations that we have acquired have been engaged in their respective businesses for over five years, we only recently acquired those assets and have undertaken to integrate their assets into our operations at varying levels. Since the acquisition of these businesses, we have made significant changes to our product mix and service mix, our growth strategies, our sales and marketing plans, and other operational matters. Given our recent investment in technology, we cannot be certain that our business model and future operating performance will yield the results that we intend. In addition, the competitive and rapidly changing nature of the Web conferencing and audio conferencing markets makes it difficult for us to predict future results. Our business strategy may be unsuccessful and we may be unable to address the risks we face. WE FACE RISKS INHERENT IN INTERNET-RELATED BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS. We face risks frequently encountered by companies in new and rapidly evolving markets such as Web conferencing and audio conferencing. We may fail to adequately address these risks and, as a consequence, our business may suffer. To address these risks among others, we must successfully introduce and attract new customers to our products and services; successfully implement our sales and marketing strategy to generate sufficient sales and revenues to sustain operations; foster existing relationships with our customers to provide for continued or recurring business and cash flow; and successfully address and establish new products and technologies as new markets develop. We may not be able to sufficiently address and overcome risks inherent in our business strategy. OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY. Our operating results have varied significantly from quarter to quarter and are likely to continue to fluctuate as a result of a variety of factors, many of which we cannot control. Factors that may adversely affect our quarterly operating results include: the size and timing of product orders; the mix of revenue from custom services and software products; the market acceptance of our products and services; our ability to develop and market new products in a timely manner; the timing of revenues and expenses relating to our product sales; and revenue recognition rules. Expense levels are based, in part, on expectations as to future revenue and to a large extent are fixed in the short term. To the extent we are unable to predict future revenue accurately, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. WE HAVE LIMITED FINANCIAL RESOURCES AND MAY NOT REMAIN PROFITABLE. We have incurred substantial operating losses and have limited financial resources at our disposal. We have long-term obligations that we will not be able to satisfy without additional debt and/or equity capital and/or ultimately generating profits and cash flows from our Web conferencing and audio conferencing operations. If we are unable to remain profitable, we will face increasing demands for capital. We may not be successful in raising additional debt or equity capital and may not remain profitable. As a result, we may not have sufficient financial resources to satisfy our obligations as they come due in the short term. 9 LISTING QUALIFICATIONS MAY NOT BE MET. The American Stock Exchange's continued listing standards require that we maintain stockholders' equity of at least $4.0 million if we have losses from continuing operations and/or net losses in three of our four most recent fiscal years. We have sustained losses in three of our four most recent fiscal years and therefore must maintain stockholders' equity of at least $4.0 million. If now or in the future, we fail to maintain a sufficient level of stockholders' equity in compliance with those and other listing standards of the American Stock Exchange, then we would be required to submit a plan to the American Stock Exchange describing how we intended to regain compliance with the requirements. In the event that our shares of common stock are diluted, the liquidity and price per share of our common stock may be adversely affected. DILUTION TO EXISTING STOCKHOLDERS WILL OCCUR UPON ISSUANCE OF SHARES WE HAVE RESERVED FOR FUTURE ISSUANCE. On March 31, 2006, 28,923,168 shares of our common stock were issued, of which 1,432,412 were held in treasury, and 17,138,028 additional shares of our common stock were reserved for issuance as the result of the exercise of warrants or the conversion of convertible notes and convertible preferred stock. The issuance of these additional shares will reduce the percentage ownership of our existing stockholders. The existence of these reserved shares coupled with other factors, such as the relatively small public float, could adversely affect prevailing market prices for our common stock and our ability to raise capital through an offering of equity securities. THE LOSS OF THE SERVICES OF OUR SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY CAUSE OUR BUSINESS TO SUFFER. Our success depends to a significant degree on the performance of our senior management team. The loss of any of these individuals could harm our business. We do not maintain key person life insurance for any officers or key employees other than on the life of James M. Powers, Jr., our Chairman, President and CEO, with that policy providing a death benefit to the Company of $1.0 million. Our success also depends on the ability to attract, integrate, motivate and retain additional highly skilled technical, sales and marketing, and professional services personnel. To the extent we are unable to attract and retain a sufficient number of additional skilled personnel, our business will suffer. OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND SERVICES. Our success depends in large part on our proprietary technology. If we fail to successfully enforce our intellectual property rights, the value of these rights, and consequently, the value of our products and services to our customers, could diminish substantially. It may be possible for third parties to copy or otherwise obtain and use our intellectual property or trade secrets without our authorization, and it may also be possible for third parties to independently develop substantially equivalent intellectual property. Currently, we do not have patent protection in place related to our products and services. Litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others. While we have not received any notice of any claim of infringement of any of our intellectual property, from time to time we may receive notice of claims of infringement of other parties' proprietary rights. Such claims could result in costly litigation and could divert management and technical resources. These types of claims could also delay product shipment or require us to develop non-infringing technology or enter into royalty or licensing agreements, which agreements, if required, may not be available on reasonable terms, or at all. COMPETITION IN THE WEB CONFERENCING AND AUDIO CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES. The markets for Web conferencing and audio conferencing products and services are relatively new, rapidly evolving and intensely competitive. Competition in our market will continue to intensify and may force us to reduce our prices, or cause us to experience reduced sales and margins, loss of market share and reduced acceptance of our services. Many of our competitors have larger and more established customer bases, longer operating histories, greater name recognition, broader service offerings, more employees and significantly greater financial, technical, marketing, public relations, and distribution resources than we do. We expect that we will face new competition as others enter our market to develop Web conferencing and audio conferencing services. 10 These current and future competitors may also offer or develop products or services that perform better than ours. In addition, acquisitions or strategic partnerships involving our current and potential competitors could harm us in a number of ways. FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED BUSINESS AND SERVICES. As commercial use of the Internet increases, federal, state, and foreign agencies could enact laws or adopt regulations covering issues such as user privacy, content, and taxation of products and services. If enacted, such laws or regulations could limit the market for our products and services. Although they might not apply to our business directly, we expect that laws or rules regulating personal and consumer information could indirectly affect our business. It is possible that such legislation or regulation could expose us to liability which could limit the growth of our Web conferencing and audio conferencing products and services. Such legislation or regulation could dampen the growth in overall Web conferencing usage and decrease the Internet's acceptance as a medium of communications and commerce. WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES WHICH MAKE OUR REVENUES DIFFICULT TO PREDICT. While audio conferencing provides a more recurring revenue base, a high percentage of our revenue is attributable to one-time purchases by our customers rather than long-term, recurring, conferencing ASP type contracts. As a result, our inability to continue to obtain new agreements and sales may result in lower than expected revenue, and therefore, harm our ability to achieve or sustain operations or profitability on a consistent basis, which could also cause our stock price to decline. Further, because we face competition from larger, better-capitalized companies, we could face increased downward pricing pressure that could cause a decrease in our gross margins. Additionally, our sales cycle varies depending on the size and type of customer considering a purchase. Potential customers frequently need to obtain approvals from multiple decision makers within their company and may evaluate competing products and services before deciding to use our services. Our sales cycle, which can range from several weeks to several months or more, combined with the license purchase model makes it difficult to predict future quarterly revenues. OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OUR VALUE ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS. We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales. These distribution partners are not obligated to distribute our services at any minimum level. As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future. The inability or unwillingness of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and therefore, harm our ability to achieve or sustain profitability on a consistent basis. SALES IN FOREIGN JURISDICTIONS BY OUR INTERNATIONAL DISTRIBUTOR NETWORK AND US MAY RESULT IN UNANTICIPATED COSTS. We continue to expand internationally through our value added reseller network and OEM partners. We have limited experience in international operations and may not be able to compete effectively in international markets. We face certain risks inherent in conducting business internationally, such as: o our inability to establish and maintain effective distribution channels and partners; o the varying technology standards from country to country; o our inability to effectively protect our intellectual property rights or the code to our software; o our inexperience with inconsistent regulations and unexpected changes in regulatory requirements in foreign jurisdictions; o language and cultural differences; o fluctuations in currency exchange rates; o our inability to effectively collect accounts receivable; or o our inability to manage sales and other taxes imposed by foreign jurisdictions. 11 THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER. We acquired our Web conferencing software and business in November of 2002 and we acquired our audio conferencing business in June of 2004. With our focus on those products and services, our growth depends on our ability to continue to develop new features, products, and services around that software and product line. We may not successfully identify, develop, and market new products and features in a timely and cost-effective manner. If we fail to develop and maintain market acceptance of our existing and new products to offset our continuing development costs, then our net losses will increase and we may not be able to achieve or sustain profitability on a consistent basis. IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS. Because the Web conferencing market is relatively new and still evolving, the prices for these services are subject to rapid and frequent changes. In many cases, businesses provide their services at significantly reduced rates, for free or on a trial basis in order to win customers. Due to competitive factors and the rapidly changing marketplace, we may be required to significantly reduce our pricing structure, which would negatively affect our revenue, margins and our ability to achieve or sustain profitability on a consistent basis. We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales. These distribution partners are not obligated to distribute our services at any particular minimum level. As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future. The inability of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and, therefore, harm our ability to achieve or sustain profitability on a consistent basis. IF WE ARE UNABLE TO COMPLETE OUR ASSESSMENT AS TO THE ADEQUACY OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF OUR COMMON STOCK. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring non-accelerated public companies to include in their annual reports on Form 10-K for fiscal years beginning after December 16, 2006 a report of management on their company's internal control over financial reporting, including management's assessment of the effectiveness of their company's internal control over financial reporting as of the company's fiscal year end. In addition, the accounting firm auditing a public company's financial statements must also attest to and report on management's assessment of the effectiveness of the company's internal control over financial reporting as well as the operating effectiveness of the company's internal controls. There is a risk that we may not comply with all of its requirements. If we do not timely complete our assessment or if our accounting firm determines that our internal controls are not designed or operating effectively as required by Section 404, our accounting firm may either disclaim its opinion as it is related to management's assessment of the effectiveness of its internal controls or may issue a qualified opinion on the effectiveness of our internal controls. If our accounting firm disclaims its opinion or qualifies its opinion as to the effectiveness of our internal controls, then investors may lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline. WE MAY ACQUIRE OTHER BUSINESSES THAT COULD NEGATIVELY AFFECT OUR OPERATIONS AND FINANCIAL RESULTS AND DILUTE EXISTING STOCKHOLDERS. We may pursue additional business relationships through acquisitions which may not be successful. We may have to devote substantial time and resources in order to complete acquisitions and we therefore may not realize the benefits of those acquisitions. Further, these potential acquisitions entail risks, uncertainties and potential disruptions to our business. For example, we may not be able to successfully integrate a company's operations, technologies, products and services, information systems, and personnel into our business. These risks could harm our operating results and could adversely affect prevailing market prices for our common stock. OUR CURRENT STOCK COMPENSATION EXPENSE NEGATIVELY IMPACTS OUR EARNINGS, AND WHEN WE ARE REQUIRED TO REPORT THE FAIR VALUE OF EMPLOYEE STOCK OPTIONS AS AN EXPENSE IN CONJUNCTION WITH THE NEW ACCOUNTING STANDARDS, OUR EARNINGS WILL BE ADVERSELY AFFECTED, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE. 12 Under our current accounting practice, stock compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. Beginning with the fiscal quarter April 1, 2006, we will be required to report all employee stock options as an expense based on a change in the accounting standards and our earnings will be negatively impacted, which could adversely affect prevailing market prices for our common stock and increase our anticipated net losses. ITEM 2. PROPERTIES We maintain corporate headquarters in Phoenix, Arizona and have occupied that 14,000 square foot Class A facility since the Company's inception in 1998. The Phoenix lease began in 1998 and has a term of 10 years. The Phoenix office can accommodate up to 85 employees and is fully equipped with up-to-date computer equipment and server facilities. Subsequent to March 31, 2006, the Company amended the lease on its Phoenix location, which was set to expire February 28, 2007. The term was extended to February 28, 2012, the square footage was reduced to 9,100 and the related rent expense was therefore reduced as a result of the amendment. After this amendment, the Phoenix lease requires a monthly rent and operating expenses of approximately $25,000. We also maintain a 2,500 square foot Class B facility in Troy, New York costing $4,600 per month with an emphasis in that location on research and development, and technical support. In addition, we maintain offices in Springville, Utah, occupying a Class A facility in two adjacent buildings. The first building houses its administrative and IT functions, with 10,000 square feet of space, with the second housing the operator complex and sales organizations with 6,122 square feet. The Springville lease began in 2003 and has a term of five years. The Springville offices can accommodate up to 100 employees and is fully equipped with up-to-date computer equipment. The facility also provides a fully redundant co-location and server facility for audio conferencing activities and hosted Web conferencing services. The Springville lease requires a monthly rent of approximately $13,500. ITEM 3. LEGAL PROCEEDINGS On June 14, 2002, the Company acquired the assets of Quisic. Subsequently, on November 4, 2002, two former employees of Quisic (Mr. Weathersby, their former CEO and Mr. Alper, their former CIO), filed a lawsuit in the Superior Court of the State of California styled George B. Weathersby, et al. vs. Quisic, et al. claiming damages against Quisic and the Board of Directors of Quisic arising from their employment termination by the Quisic Board. The Company was also added as a third party defendant with an allegation of successor liability, but only to the extent that Quisic is found liable, and then only to the extent the plaintiffs prove their successor liability claim against the Company. Through arbitration, the claims of Alper against all of the defendants were dismissed. The Company only acquired certain assets of Quisic in an asset purchase transaction. Based upon the facts and circumstances known, the Company believes that the plaintiffs' claims are without merit, and furthermore, that the Company is not the successor of Quisic, and therefore the Company intends to vigorously defend this aspect of the lawsuit. While in the opinion of management, resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur that awarded large sums to the Plaintiff against defendant Quisic, and then the court determined that the Company is a successor to Quisic, then the impact is likely to be material to the Company. The claims by Mr. Weathersby against Quisic remain with the trial proceeding in the discovery phase. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE 13 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the executive officers of the Company (ages are as of March 31, 2006): James M. Powers, Jr. 50 Chairman, President and Chief Executive Officer James L. Dunn, Jr. 44 Senior Vice President, Chief Financial Officer and General Counsel Nathan Cocozza 33 Senior Vice President of Sales Gary Moulton 37 Senior Vice President of Audio Conferencing Services JAMES M. POWERS, JR. Chairman, President and Chief Executive Officer Dr. James M. Powers, Jr. has served as Chairman, President and CEO of the Company since December 1998. Dr. Powers led the Company through its initial growth and acquisition phase and subsequent transformation to an integrated communications company providing Web, audio, video, and Voice-over IP solutions. Dr. Powers joined the Company through the merger with Liberty Dental Alliance, Inc., a Nashville-based company where he was the founder, Chairman, and President from 1997 to 1998. Dr. Powers was a founder and Chairman of Clearidge, Inc., a privately held bottled water company in Nashville, Tennessee from 1993 to 1999, where he led Clearidge through 13 acquisitions over three years to become one of the largest independent bottlers in the Southeast, before selling the company to Suntory Water Group, Inc. Dr. Powers also was a founder and Director of Barnhill's Buffet, Inc., a privately held chain of 48 restaurants in the Southeast with over $100 million in annual revenues, which was sold in early 2005. He received his Bachelor of Science Degree from the University of Memphis, a Doctor of Dental Surgery Degree from The University of Tennessee, and his MBA from Vanderbilt University's Owen Graduate School of Management. JAMES L. DUNN, JR. Senior Vice President, Chief Financial Officer and General Counsel James L. Dunn, Jr., assisted with the formation of the Company and was an integral part of the Company's initial public offering. Since the Company's inception, Mr. Dunn has been responsible for all corporate development activities, including most recently the acquisition of its Web conferencing and audio conferencing assets. Mr. Dunn is an attorney and assumed the role of General Counsel in March of 2000. He managed the legal transition of the Company from its legacy business beginnings to its current Web and audio conferencing focus. Mr. Dunn is also a CPA and assumed the role of Chief Financial Officer in June of 2005. He received his law degree from Southern Methodist University School of Law in 1987 and his Bachelor's Degree in Business Administration-Accounting from Texas A & M University in 1984. NATHAN COCOZZA Senior Vice President of Sales Nathan Cocozza joined the Company in early January of 2004 as Senior Vice President of Sales. Mr. Cocozza has had extensive sales experience, specifically in the Web conferencing, audio conferencing, and Web collaboration industry. He was previously the Vice President of strategic development for PlaceWare where he was responsible for their growth in their major accounts department from five to 50 people, obtaining contracts from organizations representing over 50% of the Fortune 100, and a major factor in PlaceWare's overall growth in revenue to over $50 million annually. PlaceWare was a leading provider of Web conferencing services that began in 1997 and ultimately was purchased by Microsoft for reportedly $200 million. Mr. Cocozza subsequently served as Vice President of North American Web sales for Genesys Conferencing (NasdaqNM:GNSY), where he was responsible for the launch of the Genesys Web collaboration services in the United States. Genesys, a French-based company, provides primarily audio conferencing as well as integrated Web conferencing services in 20 countries. GARY MOULTON Senior Vice President of Audio Conferencing Services Gary Moulton joined the Company as Senior Vice President of Audio Conferencing Services with the Glyphics transaction in June 2004. Mr. Moulton brings more than 10 years of service, management, and customer support experience to iLinc in the audio conferencing industry. He founded Glyphics in 1995 and managed its growth into a leading provider of phone conferencing and audio conferencing services and events. As a member of the Glyphics' Board of Directors and as President and Chief Executive Officer, he was responsible for developing and implementing corporate vision and strategy. Prior to starting Glyphics, Mr. Moulton was manager of inside sales and customer service for Cookietree Bakeries, Inc., a national food service company. Mr. Moulton also served for four years in the United States Marine Corps. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION, HOLDERS, AND DIVIDENDS The Company's common stock has been traded on the American Stock Exchange system under the symbol "ILC" since February 6, 2004. The following table sets forth the range of the reported high and low sales prices of the Company's common stock for the years ended March 31, 2006 and 2005: 2006 HIGH LOW - --------- ------- ------ First Quarter................................................ $0.38 $0.25 Second Quarter............................................... $0.30 $0.18 Third Quarter................................................ $0.34 $0.15 Fourth Quarter............................................... $0.49 $0.24 2005 HIGH LOW - --------- ------- ------ First Quarter ............................................... $1.37 $0.77 Second Quarter............................................... $0.92 $0.41 Third Quarter................................................ $0.60 $0.40 Fourth Quarter............................................... $0.54 $0.32 As of June 26, 2006, the closing price of our common stock was $0.54 per share and there were approximately 250 holders of record, as shown on the records of the transfer agent and registrar of common stock. The number of record holders does not bear any relationship to the number of beneficial owners of the common stock. The Company has not paid any cash dividends on its common stock in the past and does not plan to pay any cash dividends on its common stock in the foreseeable future. The Company's Board of Directors intends, for the foreseeable future, to retain earnings to finance the continued operation and expansion of the Company's business. EQUITY COMPENSATION PLANS The table below provides information relating to our equity compensation plans as of March 31, 2006. Number of Securities Remaining Available for Future Issuance Under Number of Securities to Weighted-Average Compensation Plans be Issued Upon Exercise Exercise Price of (Excluding Securities of Outstanding Options, Outstanding Options, Reflected in First Plan Category Warrants and Rights Warrants and Rights Column) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 2,637,864 $1.07 2,230,768 Equity compensation plans approved by security holders 450,000 $8.50 ---- Equity compensation plans not approved by security holders ---- ---- ---- -------------------------- ------------------------- Total 3,087,864 2,230,768 ========================== =========================
15 In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its Chief Executive Officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the Chief Executive Officer. The shares were valued at $405,000 based on the closing price of the stock on the date of grant, which is recorded as compensation expense ratably over the vesting period. The shares 100% vest after 10 years from the date of grant or upon attaining the following price performance criteria: 150,000 shares vest if the share price trades for $4.50 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $8.50 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $12.50 per share for 20 consecutive days. Subsequent to March 31, 2006, the Compensation Committee of the Board of Directors amended the vesting performance criteria hurdles as follows: 150,000 shares vest if the share price trades for $1.00 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $2.00 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $3.00 per share for 20 consecutive days. All other aspects of the grant remained the same. SALES OF UNREGISTERED SECURITIES Set forth below are the securities we issued during the 2006 fiscal year in private placement transactions which at the time were not registered under the Securities Act of 1933, as amended (the "Securities Act"). Further included is the consideration, if any, we received for such securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed. On September 30, 2005, the Company executed definitive agreements with nine investors to issue 70,000 unregistered shares of its Series B Preferred Stock, par value $0.001 (the "Series B Preferred Stock") and warrants to purchase 700,000 shares of its common stock (the "Warrants") in a private transaction that was exempt from registration under Section 4(2) of the Securities Act. Of the total Series B Preferred Stock issued, 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to four individuals in exchange for their cash investment of $150,000; 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to two vendors in exchange for an offset of their accounts payable balance in the amount of $150,000; and 40,000 shares of Series B Preferred Stock with Warrants to purchase 400,000 shares of common stock (effective August 29, 2005 as previously disclosed on Form 8-K dated September 2, 2005) were issued to three institutional investors in exchange for the offset of accrued liabilities in the amount of $400,000 that arose from the acquisition of certain assets from Quisic Corporation in June of 2002. The Company recorded a gain in debt conversion of $50,000 associated with this transaction since the liabilities outstanding were $450,000. The Series B Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share issue price, and is convertible into 2,800,000 shares of the Company's common stock using a conversion price of $0.25 per share. The Warrants that are exercisable at an exercise price equal to $0.50 per share expire on the third anniversary of the issue date of September 30, 2005. The issuance of these securities was made in reliance upon the exemptions from registration set forth in Section 4(2) of the Securities Act and Regulation D under the Securities Act. The aggregate value of the warrants of $55,000 is considered a deemed dividend in the calculation of loss per share. Subsequent to March 31, 2006, on June 9, 2006, the Company completed a private placement of 5,405,405 unregistered, restricted shares of common stock providing the Company $1.7 million in net cash proceeds. The Company paid its placement agent an underwriting commission of $180,000, of which $25,000 was recorded as deferred offering costs at March 31, 2006, and incurred additional offering expenses of approximately $50,000. Within 30 days of the closing date, the Company will file a Registration Statement on Form S-3 to enable the resale of the shares by the Investors. The Company intends to use the proceeds for working capital and general corporate purposes. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company (AMEX:ILC) that has been derived from the audited consolidated financial statements. Effective January 1, 2004, the Company discontinued its dental practice management services. The Company has restated its historical results to reflect that business segment as a discontinued operation. The Company began its current Web conferencing operations during the 2002 fiscal year. The selected financial data should also be read in conjunction with the Company's consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. 16 STATEMENT OF OPERATIONS DATA: YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 2006 2005 2004(*) 2003(*) 2002(*) -------- -------- -------- -------- -------- Revenues Licenses ...................................... $ 3,014 $ 3,274 $ 2,240 $ 446 $ 92 Software and audio services ................... 7,070 5,052 1,195 1,117 -- Maintenance and professional services ......... 2,448 2,043 2,471 2,513 2,590 -------- -------- -------- -------- -------- Total revenue ............................... 12,532 10,369 5,906 4,076 2,682 Cost of revenues and operating expenses ......... 11,789 13,743 7,293 6,748 3,446 -------- -------- -------- -------- -------- Income (loss) from operations ................... 743 (3,374) (1,387) (2,672) (764) -------- -------- -------- -------- -------- Loss from continuing operations before income taxes ......................................... (1,254) (5,199) (2,293) (3,889) (1,062) Income tax expense .............................. -- -- -- -- -- -------- -------- -------- -------- -------- Loss from continuing operations ................. (1,254) (5,199) (2,293) (3,889) (1,062) Income (loss) from discontinued operations ...... 83 (128) 275 133 6,867 -------- -------- -------- -------- -------- Net income (loss) ............................... (1,171) (5,327) (2,018) (3,756) 5,805 Preferred stock dividends ....................... (130) (105) (75) -- -- Imputed preferred stock dividends ............... (55) -- (247) -- -- -------- -------- -------- -------- -------- Income (loss) available to common shareholders... $ (1,356) $ (5,432) $ (2,340) $ (3,756) $ 5,805 ======== ======== ======== ======== ======== Earnings (loss) per common share - basic and Diluted From continuing operations ................... $ (0.05) $ (0.23) $ (0.16) $ (0.25) $ (0.09) From discontinued operations ................. -- -- 0.02 0.01 0.58 -------- -------- -------- -------- -------- Net earnings (loss) per common share ......... $ (0.05) $ (0.23) $ (0.14) $ (0.24) $ 0.49 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents ....................... $ 466 $ 532 $ 292 $ 409 $ 1,498 Working capital (deficit) ....................... (1,941) (4,251) (3,113) (2,984) (1,538) Assets of discontinued operations ............... -- 114 301 620 7,350 Total assets .................................... 16,000 17,229 12,460 12,423 15,587 Long-term debt, less current maturities ......... 8,467 8,822 6,404 7,901 7,361 Long-term debt discount ......................... (1,493) (2,120) (1,960) (2,038) (2,264) Liabilities of discontinued operations .......... 53 263 -- -- -- Total shareholders' equity ...................... 4,370 3,670 3,366 2,320 4,666
______________ (*) Effective January 1, 2004, the Company discontinued its dental practice management services. The Company has restated its historical results and selected financial data to reflect its dental segment as a discontinued operation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT INVOLVE WORDS LIKE "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, OUR DEPENDENCE ON OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS, OUR ABILITY TO EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE ABILITY OF CHANNEL PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. OUR REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEB SITE. 17 COMPANY OVERVIEW Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a leading provider of Web conferencing, audio conferencing and collaboration software and services. We develop and sell software that provides real-time collaboration and training using Web-based tools. Our four-product iLinc Suite, comprised of LearnLinc, MeetingLinc, ConferenceLinc, and SupportLinc, is an award winning virtual classroom, Web conferencing and collaboration suite of software. With our Web collaboration, conferencing and virtual classroom products, we provide simple, reliable and cost-effective tools for remote presentations, meetings and online events. Our software is based on a proprietary architecture and code that finds its origins as far back as 1994, in what we believe to be the beginnings of the Web collaboration industry. Versions of the iLinc Suite have been translated into six languages, and it is currently available in Version 8.01. Our customers may choose from several different pricing and licensing options for the iLinc Suite depending upon their needs. Uses for our four-product suite of Web collaboration software include online business meetings, sales presentations, training sessions, product demonstrations and technical support assistance. We sell our software solutions to large and medium-sized corporations inside and outside of the Fortune 1000. We market our products using a direct sales force and a distribution channel consisting of agents and value added resellers. We allow customers to choose between purchasing a perpetual license and subscribing to a term license, providing for flexibility in pricing and payment methods. Our revenues are a mixture of high margin perpetual licenses of software and monthly recurring revenues from annual maintenance, hosting and support agreements, and other products and services. PRODUCTS AND SERVICES WEB CONFERENCING AND WEB COLLABORATION The iLinc Suite is a four-product suite of software that addresses the most common business collaboration needs. LearnLinc is an Internet-based software that is designed for training and education of remote students. With LearnLinc, instructors and students can collaborate and learn remotely providing an enhanced learning environment that replicates and surpasses traditional instructor-led classes. Instructors can create courses and classes, add varied agenda items, enroll students, deliver live instruction, and deliver content that includes audio, video, and interactive multimedia. In combination with TestLinc, LearnLinc permits users to administer comprehensive tests, organize multiple simultaneous breakout sessions, and record, edit, play back, and archive entire sessions for future use. MeetingLinc is an online collaboration software designed to facilitate the sharing of documents, PowerPoint(TM) presentations, graphics, and applications between meeting participants without leaving their desks. MeetingLinc allows business professionals, government employees, and educators to communicate more effectively and economically through interactive online meetings using Voice-over IP technology to avoid the expense of travel and long distance charges. MeetingLinc allows remote participants to give presentations, demonstrate their products and services, annotate on virtual whiteboards, edit documents simultaneously and take meeting participants on a Web tour. Like all of the Web collaboration products in the Suite, MeetingLinc includes integrated voice and video conferencing services. ConferenceLinc is a presentation software designed to deliver the message in a one-to-many format providing professional management of Web conferencing events. ConferenceLinc manages events such as earning announcements, press briefings, new product announcements, corporate internal mass communications and external marketing events. ConferenceLinc is built on the MeetingLinc software platform and code to combine the best interactive features with an easy-to-use interface providing meaningful and measurable results to presenters and participants alike. Its design includes features that take the hassle out of planning and supporting a hosted Web seminar. ConferenceLinc includes automatic email invitations, "one-click join" capabilities, online confirmations, update notifications, and customized attendee registration. With ConferenceLinc, presenters may not only present content, but may also gain audience feedback using real-time polling, live chat, question and answer sessions, and post-event assessments. The entire presentation is easily recordable for viewing offline and review after the show with the recorder capturing the content and the audio, video and participant feedback. 18 SupportLinc is an online technical support and customer sales support software designed to give customer service organizations the ability to provide remote hands-on support for products, systems, or software applications. SupportLinc manages the support call volume and enhances the effectiveness of traditional telephone-based customer support systems. SupportLinc's custom interface is designed to be simple to use so as to improve the interaction and level of support for both customers and their technical support agents. Our Web collaboration software is sold on a perpetual license or periodic license basis. A customer may choose to acquire a one-time perpetual license (the "Purchase Model") or may rent our software on an annual basis on either a per seat or per minute basis (the "ASP Model"). Should they choose to acquire the software using the Purchase Model, then they may either elect to host our software behind their own firewall or they may choose to have iLinc host it for them, depending upon their preferences, budget and IT capabilities. Customers who select the Purchase Model, whether hosted by iLinc or the customer, may also subscribe for ongoing customer support and maintenance services, using a support and maintenance contract with terms from one to five years. The maintenance and support fee charged is between 15% and 18% of the purchase license fee that is paid for the perpetual licenses and varies depending upon the length of the support agreement. If a customer chooses to have iLinc host their Purchase Model licenses, then the customer is charged a hosting fee equal to 10% of the purchase license fee that was paid for the perpetual license. During Fiscal 2006, iLinc launched its Enterprise Unlimited perpetual licensing model that enables customers to pay a one-time up-front fee for unlimited, organization-wide Web Conferencing. Those customers who qualify for the iLinc Enterprise Unlimited site license may subscribe to an unlimited use license. The initial iLinc Enterprise Unlimited license fee is determined based upon the number of employees within the customer's organization and various other factors. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are then based upon a fixed rate per-seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement. Customers may expand the number of active seats available to them at any time with a corresponding increase in annual maintenance and hosting fees being charged. Customers choosing the ASP Model pay per seat (concurrent connection) on either a per month or per year basis depending upon the length and term of the subscription agreement. Hosting and maintenance are included as a part of the monthly or annual rental fees. Customers may also obtain Web conferencing and audio conferencing on a per minute basis using the iLinc On-Demand product. Those choosing the iLinc On-Demand product pay on a monthly basis typically without contractual commitment. AUDIO CONFERENCING Through its acquisition of substantially all of the assets of Glyphics Communications, Inc. ("Glyphics") in June 2004, the Company also delivers comprehensive audio conferencing solutions that help businesses provide virtual meetings, corporate events, distance learning programs, and daily conference calls. Our audio conferencing offering includes a wide array of services and products that include the following: o AUDIO ON-DEMAND (NO RESERVATIONS NEEDED): With pre-established calling accounts for each user, you can create or participate in conference calls with no advance notice, 24/7; o RESERVED AUTOMATED: The solution for recurring calls, each participant has a permanent number and passcode; o OPERATOR ASSISTED: For important calls, this service includes an iLinc conference operator to host, monitor, and coordinate the call; and, o ONLINE SEMINARS: High-quality event services that include invitation and user management, scripting, presentation preparation, post show distribution, and dedicated operator assistance from iLinc. 19 Customers may purchase our audio conferencing products and services without an annual contract commitment on a monthly recurring usage basis, and often subscribe for a fixed per-minute rate. OTHER PRODUCTS AND SERVICES In addition to the iLinc Suite of products and services, we offer to our customers an array of e-Learning and training products and services. We offer training software products that, like iLinc, promote online collaboration with products that integrate with our LearnLinc software. These include: TestLinc which is an assessment and quizzing tool that allows for formal testing and evaluation of students and i-Canvas, which is a training content development software that allows non-technical training professionals to create Web-based training courses without programming. i-Canvas is sold on an individual user perpetual license basis. We offer custom content development services through a subcontractor relationship. We also offer a library of online courses focused upon the training of executives on essential business topics. Our off-the-shelf online library of content includes an online mini-MBA program co-developed with the Tuck School of Business at Dartmouth College. INDUSTRY TRENDS Industry analyst Frost and Sullivan in their recent World Web Conferencing Market report separates the Web Conferencing vendor community into distinct groups that include: service providers ("Service Providers") and software providers ("Software Providers"). The difference between Service Providers and Software Providers is that the Service Providers effectively only offer Web conferencing as an ASP service or rental model basis. However, Software Providers offer Web conferencing as a solution that can be purchased and owned by customers (whether the software is installed internally by customers or hosted by the software provider). iLinc is one of the only providers that effectively competes in both the Service Provider and Software Provider markets. While we also offer our iLinc Suite as an ASP or per-minute service, the predominate licensing arrangement selected by our customer base remains the Purchase Model. The Web conferencing software market is the faster growing segment, representing about $227 million of the current Web conferencing market. A Frost and Sullivan forecast projects a 40% Compound Annual Growth Rate ("CAGR") between 2002 and 2010 (as compared with the service provider market which is projected to grow at a 22% CAGR for the same time period). The Software Provider market, based upon its higher growth rate, is expected to outgrow the Service Provider market by the end of 2009. Another important trend in the industry is the convergence of communication technologies such as audio and Web conferencing and the increase in demand for a single source for both of these capabilities. Frost and Sullivan has noted, in a separate report on audio conferencing, that the demand for integrated audio, Web, and video conferencing solutions continues to surge as end user needs for easy-to-use, single-source solutions swell. Developing and providing a truly converged user environment and experience, including the integration of audio, Web and video conferencing technologies, is essential. With the addition of audio conferencing capabilities, we have been able to provide a single source for deeply integrated Web, audio, video as well as Voice-over IP. Increasingly, the option a vendor chooses for Web conferencing determines their selection for audio conferencing. We believe we have already made significant progress in selling audio conferencing to the iLinc customer base and we actively cross sell all of our products and services to all customers. We believe that another benefit of the integrated conferencing approach is customer retention. According to the same Frost and Sullivan report, when Web conferencing and audio conferencing are sold together as an integrated package there is a significant increase in retention of the audio conferencing service. We are continuing to create incentives for our audio customers to be both Web and audio customers to drive this retention. MARKET POSITION - DIFFERENTIATORS We view our position in the market as the best solution for the enterprise-wide buyer that has already adopted Web conferencing, as well as organizations that believe their usage of Web conferencing will grow quickly. As mentioned earlier, a growing number of these organizations are using four or more different vendors for Web or audio conferencing services and, therefore, not realizing the economies of scale that consolidating to one or two vendors for these services can provide. There are also other important considerations revolving around Web conferencing such as security and bandwidth availability that are forcing the buying decision for Web and audio conferencing out of the business units and into the IT department. We believe that our solution uniquely maps to critical IT requirements among these mature buyers in four important areas. First, we offer WEB CONFERENCING SOFTWARE WITH FLEXIBLE LICENSING OPTIONS that allows organizations to pay a one-time license fee to install the software inside of their environment, or to purchase perpetual licenses and have those licenses hosted in our co-location facility. We find this flexibility to be an important differentiator to address the needs of customers that are ready to make an enterprise-wide decision as well as customers that think their usage may grow throughout their organization. We believe this licensing structure also enables us to maintain a consistent revenue stream of smaller sized purchases while also winning larger enterprise-wide deals that help substantially increase revenue growth. 20 Second, we believe we offer the HIGHEST LEVEL OF DATA SECURITY commercially available. We believe that we are the only Web conferencing provider that offers a customer-hosted solution with a purchase license option and true point-to-point security with our unique combination of Advanced Encryption Standard and secure socket layer (SSL). All information within a session can be transmitted between meeting attendees securely without any reduction in performance. We believe this aspect of our software has been extremely attractive to government, military, and financial organizations as well as to the companies that supply to these entities. We also believe that this solution, combined with other aspects of our software, enables us to be a more reliable solution than our Web conferencing software competitors. Third, our solution is SUITABLE AND SCALABLE FOR ENTERPRISE-WIDE DEPLOYMENT. The iLinc Suite contains four modes that address the most common needs for business collaboration within the enterprise. We offer virtual classroom software with our LearnLinc mode, presentation and sales demonstration capabilities with MeetingLinc, customer support with SupportLinc, and a mode for Web casts and marketing events with ConferenceLinc. Each of these modes shares a common interface enabling users of one mode to easily understand any of our other modes. We believe this reduces the learning curve for Web conferencing enterprise-wide roll out and we believe increases adoption success. All users can have access to all four modes of the suite. This is an important differentiation because our competition typically charges separate licensing fees for the use of separate modes. Giving users access to the full suite supports the natural migration of Web conferencing usage from department to department. Each of the modes has functionality built specifically for a particular type of activity. Fourth, we provide what we believe to be an EXCEPTIONAL "TOTAL COST OF OWNERSHIP" VALUE. Our software and services are competitively priced but, unlike our competitors, a customer's installation of our product is a very short and non-labor intensive process. Maintenance of our software also requires minimal attention from an IT perspective. We believe most of our Web conferencing software competitors require very complex and costly implementations. We believe that all of these factors make our solution compelling to organizations that have already adopted the practice of Web conferencing as a best practice as well as companies that are just starting to use Web conferencing, but anticipate that their usage will grow quickly. We recognize that in order to grow our market share we need to develop products that are easy to implement and that scale with our customer needs. SALES AND MARKETING FOCUS To leverage these advantages, our organization continually creates new marketing and sales campaigns that focus in four target markets. o We sell to prospects that are using other Web conferencing service providers that are ready to migrate to Web conferencing software. We find that these organizations appreciate the cost and feature advantages that our technology offers. o We target organizations that have a natural fit for highly secure Web conferencing software such as government, military, and financial organizations as well as the companies that supply to these entities. o We target organizations looking to deploy live, Web-based training. Our software was originally built for training and we have maintained a competitive technology advantage in this area. o We continue to cross sell all of our products and services to our large database of existing customers. 21 RESULTS OF OPERATIONS As of March 31, 2006, we provide integrated Web and audio conferencing software and services with what we believe to be a very robust feature set that includes integrated video and Voice-over IP. The iLinc Suite includes: LearnLinc, which permits live instructor-led training and education over the Internet to remote students replicating the instructor-led environment; MeetingLinc, which facilitates more effective and economical communication through online meetings using Voice-over IP technology to avoid the expense of travel and long-distance charges; ConferenceLinc, which delivers your message more consistently in a one-to-many format replicating professionally managed conferencing events; and SupportLinc, which gives customer service organizations the ability to provide remote, hands-on support for products, systems, or software applications. The iLinc Suite is available in both a periodic license rental model and perpetual license purchase model. Since its beginnings in 1994, LearnLinc and MeetingLinc have been installed and operational in corporate, government, and educational organizations in the United States and internationally. Our iLinc suite of products includes the ability to use integrated Voice-over IP and two-way live video. We have also completely integrated audio conferencing services into the Web conferencing products. These services supplement the Web product but can also be purchased separately. The operations of the Company involve many risks, which, even through a combination of experience, knowledge, and careful evaluation, may not be overcome. These risks include the fact that the market for Web conferencing products and services is in the early stages of development and may not grow to a sufficient size or at a sufficient rate to sustain the Company's business. The Company also faces intense competition from other Web conferencing and audio conferencing providers and may be unable to compete successfully. Many of the Company's existing and potential competitors have longer operating histories and significantly greater financial, technical, and other resources and therefore may be able to more quickly respond to changing opportunities or customer requirements. New competitors are also likely to enter this market in the future due to the lack of significant barrier to entry in the market share. See "Additional Risk Factors That May Affect Our Operating Results and The Market Price of Our Common Stock." REVENUES FROM CONTINUING OPERATIONS Total revenues generated from continuing operations for the 12 months ended March 31, 2006 ("fiscal 2006") and March 31, 2005 ("fiscal 2005") were $12.5 million and $10.4 million, respectively, an increase of $2.1 million. License revenues from continuing operations decreased $260,000 from $3.3 million in fiscal 2005 to $3.0 million in fiscal 2006. Software and audio services revenues increased $2.0 million from $5.1 million in fiscal 2005 to $7.1 million in fiscal 2006, and maintenance and professional services revenues increased $405,000 from $2.0 million in fiscal 2005 to $2.4 million in fiscal 2006. The overall increase in revenue is primarily a result of the Company's audio services revenue for a full twelve months in fiscal 2006 versus only ten months in fiscal 2005 due to the Glyphics acquisition, as well as continuing expansion into the Web and audio conferencing marketplace and concentrated sales and marketing strategies focused on promoting the iLinc Suite of products. Software license sales were relatively flat between fiscal 2006 and 2005. Total revenues from continuing operations generated for the 12 months ended March 31, 2005 and March 31, 2004 ("fiscal 2004") were $10.4 million and $5.9 million, respectively, an increase of $4.5 million. License revenues from continuing operations increased $1.0 million from $2.2 million in fiscal 2004 to $3.3 million in fiscal 2005, software and audio services revenue increased $3.9 million from $1.2 million in fiscal year 2004 to $5.1 million in fiscal 2005, and service and maintenance revenues decreased $428,000 from $2.5 million in fiscal 2004 to $2.0 million in fiscal 2005. The increase in revenue is a result of the Company's continuing expansion into the Web conferencing marketplace and concentrated sales and marketing strategies focused on promoting the iLinc Suite of products. COST OF REVENUES FROM CONTINUING OPERATIONS Cost of license revenues is driven by the amount of software licenses sold. It consists of royalty and usage fees paid to third parties on sale of certain product licenses and costs for fulfillment and materials. Cost of license revenues for the 12 months ended March 31, 2006 and March 31, 2005 were $51,000 and $154,000 respectively, a decrease of $103,000. The decrease is related to a decrease in third party usage fees for the Company's online learning management product. Cost of license revenues for the 12 months ended March 31, 2005 and March 31, 2004 were $154,000 and $219,000, respectively, a decrease of $65,000. The decrease is related to a decrease in third party usage fees for the Company's online learning management product. 22 Cost of software and audio services revenue include salaries and related expenses for our Web conferencing and audio services organizations, an overhead allocation consisting primarily of a portion of our facilities, communications, and depreciation expenses that are attributable to providing these services, an allocation of technical support costs attributable to providing support for these services and direct costs related to our ASP, hosting, and audio services offerings. Cost of software and audio services for the 12 months ended March 31, 2006 and March 31, 2005 were $3.9 million and $3.8 million, respectively, an increase of $82,000. The overall increase in costs is due to the inclusion of the Glyphics audio conferencing acquisition for a full year in fiscal 2006 compared to ten months in the prior year. The increase is partially offset by a reduction of estimates of liabilities assumed with that acquisition of $355,000, primarily in the second and third quarters of fiscal 2006. During fiscal 2006, it was determined through review of the liabilities and confirmation with Glyphics vendors that these liabilities were not owed and could be eliminated as a one-time reduction to expenses. Cost of software and audio services revenues for the 12 months ended March 31, 2005 and March 31, 2004 were $3.8 million and $526,000, respectively, an increase of $3.3 million. This increase is primarily a result of the acquisition of the Glyphics' audio conferencing assets and business in June of 2004. Cost of maintenance and professional services revenue include an allocation of technical support costs related to the maintenance services, an overhead allocation consisting primarily of a portion of our facilities costs, communications and depreciation expenses that are attributable to providing these services and third party costs related to our custom content revenues. Cost of maintenance and professional services for the 12 months ended March 31, 2006 and March 31, 2005 was $827,000 and $792,000, respectively, an increase of $35,000. Cost of maintenance and professional services revenue for the 12 months ended March 31, 2005 and March 31, 2004 was $792,000 and $1.2 million, respectively, a decrease of $456,000. This decrease is primarily attributable to a decrease of $640,000 in revenue from custom content contracts. Amortization of acquired developed technology consists of amortization of acquired software technology from the Mentergy, Glyphics, and Quisic acquisitions. Amortization of acquired technology for the 12 months ended March 31, 2006 and March 31, 2005 was $376,000 and $451,000, respectively, a decrease of $75,000 which is related to the full amortization of the software technology from the Mentergy and Quisic acquisitions. Amortization of acquired developed technology for the 12 months ended March 31, 2005 and March 31, 2004 was $451,000 and $233,000, respectively, an increase of $218,000, due primarily to the amortization of the Glyphics software technology. OPERATING EXPENSES FROM CONTINUING OPERATIONS Operating expenses from continuing operations consist of research and development, sales and marketing, general and administrative expenses. The Company incurred operating expenses from continuing operations of $6.7 million in fiscal 2006, a decrease of $1.8 million from $8.5 million in fiscal 2005. This decrease is due to a decrease in research and development costs of $153,000, a decrease in sales and marketing costs of $1.0 million and a decrease in general and administrative costs of $737,000. Fiscal 2005 operating expenses from continuing operations were $8.5 million, a $3.4 million increase from fiscal 2004 operating expenses of $5.1 million. The increase is primarily due to an increase in research and development costs of $511,000, an increase in sales and marketing costs of $1.9 million and an increase in general and administrative costs of $1.1 million. Research and development expenses from continuing operations represent expenses incurred in connection with the provision of Web and audio conferencing services, development of new products and new product versions and consist primarily of salaries and benefits, communication equipment and supplies. Research and development expenses for fiscal 2006 and fiscal 2005 were $1.4 million and $1.5 million respectively, a decrease of $153,000. The decrease is primarily the result of decreased salaries and benefits of $178,000 related to an overall decrease in the number of employees. Fiscal 2005 research and development expenses from continuing operations were $1.5 million, an increase of $511,000 from fiscal 2004 research and development expenses of $1.0 million. The increase is primarily the result of increased salaries and benefits of $302,000 related to an overall increase in the number of employees and additional compensation and benefits of $215,000 as a result of the Glyphics acquisition. 23 Sales and marketing expenses from continuing operations consist primarily of sales and marketing salaries and benefits, travel, advertising, and other marketing literature. Sales and marketing expenses were $3.1 million and $4.1 million for fiscal 2006 and fiscal 2005, respectively, a decrease of $1.0 million. The decrease is primarily a result of decreased salaries and related benefits of $547,000 due to a decrease in the average number of sales and marketing employees, decreases in marketing expenses of $298,000 related to lead generation activities, trade show attendance, and advertising costs. As a result of management's cost reduction program that was implemented in August 2005, overall overhead was reduced primarily in the second and third quarter of fiscal 2006. In 2006 as compared to 2005, travel and entertainment expenses decreased $51,000, recruiting fees decreased by $57,000 and general office and other overhead expenses decreased by $154,000. This amount also included costs related to the amortization of customer lists and intangibles from the Glyphics acquisition of $200,000 in fiscal 2006. Sales and marketing expenses were $4.1 million and $2.2 million for fiscal 2005 and fiscal 2004, respectively, an increase of $1.9 million. The increase is primarily a result of increased salaries and related benefits of $787,000 due to an increase in the average number of sales and marketing employees, increases in marketing expenses of $487,000 related to lead generation activities, trade show attendance, and advertising costs. This amount also included costs directly associated with sales and marketing expenses related to the Glyphics acquisition of $321,000 and costs related to the amortization of customer lists and intangibles from the Glyphics acquisition of $167,000. Advertising costs are expensed as incurred. The Company's advertising expense at March 31, 2006, 2005 and 2004 was $40,000, $22,000 and $122,000, respectively. General and administrative expenses from continuing operations consist of the corporate expenses of the Company. These corporate expenses include salaries and benefits of executive, finance, and administrative personnel, rent, bad debt expense, professional services, travel, office costs, and other general corporate expenses. During fiscal 2006 and 2005, general and administrative expenses from continuing operations were $2.2 million and $2.9 million, respectively, a decrease of $737,000. General and administrative expenses decreased primarily due to a cost cutting initiative led by management, which took effect primarily in the second and third quarters of fiscal 2006. The overall decrease in general and administrative expense was primarily comprised of a decrease in bad debt expense of $102,000, salaries and related benefits of $21,000, contract labor of $61,000, accounting fees of $198,000, consulting fees of $94,000, recruiting fees of $33,000, legal fees of $21,000 and investor relations expense of $23,000. Tax liabilities also decreased by $83,000 of which $81,000 related to the release of a tax liability that was recorded as an estimate as part of the Glyphics acquisition. After further review and confirmation from the tax authority, the Company determined that the tax liability would not be realized, and therefore the liability was eliminated and a corresponding reduction of the expense was recorded as a one-time reduction. During fiscal 2005 and 2004, general and administrative expenses from continuing operations were $2.9 million and $1.8 million, respectively, an increase of $1.1 million. General and administrative expenses increased primarily due to the expansion of the business, which included the Glyphics acquisition. The overall increase in general and administrative expense was primarily comprised of an increase in bad debt expense of $331,000, salaries and related benefits of $208,000, accounting fees of $166,000, consulting fees of $145,000, warrant expense of $91,000, and investor relations expense of $85,000. INTEREST EXPENSE FROM CONTINUING OPERATIONS Interest expense from continuing operations was $1.9 million in fiscal 2006 and in fiscal 2005. Interest expense from continuing operations increased from $1.2 million in fiscal 2004 to $1.9 million in fiscal 2005 primarily as a result of the $3.2 million issuance on senior notes and debt acquired from Glyphics. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS The Company recorded no tax benefit during fiscal 2006 because it concluded it is not likely it would be able to recognize the tax asset created due to the lack of operating history of its Web and audio conferencing business strategy. At March 31, 2006, the Company has a net deferred tax asset of $13,627,000 with a corresponding valuation allowance. The Company's tax benefits are scheduled to expire over a period of five to 13 years. The Company recorded no tax expense during fiscal 2006 and 2005 as a result of the losses it incurred in those years and did not record a tax benefit during fiscal 2004 due to the utilization of its fully reserved net operating loss carry-forward. 24 RESULTS OF DISCONTINUED OPERATIONS Effective January 1, 2004, the Company discontinued its dental practice management services. Results of operations from this segment are presented as discontinued operations for the fiscal years ended March 31, 2006, 2005, and 2004 in accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities." Net income/(loss) from discontinued operations for fiscal 2006, 2005 and 2004 was $83,000, ($128,000), and $275,000, respectively. Cash flows (used in)/provided by discontinued operations were ($13,000), $116,000, and $387,000 during the fiscal years 2006, 2005, and 2004, respectively. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2006, the Company had a working capital deficit of $1.9 million. Current assets included $466,000 in cash and $2.2 million in net accounts receivable and $42,000 in prepaids and other assets. Current liabilities consisted of $917,000 of deferred revenue, $269,000 of current maturities of long-term debt and capital leases and $3.5 million in accounts payable and accrued liabilities. We have generated cash from operations during 2006, specifically $457,000 in the third quarter and $249,000 in the fourth quarter, resulting in net cash provided by operating activities of $634,000 for the year ending March 31, 2006. Subsequent to March 31, 2006, the Company raised $2,000,000 of gross proceeds in a private placement of 5.4 million shares of common stock. A portion of the Company's plans to address its working capital deficiency includes further reductions in overhead and continued development, marketing and licensing of our iLinc suite of products and services through the internal sales efforts and external channel partnerships. Although we continue to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its Web conferencing and audio conferencing products and services to provide adequate cash flows to sustain our operations. CASH FLOWS FROM CONTINUING OPERATIONS Cash provided by operating activities was $634,000 during fiscal 2006. Cash used in operating activities was $2.6 million during fiscal 2005. Cash provided by operating activities during fiscal 2006 was primarily attributable to non-cash expenses of depreciation and amortization of $1.7 million, accretion of debt discount to interest expense of $626,000 and net debt conversion expense of $249,000. These items were partially offset by increases in accounts receivable of $352,000, decreases in accounts payable and accrued liabilities of $452,000 and a net loss of $1.2 million. Cash used in operating activities was $2.6 million during fiscal 2005. Cash used in operating activities during fiscal 2005 was primarily attributable to a net loss of $5.2 million and increases in accounts receivable of $450,000. These items were partially offset by increases in accounts payable and accrued liabilities of $465,000 and non-cash expenses and revenues totaling $2.6 million. Cash used in operating activities during fiscal 2004 was $1.1 million and was primarily attributable to a net loss of $2.3 million and an increase in accounts receivable of $352,000. These items were partially offset by increases in accounts payable and accrued liabilities of $753,000 and non-cash expenses and revenues totaling $1.0 million. Cash used by investing activities was $292,000, $194,000, and $364,000 in fiscal years 2006, 2005, and 2004, respectively. Cash used by investing activities during fiscal 2006 was primarily due to acquisition royalty earnout of $261,000 and capital expenditures of $55,000. Cash used by investing activities during fiscal 2005 was primarily due to capital expenditures of $153,000. Cash used by investing activities during fiscal 2004 was primarily due to capital expenditures of $66,000 and acquisitions, net of cash acquired of $367,000. Cash used in financing activities was $395,000 during fiscal 2006. Cash provided in financing activities was $2.9 million during fiscal 2005 and $926,000 during fiscal 2004. Cash used in financing activities in fiscal 2006 was primarily a result of repayment of long-term debt and capital lease liabilities of $308,000 and $157,000, respectively. Cash provided by financing activities during fiscal 2005 was primarily due to proceeds from the issuance of long-term debt of $4.3 million, partially offset by the repayment of long-term debt and capital lease liabilities of $514,000 and $328,000, respectively. Cash provided by financing activities during fiscal 2004 was primarily due to proceeds from the issuance of preferred stock of $1.5 million and issuance of long-term debt of $500,000. These were partially offset by the repayment of long-term debt and capital lease liabilities of $559,000 and $242,000, respectively and $212,000 in financing costs. 25 ACTIVITIES RELATED TO ACQUISITIONS AND CAPITAL RAISE ACTIVITIES In connection with the Company's initial public offering (IPO) in March of 1998, the Company issued notes to certain shareholders who had provided capital prior to the IPO. These notes were originally due in April of 2005 and required quarterly payments of interest only at the rate of 10%. During the first quarter of fiscal 2006, many of the noteholders agreed to extend the maturity date and accept installment payments that were due during the year ended March 31, 2006. The outstanding principal balance on these notes is $157,000 as of March 31, 2006. The Company has agreed to make installment payments for the outstanding principal balance plus accrued interest. As of March 31, 2006, the Company owed installment payments for principal of $87,000 on those IPO Notes, with no claims of default by the holders of the outstanding IPO notes. In March 2002, the Company completed a private placement offering (the "Convertible Note Offering") raising capital of $5,775,000 that was used to extinguish an existing line of credit. Under the terms of the Convertible Note Offering, the Company issued unsecured subordinated convertible notes (the "Convertible Notes"). The Convertible Notes bear interest at the rate of 12% per annum and require quarterly interest payments, with the principal due at maturity on March 29, 2012. The holders of the Convertible Notes may convert the principal into shares of the Company's common stock at the fixed price of $1.00 per share. The Company may force redemption by conversion of the principal into common stock at the fixed conversion price, if at any time the 20 trading day average closing price of the Company's common stock exceeds $3.00 per share. The notes are subordinated to any present or future senior indebtedness. As a part of the Convertible Note Offering the Company also issued warrants to purchase 5,775,000 shares of the Company's common stock for an exercise price of $3.00 per share. Those warrants expired on March 29, 2005 without exercise. The fair value of the warrants was estimated using a Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. A discount to the Convertible Notes of $1,132,000 was recorded using this value, which is being amortized to interest expense over the 10-year term of the Convertible Notes. As the carrying value of the notes is less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and is being amortized to interest expense over the 10 year term of the Convertible Notes. Upon conversion, any remaining discount and beneficial conversion feature will be expensed in full at the time of conversion. During fiscal 2004, holders with a principal balance totaling $150,000 converted their notes into 150,000 common shares of the Company. During fiscal 2006, holders with a principal balance of $525,000 converted their notes and $8,000 of accrued interest into 1,971,088 shares of the Company's common stock that had been registered with the SEC at a price of $0.25, $0.26 and $0.30 per share. Since the actual conversion price for the convertible debt was less than the fixed conversion price of $1.00, the Company recorded conversion expense of $338,000 for the year ending March 31, 2006. During fiscal 2006, the Company accelerated the amortization of the deferred offering costs and the discount and beneficial conversion feature associated with the debt by expensing $50,000 and $137,000, respectively at the time of conversion. On September 16, 2003, the Company completed its private placement of series A convertible preferred stock(the "Series A Preferred Stock") with detachable warrants. The Company sold 30 units at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000 shares of Series A Preferred Stock, par value $0.001 and a warrant to purchase 25,000 shares of common stock. The Series A Preferred Stock is convertible into the Company's common stock at a price of $0.50 per share, and the warrants are immediately exercisable at a price of $1.50 per share with a three-year term. Accordingly, each share of preferred stock is convertible into 20 shares of common stock and retains a $10 liquidation preference. The Company pays an 8% dividend to holders of the Series A Preferred Stock, and the dividend is cumulative. The Series A Preferred Stock is non-voting and non-participating. The shares of Series A Preferred Stock will not be registered under the Securities Act of 1933, as amended, and were offered in a private placement providing exemption from registration. The cash proceeds of the private placement of Series A Preferred Stock were allocated pro rata between the relative fair values of the Series A Preferred Stock and warrants at issuance using the Black-Scholes valuation model for valuing the warrants. The aggregate value of the warrants and the beneficial conversion discount of $247,000 are considered a deemed dividend in the calculation of loss per share. During the 2005 fiscal year, holders of 22,500 shares of Series A Preferred Stock converted those shares into 450,000 shares of the Company's common stock. The underlying common stock that would be issued upon conversion of the Series A Preferred Stock and upon exercise of the associated warrants have been registered with the SEC and may be sold pursuant to a resale prospectus dated May 24, 2004. 26 In April of 2004, the Company completed a private placement offering of unsecured senior notes (the "2004 Senior Note Offering") that provided gross proceeds of $4.25 million. Under the terms of the 2004 Senior Note Offering, the Company issued $3,187,000 in unsecured senior notes and 1,634,550 shares of the Company's common stock. The senior notes were issued as a series of notes pursuant to a unit purchase and agency agreement. The senior notes are unsecured. The placement agent received a commission equal to 10% of the gross proceeds together with a warrant for the purchase of 163,455 shares of the Company's common stock with an exercise price equal to 120% of the price paid by investors. The senior notes bear interest at a rate of 10% per annum and accrued interest is due and payable on a quarterly basis beginning July 15, 2004, with principal due at maturity on July 15, 2007. The senior notes are redeemable by the Company at 100% of the principal value at any time after July 15, 2005. The notes and common stock were issued with a debt discount of $768,000. The fair value of the warrants was estimated and used to calculate a discount of $119,000 of which $68,000 was allocated to the notes and $51,000 was allocated to equity. The total discount allocated to the notes of $836,000 is being amortized as a component of interest expense over the term of the notes which is approximately 39 months. The senior notes are unsecured obligations of the Company but are senior in right of payment to all existing and future indebtedness of the Company. The common stock issued in the 2004 Senior Note Offering was registered with the SEC pursuant to a resale prospectus dated August 2, 2005. Effective August 1, 2005, holders with a principal balance totaling $225,000 converted their senior notes and accrued interest of $800 into 903,205 shares of the Company's common stock at a price of $0.25 per share. Since the actual conversion price for the debt was greater than the market value of the stock at the date of conversion, the Company recorded a gain on conversion of $9,000 for the period ended December 31, 2005. During fiscal 2006, the Company accelerated the amortization of the deferred offering costs and the discount associated with the debt by expensing $10,000 and $35,000, respectively at the time of conversion. On November 9, 2005, placement agent warrants originally issued with an exercise price of $0.78 per common share were converted to 163,455 common shares at an exercise price of $0.25 per share, in which the Company received $41,000 in cash. The transaction resulted in an increase in deferred offering costs of $7,000 and an adjustment to additional paid-in capital of $7,000. On June 3, 2004, the Company executed an agreement to acquire substantially all of the assets of and assume certain liabilities of Glyphics Communications, Inc., ("Glyphics"), a Utah based private company, and a provider of comprehensive audio conferencing products and services. The acquisition had a stated effective date of June 1, 2004 and was fully consummated on June 14, 2004. The purchase price was $5.349 million. The purchase price was paid with the assumption of $2.466 million in specific liabilities, with the balance paid using the Company's common stock, which included the issuance of 2,820,355 shares valued at $0.98 per share upon execution of the agreement, and 308,133 shares valued at $0.39 per share upon release of escrow pending the settlement of certain acquisition contingencies. Subsequent to March 31, 2006, 704,839 shares were released from escrow related to the acquisition of Glyphics. Of that amount, 396,706 were returned to iLinc Communications due to the Company assuming obligations of $377,815 greater than scheduled in the purchase agreement. The remaining 308,133 shares were issued to the Glyphics shareholders at $0.39 per share based on the closing price of the agreement date of April 18, 2006. These shares were recorded as outstanding on March 31, 2006 pursuant to the terms of the Escrow Agreement. On September 30, 2005, the Company executed definitive agreements with nine investors to issue 70,000 unregistered shares of its Series B Preferred Stock, par value $0.001 (the "Series B Preferred Stock") and warrants to purchase 700,000 shares of its common stock (the "Warrants") in a private transaction that was exempt from registration under Section 4(2) of the Securities Act of 1933. Of the total Series B Preferred Stock issued, 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to four individuals in exchange for their cash investment of $150,000; 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to two vendors in exchange for an offset of their accounts payable balance in the amount of $150,000; and 40,000 shares of Series B Preferred Stock with Warrants to purchase 400,000 shares of common stock (effective August 29, 2005 as previously disclosed on Form 8-K dated September 2, 2005) were issued to three institutional investors in exchange for the offset of accrued liabilities in the amount of $400,000 that arose from the Quisic acquisition. The Company recorded a gain on debt conversion of $50,000 associated with this transaction since the liabilities outstanding were $450,000 at the time of the transaction. The Series B Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share issue price, and is convertible into 2,800,000 shares of the Company's common stock using a conversion price of $0.25 per share. The Warrants that are exercisable at an exercise price equal to $0.50 per share expire on the third anniversary of the issue date of September 30, 2005. The aggregate value of the warrants of $55,000 is considered a deemed dividend in the calculation of loss per share. 27 Subsequent to March 31, 2006, on June 9, 2006, the Company completed a private placement of 5,405,405 unregistered, restricted shares of common stock for approximately $1.7 million in net cash proceeds. The Company paid its placement agent an underwriting commission of $180,000 of which $25,000 was recorded as deferred offering costs at March 31, 2006 and incurred additional offering expenses of approximately $50,000. Within 30 days of the closing date, the Company will file a Registration Statement on Form S-3 to enable the resale of the shares by the investors. The Company intends to use the proceeds for working capital and general corporate purposes. CONTRACTUAL OBLIGATIONS The following schedule details all of the Company's indebtedness and the required payments related to such obligations at March 31, 2006 (IN THOUSANDS): DUE IN DUE IN YEARS LESS THAN DUE IN DUE IN YEAR FOUR AND DUE AFTER TOTAL ONE YEAR YEAR TWO THREE FIVE FIVE YEARS --------------------------------------------------------------------------------------- Long term debt................ $ 8,666 $ 199 $ 3,364 $ 2 $ 1 $ 5,100 Capital lease obligations..... 70 70 -- -- -- -- Interest Expense.............. 4,099 953 698 612 1,224 612 Operating lease obligations... 2,072 539 412 282 570 269 Base salary commitments under employment agreements................. 774 399 375 -- -- -- --------------------------------------------------------------------------------------- Total contractual obligations. $ 15,681 $ 2,160 $ 4,849 $ 896 $ 1,795 $ 5,981 =======================================================================================
The lease obligations above include commitments in accordance with amendments to the lease for the Phoenix location that was renegotiated and extended subsequent to March 31, 2006 (see Note 17). CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The more significant areas requiring use of estimates relate to revenue recognition, accounts receivable and notes receivable valuation reserves, realizability of intangible assets, realizability of deferred income tax assets, and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. REVENUE RECOGNITION Our revenues are generally classified into three main categories: license revenue, software and audio service revenue and maintenance and professional service revenue. License revenue is generated from the sale of our iLinc suite of Web conferencing software on a software purchase model basis and from the sale of our off-the-shelf courseware, primarily the online Bridge (Mini-MBA) program. Software and audio service revenue is generated from the sale of our iLinc Suite of Web conferencing software on an Application Service Provider ("ASP") model basis, the sale of our iLinc Suite software on a per-minute basis, and includes all revenue from the provision of audio conferencing services, as well as, all service contracts that might include hosting and training services. Maintenance and professional service revenue is generated from the sale of maintenance contracts related to our iLinc suite of Web conferencing software on a purchase model basis, when hosted by the customer, and from the sale of professional services that are associated with our custom content development services. 28 Sales of Software Licenses Because we offer the iLinc Suite software in one of two forms, the first being a purchase model and the second being an ASP or per-minute model, we have separate revenue recognition policies applicable to each licensing model. With each sale of our Web conferencing products and services, we execute written contracts with our customers that govern the terms and conditions of each software license sale, hosting agreement, maintenance and support agreement, and other services arrangements. We do not typically execute written agreements for the sale of audio conferencing services. In connection with the Company's sales of software licenses, whether on a purchase model basis or periodic license basis, the Company adopted Statement of Position ("SOP") 97-2 "Software Revenue Recognition" as issued by the American Institute of Certified Public Accountants. In accordance with SOP 97-2, the Company recognizes revenue from the sale of software licenses if all of the following conditions are met: first, there is persuasive evidence of an arrangement with the customer; second, the product has been delivered to the customer; third, the amount of the fees to be paid by the customer is fixed or determinable; and, fourth, collection of the fee is probable. Each of these factors, particularly the determination of whether a fee is fixed and determinable and the collectability of the resulting receivable, requires the application of the judgment and the estimates of management. Therefore, significant management judgment is utilized and estimates must be made in connection with the revenue we recognize in any accounting period. We analyze various factors, including a review of the nature of the license or product sold, the terms of each specific transaction, the vendor specific objective evidence of the elements required by SOP 97-2, any contingencies that may be present, our historical experience with like transactions or with like products, the creditworthiness of the customer, and other current market and economic conditions. Changes in our judgment based upon these factors and others could impact the timing and amount of revenue that we recognize, and ultimately the results of operations and our financial condition. Therefore, the recognition of revenue is a key component of our results of operations. At the time of the sale of our software license on a purchase license basis, we assess whether the fee associated with the transaction is fixed or determinable based on the payment terms associated with the transaction before recording immediate revenue recognition, assuming all other elements of revenue recognition are present. Billings to our customers are generally due within 30 to 90 days, with payment terms up to 180 days available to certain credit worthy customers. We believe that we have sufficient history of collecting all amounts within these normal payment terms and to conclude that the fee is fixed or determinable at the time of the perpetual license sale. We consider all arrangements with payment terms longer than 180 days not to be fixed or determinable and for arrangements involving the extended payment terms exceeding 180 days, revenue recognition occurs when payments are collected, assuming all other elements of revenue recognition are present. In addition, in assessing whether collection is probable or not for a given transaction, and therefore whether we should recognize the revenue, we make estimates regarding the creditworthiness of the customer. Initial creditworthiness is assessed through internal credit check processes, such as credit applications or third party reporting agencies. Creditworthiness for transactions to existing customers primarily relies upon a review of their prior payment history. We do not request collateral or other security from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon the receipt of payment or other change in circumstance. During Fiscal 2006, iLinc launched its Enterprise Unlimited perpetual licensing model, that enables customers to pay a one-time up-front fee for unlimited, organization-wide Web conferencing, with revenue recognized at the time of the sale of the Enterprise Unlimited perpetual license. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are based upon a fixed rate per seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement and that is approximately equivalent to the 15% to 18% charged for concurrent seat perpetual license contracts. 29 Customers may expand the number of active seats available to them at any time with a corresponding increase in annual maintenance and hosting fees being charged with the additional revenue recognized on a straight-line basis over the period of the contract. Sales of Concurrent Licenses on an ASP and Per-Minute Basis Historically and on a continuing basis, a majority of our license revenue has been generated under the software purchase model basis, with revenue recognized based on a one-time sale of a perpetual license. In addition to that purchase model software sale, we also offer a more flexible concurrent connection seat license and a pay-per-minute usage based model. Under our ASP model, a customer may subscribe to a certain number of concurrent connections or seats for a fixed period, often a year. Under this ASP method, we recognize the revenue associated with these monthly, fixed-fee subscription arrangements each month on a straight-line basis over the term of the agreement. Other customers choose to avoid annual commitments and instead use our Web conferencing and audio conferencing products and services based upon a per-minute or usage-based pricing model. Per-minute customers may also include those customers on an ASP model that incur overage fees for usage in excess of the permitted number of seats or minutes in excess of the minimum commitment. The per-minute fees that include overage fees are charged at the end of each month and recorded as revenue at the end of each month as the services are provided. Customers with contractually established minimum per-minute fees are assessed the greater of the established minimum or the actual usage at the end of each month. Customers wishing to avoid monthly commitments may use the e-commerce portion of our Web site that permits the use of our Web conferencing services on a pay-per-use basis, with no monthly minimum, purchasing the services and paying for those services online by credit card. Sales of Maintenance, Hosting, and Other Related Services The Company offers with each sale of its software products a software maintenance, upgrade, and support arrangement. These contracts may be elements in a multiple-element arrangement or may be sold in a stand-alone basis. Revenues from maintenance and support services are recognized ratably on a straight-line basis over the term that the maintenance service is provided. Maintenance contracts typically provide for 12-month terms with maintenance contracts available up to 36 months. The Company typically charges 15% to 18% of the software purchase price for a 12-month contract with discounts available for longer-term agreements. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are based upon a fixed rate per seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement and that is approximately equivalent to the 15% to 18% charged for concurrent seat perpetual license contracts. The Company also typically charges 5% to 10% for hosting of purchase model software sales for customers who do not wish to install and host the iLinc Suite on their own premises or that of a co-location facility. Charges for hosting are likewise spread ratably over the term of the hosting agreement, with the typical hosting agreement having a term of 12 months, with renewal on an annual basis. Revenues from consulting, training, and education services are recognized either as the services are performed, ratably over a subscription period, or upon completing a project milestone if defined in the agreement. These consulting, training, and education services, are not considered essential to the functionality of our products as these services do not alter the product capabilities, do not require specialized skills, and are often performed by the customer or our VAR's customers without access to those services. Implementation, consulting, training, translation, and other event-type services may also be sold in conjunction with the sale of our software products. Those services are generally recognized as the services are performed or earlier when all other revenue recognition criteria have been met. Although the Company may provide implementation, training, and consulting services on a time and materials basis, a significant portion of these services have been provided on a fixed-fee basis. Should the sale of our software involve an arrangement with multiple elements (for example, the sale of a software license along with the sale of maintenance and support to be delivered over the contract period), we allocate revenue to each component of the arrangement using the residual-value method based on the fair value of the undelivered elements. We defer revenue from the arrangement equivalent to the fair value of the undelivered elements and recognize the remaining amount at the time of the delivery of the product or when all other revenue recognition criteria have been met. Fair values for the ongoing maintenance and support obligations are based upon separate sales of renewals of maintenance contracts. Fair value of services, such as training or consulting, is based upon separate sales of these services to other customers. Thus, these types of arrangements require us to make judgments about the fair value of undelivered arrangements. 30 Sales of Custom Content Development Services A component of our maintenance and professional services revenue is derived from custom content development services. The sale of custom content development services often involves the execution of a master service agreement and corresponding work orders describing the deliverable due, the costs involved, the project milestones, and the payments required. These custom content development services are primarily outsourced to a subcontractor, Interactive Alchemy. For contracts and revenues related exclusively to custom content development services, the Company recognizes revenue and profit as work progresses on custom content service contracts using the percentage-of-completion method. This method relies on estimates of total expected contract revenue and costs as each job progresses throughout the relevant contract period. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a custom content service contract can be made. Recognized revenues and profit are subject to revisions as the custom content service contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Customers sometimes request modifications to projects in progress which may result in significant revisions to cost estimates and profit recognition, and the Company may not be successful in negotiating additional payments related to the changes in scope of requested services. Should this arise, the provision for any estimated losses on uncompleted custom content service contracts are made in the period in which such losses become evident. There were no such losses at March 31, 2006 for any custom content development services. For arrangements requiring customer acceptance, revenue is deferred until the earlier of the end of the acceptance period or until written notice of acceptance is received from the customer. Sales by VARs and Agents The Company has engaged organizations within the United States of America and in 12 other countries that market and sell its products and services through their sales distribution channels that are value added resellers (VARs). The VARs primarily sell, on a non-exclusive basis, our iLinc suite of Web conferencing products and predominately sell purchase-model perpetual licenses for installation and hosting by the VAR's customer. The Company's VAR contracts have terms of one to two years and are automatically renewed for an additional like term unless either party terminates the agreement for breach or other financial reasons. Each VAR purchases the product from the Company and resells the product to its customers. Under those VAR agreements, the Company records only the amount paid by the VAR as revenue and recognizes revenue when all revenue recognition criteria have been met. The Company also engages organizations that act as mere agents or distributors of its products ("Agents"), without title passing to the Agent and with the Agent only receiving a commission on the consummation of the sale to our customer. The Company records revenue on sales by Agents on a gross basis before commissions due to the Agent and only when all revenue recognition criteria are met as would be with a sale by the Company directly to a customer not involving an agent. Sales Reserves The sales reserve is an estimate for losses on receivables resulting from customer credits, cancellations and terminations and is recorded, if at all, as a reduction in revenue at the time of the sale. Increases to sales reserve are charged to revenue, reducing the revenue otherwise reportable. The sales reserve estimate is based on an analysis of the historical rate of credits, cancellations, and terminations. The accuracy of the estimate is dependent on the rate of future credits, cancellations, and terminations being consistent with the historical rate. If the rate of actual credits, cancellations and terminations is different than the historical rate, revenue would be different from what was reported. As of March 31, 2006, we did not believe that an accrual for sales reserves was necessary, and we will continue to assess the adequacy of the sales reserve account balance on a quarterly basis. Allowance for Doubtful Accounts We record an allowance for doubtful accounts to provide for losses on accounts receivable due to customer credit risk. Increases to the allowance for doubtful accounts are charged to general and administrative expense as bad debt expense. Losses on accounts receivable due to financial distress or failure of the customer are charged to the allowance for doubtful accounts. The allowance estimate is based on an analysis of the historical rate of credit losses. The accuracy of the estimate is dependent on the future rate of credit losses being consistent with the historical rate. If the rate of future credit losses is greater than the historical rate, then the allowance for doubtful accounts may not be sufficient to provide for actual credit losses. 31 The allowance for doubtful accounts is, as of March 31, 2006, $120,000 and $84,000, respectively, as March 31, 2006 and 2005 and is based on our historical collection experience. Any adjustments to these accounts are reflected in the income statement for the current period, as an adjustment to revenue in the case of the sales reserve and as a general and administrative expense in the case of the allowance for doubtful accounts. SOFTWARE DEVELOPMENT COSTS The Company accounts for software development costs in accordance with Statements of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," whereby costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Technological feasibility is established upon completion of a working model. Costs of maintenance and customer support are charged to expense when related revenue is recognized or when those costs are incurred, whichever occurs first. Software development costs incurred subsequent to the establishment of technological feasibility have not been significant to date, and all software development costs have been charged to research and development expense in the accompanying consolidated statements of operations. INTANGIBLE ASSETS On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and as a result, the Company's goodwill is no longer amortized. SFAS No. 142 requires that goodwill be tested annually (or more frequently if impairment indicators arise) for impairment. Upon initial application of SFAS No. 142, the Company determined there was no impairment of goodwill. The Company has established the date of March 31 on which to value its goodwill. The Company has made acquisitions of companies having operations or technology in areas within its strategic focus and has recorded goodwill and other intangible assets associated with its acquisitions. Future adverse changes in market conditions or poor operating results of the underlying acquired operations could result in losses or an inability to recover the carrying value of the goodwill and other intangible assets thereby possibly requiring an impairment charge in the future. The Company, based in part on a third party full scope valuation with a valuation date of March 31, 2006, has determined that impairment of that goodwill and intangible assets was not required. Based upon that third party valuation and further analysis performed, the Company's management believes no such impairment exists at March 31, 2006. Debt issuance costs are amortized using the straight-line method over the term of the related debt obligations. Other intangibles primarily consist of the LearnLinc and Glyphics purchase consideration that was allocated to purchased software and customer relationship intangibles. Such other intangibles are amortized over their expected benefit period of 24 to 72 months. INCOME TAXES The Company utilizes the liability method of accounting for income taxes in accordance with SFAS No. 109 "Accounting for Income Taxes." Under this method, deferred taxes are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. The Company has recorded a full valuation allowance to reduce the carrying value of its net deferred tax assets because it has concluded that it is more likely than not that it will not be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such a determination was made. STOCK-BASED COMPENSATION In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method on accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 123 and accordingly the implementation of SFAS No. 148 did not have a material affect on the Company's consolidated financial position or results of operations. 32 In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and to recognize the expense over the service period. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows for several alternative transition methods. The Company expects to adopt SFAS 123R in its first quarter of fiscal 2007 on a prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. We are currently assessing the impact of this proposed Statement on our share-based compensation programs, however, we expect that the requirement to expense stock options and other equity interests that have been or will be granted to employees will increase our operating expenses and result in lower earnings per share. GUARANTEES AND INDEMNIFICATIONS The Company provides a limited 90-day warranty for certain of its software products. Historically, claims by customers under this limited warranty have been minimal, and as such, no warranty accrual has been provided for in the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of the Company's agreements that the Company has determined are within the scope of FIN No. 45. Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officers or directors serving in such capacity. The term of the indemnification period is for the officer or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a director and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of March 31, 2006. The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2006. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and to recognize the expense over the service period. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows for several alternative transition methods. The Company expects to adopt SFAS 123R in its first quarter of fiscal 2007 on a prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. We are currently assessing the impact of this proposed Statement on our share-based compensation programs, however, we expect that the requirement to expense stock options and other equity interests that have been or will be granted to employees will increase our operating expenses and result in lower earnings per share. 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have not traded or otherwise bought and sold derivatives nor do we expect to in the future. We also do not invest in market risk sensitive instruments for trading purposes. We provide our products and services to customers in the United States, Europe and elsewhere throughout the world. Sales are predominately made in U.S. Dollars, however, we have sold products that were payable in Euros and Canadian Dollars. A strengthening of the U.S. Dollar could make our products and services less competitive in foreign markets. The primary objective of the Company's investment activity is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents in a variety of money market funds. As of March 31, 2006, the carrying value of our outstanding convertible redeemable subordinated notes and unsecured senior notes was approximately $8.2 million at fixed interest rates of 10% to 12%. In certain circumstances, we may redeem this long-term debt. Our other components of indebtedness of $447,000 bear interest rates of 6% to 26.99%. Increases in interest rates could increase the interest expense associated with future borrowings, if any. We do not hedge against interest rate increases. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO FINANCIAL STATEMENTS PAGE(S) FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm.................. 36 Report of Independent Registered Public Accounting Firm.................. 37 Consolidated Balance Sheets at March 31, 2006 and 2005................... 38 Consolidated Statements of Operations for the years ended March 31, 2006, 2005 and 2004 ................. 39 Consolidated Statements of Shareholders' Equity for the years ended March 31, 2006, 2005 and 2004................... 40 Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004................... 42 Notes to Consolidated Financial Statements............................... 43 FINANCIAL STATEMENTS SCHEDULE: Report of Independent Registered Public Accounting Firm.................. 74 Report of Independent Registered Public Accounting Firm.................. 75 Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2006, 2005 and 2004................... 76 All other schedules are omitted because they are not applicable. 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Stockholders and Board of Directors of iLinc Communications, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of iLinc Communications, Inc. and subsidiaries as of March 31, 2006 and 2005 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of iLinc Communications, Inc. and its subsidiaries as of March 31, 2006 and 2005, and the consolidated results of its operations and cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Epstein, Weber & Conover, PLC Scottsdale, Arizona June 13, 2006 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- The Board of Directors and Shareholders iLinc Communications, Inc. and Subsidiaries We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of iLinc Communications, Inc. for the year ended March 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of iLinc Communications, Inc. and its subsidiaries for the year ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a significant working capital deficiency and has suffered substantial recurring losses and negative cash flows from operations. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. The long-term continuation of the Company is dependent on the Company's ability to raise additional equity or debt capital, to increase its revenues, to generate positive cash flows from operations and to achieve profitability. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Costa Mesa, California May 21, 2004 37 ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, MARCH 31, 2006 2005 -------- -------- ASSETS Current assets: Cash and cash equivalents ....................................................... $ 466 $ 532 Accounts receivable, net of allowance for doubtful accounts of $120 and $84, at March 31, 2006 and 2005, respectively ................................. 2,207 1,949 Note receivable ................................................................. 12 25 Prepaid expenses and other current assets ....................................... 30 69 -------- -------- Total current assets ........................................................ 2,715 2,575 Property and equipment, net ..................................................... 336 1,221 Goodwill ........................................................................ 11,206 10,797 Intangible assets, net .......................................................... 1,731 2,504 Other assets .................................................................... 12 18 Assets of discontinued operations ............................................... -- 114 -------- -------- Total assets ................................................................ $ 16,000 $ 17,229 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .............................................. $ 199 $ 885 Accounts payable and accrued liabilities ....................................... 3,470 4,731 Current portion of capital lease liabilities ................................... 70 196 Deferred revenue ............................................................... 917 1,014 -------- -------- Total current liabilities ................................................... 4,656 6,826 Long-term debt, less current maturities, net of discount and beneficial conversion feature of $1,493 and $2,120, at March 31, 2006 and 2005, respectively ...... 6,974 6,702 Capital lease liabilities, less current maturities .............................. -- 31 -------- -------- Total liabilities ........................................................... 11,630 13,559 -------- -------- Commitments and contingencies Shareholders' Equity: Preferred stock series A and B, 10,0000,000 shares authorized: Preferred stock series A, $.001 par value, 127,500 and 127,500 shares issued and outstanding, liquidation preference of $1,275,000 and $1,275,000, at March 31, 2006 and 2005, respectively ........................................ -- -- Preferred stock series B, $.001 par value, 70,000 and no shares issued and outstanding, liquidation preference of $700,000 and $0, at March 31, 2006 and 2005 respectively ............................................................ -- -- Common stock, $.001 par value, 100,000,000 shares authorized, 28,923,168 and 25,577,287 issued, at March 31, 2006 and 2005, respectively .................. 29 26 Additional paid-in capital ..................................................... 44,228 42,175 Accumulated deficit ............................................................ (38,479) (37,123) Less: 1,432,412 treasury shares at cost ........................................ (1,408) (1,408) -------- -------- Total shareholders' equity .................................................. 4,370 3,670 -------- -------- Total liabilities and shareholders' equity .................................. $ 16,000 $ 17,229 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 38 ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2006 2005 2004 -------- -------- -------- Revenues Software Licenses .................................. $ 3,014 $ 3,274 $ 2,240 Software and audio services ........................ 7,070 5,052 1,195 Maintenance and professional services .............. 2,448 2,043 2,471 -------- -------- -------- Total revenues ................................. 12,532 10,369 5,906 -------- -------- -------- Cost of revenues Software Licenses .................................. 51 154 219 Software and audio services ........................ 3,881 3,799 526 Maintenance and professional services .............. 827 792 1,248 Amortization of acquired developed technology ...... 376 451 233 -------- -------- -------- Total cost of revenues ........................... 5,135 5,196 2,226 -------- -------- -------- Gross profit .......................................... 7,397 5,173 3,680 -------- -------- -------- Operating expenses Research and development ........................... 1,392 1,545 1,034 Sales and marketing ................................ 3,075 4,078 2,202 General and administrative ......................... 2,187 2,924 1,831 -------- -------- -------- Total operating expenses ......................... 6,654 8,547 5,067 -------- -------- -------- Income/(loss) from operations ......................... 743 (3,374) (1,387) -------- -------- -------- Interest expense ...................................... (1,041) (1,081) (825) Amortization of beneficial debt conversion ............ (856) (853) (408) -------- -------- -------- Total interest expense .......................... (1,897) (1,934) (1,233) Interest income and other ............................. 117 25 6 Gain on sale of assets ................................ 40 -- -- Net (loss)/ gain on settlement of debt and other obligations ........................................... (257) 82 349 Gain/ (loss) on foreign currency translation .......... -- 2 (28) -------- -------- -------- Other loss from continuing operations ................. (1,997) (1,825) (906) -------- -------- -------- Loss from continuing operations before income taxes ... (1,254) (5,199) (2,293) Income tax expense .................................... -- -- -- -------- -------- -------- Loss from continuing operations ....................... (1,254) (5,199) (2,293) Income/ (loss) from discontinued operations ........... 83 (128) 275 -------- -------- -------- Net loss .............................................. (1,171) (5,327) (2,018) Series A and B preferred stock dividends .............. (130) (105) (75) Imputed preferred stock dividends ..................... (55) -- (247) -------- -------- -------- Loss available to common shareholders ................. $ (1,356) $ (5,432) $ (2,340) ======== ======== ======== Income/ (Loss) per common share, basic and diluted From continuing operations ......................... $ (0.05) $ (0.23) $ (0.16) From discontinued operations ....................... -- -- 0.02 -------- -------- -------- Net loss per common share .......................... $ (0.05) $ (0.23) $ (0.14) ======== ======== ======== Number of shares used in calculation of income/ (loss) per share basic and diluted: ........................ 26,075 23,179 16,743 ======== ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 39 ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------------- --------------------- PAID - IN ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY ------------------------------------------------------------------------------------------ Balances, April 1, 2003 ............ -- $ -- 17,018 $ 17 $ 32,854 $(29,300) $ (1,251) $ 2,320 Issuances of common stock .......... -- -- 25 -- 14 -- -- 14 Repricing of warrants .............. -- -- -- -- 12 -- -- 12 Vesting of restricted stock grant ...................... -- -- -- -- 40 -- -- 40 Issuance of convertible preferred stock in private placement (net of expenses of $212) ............ 150 -- -- -- 1,288 -- -- 1,288 Convertible subordinated notes converted to common stock ..................... -- -- 1,572 2 1,099 -- -- 1,101 Convertible redeemable subordinated notes converted to common stock ........................... -- -- 150 -- 150 -- -- 150 Beneficial conversion feature associated with convertible redeemable notes .............................. -- -- -- -- 214 -- -- 214 Debt and accrued liability converted to common stock .......... -- -- 492 -- 456 -- -- 456 Preferred stock dividends .......... -- -- -- -- -- (75) -- (75) Warrant grant ...................... -- -- -- -- 21 -- -- 21 Affiliate Practice terminations ....................... -- -- -- -- -- -- (157) (157) Imputed preferred stock dividends .......................... -- -- -- -- 247 (247) -- -- Net loss ........................... -- -- -- -- -- (2,018) -- (2,018) ------------------------------------------------------------------------------------------ Balances, March 31, 2004 ........... 150 -- 19,257 19 36,395 (31,640) (1,408) 3,366 Glyphics acquisition ............... -- -- 2,819 3 2,760 -- -- 2,763 Warrant expense .................... -- -- -- -- 90 -- -- 90 Vesting of restricted stock grant .. -- -- -- -- 40 -- -- 40 Issuance of common stock in private placement (net of expenses) ..... -- -- 1,635 2 1,734 (51) -- 1,685 Convertible notes converted to common stock .................... -- -- 714 1 493 -- -- 494 Preferred stock conversions ........ (23) -- 450 -- -- -- -- -- Debt converted to common stock ..... -- -- 551 -- 583 -- -- 583 Preferred stock dividends .......... -- -- -- -- -- (105) -- (105) Stock option exercises ............. -- -- 151 1 80 -- -- 81 Net loss ........................... -- -- -- -- -- (5,327) -- (5,327) ------------------------------------------------------------------------------------------ Balances, March 31, 2005 ........... 127 -- 25,577 26 42,175 (37,123) (1,408) 3,670 Warrant grant ...................... -- -- -- -- 6 -- -- 6 Series A preferred stock dividends . -- -- -- -- -- (103) -- (103) Series B preferred stock dividends . -- -- -- -- -- (27) -- (27) Vesting of restricted stock grant .. -- -- -- -- 40 -- -- 40 Warrant exercise ................... -- -- 164 1 40 -- -- 41 Warrant conversion expense due to warrant repricing ........ -- -- -- -- 7 -- -- 7 Issuance of Series B preferred stock in private placement from accounts payable and accrued liabilities conversion .......... 55 -- -- -- 550 -- -- 550 Issuance of Series B preferred stock in private placement ............ 15 -- -- -- 150 -- -- 150 Imputed preferred stock dividend ... -- -- -- -- 55 (55) -- -- Conversion of 2002 convertible redeemable subordinated notes and accrued interest to common stock .................... -- -- 1,971 2 531 -- -- 533 40 CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------------- --------------------- PAID - IN ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY ------------------------------------------------------------------------------------------ Conversion expense associated with conversion of 2002 convertible redeemable subordinated notes to common stock .................... -- -- -- -- 338 -- -- 338 Conversion of 2004 senior unsecured promissory notes to common stock ........... -- -- 903 -- 225 -- -- 225 Gain on conversion of 2004 senior unsecured promissory notes to common stock .................... -- -- -- -- (9) -- -- (9) Issuance of common shares held in escrow to Glyphics shareholders ........... -- -- 308 -- 120 -- -- 120 Net loss ........................... -- -- -- -- -- (1,171) -- (1,171) ------------------------------------------------------------------------------------------ Balances, March 31, 2006 ........... 197 $ -- 28,923 $ 29 $ 44,228 $(38,479) $(1,408) $ 4,370 ========================================================================================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 41 ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED MARCH 31, ENDED MARCH 31, ENDED MARCH 31, 2006 2005 2004 ------- ------- ------- Cash flows from continuing operating activities: Loss from continuing operations .............................. $(1,254) $(5,199) $(2,293) Adjustments to reconcile loss from continuing operations to cash provided by/ (used in) continuing operating activities: Provision for/ (recovery of) bad debts .................... 111 212 (148) Loss on disposal of fixed assets .......................... -- 6 -- Depreciation and amortization ............................. 1,684 1,657 462 Warrant expense ........................................... 6 90 33 Loss on CNLearn note receivable settlement ................ 8 -- -- Debt conversion expense, net .............................. 249 -- -- Gain on sale of assets to Learn Something ................. (40) -- -- Stock compensation expense ................................ 40 40 40 Net gain on settlement of debt and other obligations ...... -- (82) (349) Accretion of debt discount to interest expense ........... 626 676 292 Stock issued for contingent compensation .................. 60 -- 300 Changes in operating assets and liabilities, net of business acquisitions: (Increase) in accounts receivable ....................... (352) (450) (352) Decrease/ (increase) in prepaid expenses and other current assets ........................................ 39 39 (76) Decrease in other assets ................................ 6 13 5 (Decrease)/ increase in accounts payable and accrued liabilities ........................................... (452) 465 753 (Decrease)/ increase in deferred revenue ................ (97) (85) 267 ------- ------- ------- Net cash provided by/ (used in) operating activities . 634 (2,618) (1,066) ------- ------- ------- Cash flows from investing activities: Capital expenditures ...................................... (55) (153) (66) Acquisitions, net of cash acquired ........................ (4) 4 (367) Acquisition royalty earnout ............................... (261) (70) -- Deferred acquisitions costs ............................... -- -- 44 Proceeds from sale of software ............................ 20 -- -- Repayment of notes receivable ............................. 8 25 25 ------- ------- ------- Net cash used in investing activities ................ (292) (194) (364) ------- ------- ------- Cash flows from financing activities: Proceeds from issuance of preferred stock ................. 150 -- 1,500 Preferred stock dividends ................................. (116) (105) (75) Proceeds from issuance of long-term debt .................. 19 4,250 500 Stock issuance expense .................................... -- -- 14 Proceeds from exercise of stock options ................... -- 81 -- Proceeds from exercise of stock warrants .................. 41 -- -- Repayment of long-term debt ............................... (308) (514) (559) Repayment of capital lease liabilities .................... (157) (328) (242) Financing costs incurred .................................. (24) (448) (212) ------- ------- ------- Net cash (used in)/ provided by financing activities . (395) 2,936 926 ------- ------- ------- Cash flows from continuing operations ........................ (53) 124 (504) Cash flows from discontinued operations ...................... (13) 116 387 ------- ------- ------- Net change in cash and cash equivalents .............. (66) 240 (117) Cash and cash equivalents, beginning of period ............... 532 292 409 ------- ------- ------- Cash and cash equivalents, end of period ..................... $ 466 $ 532 $ 292 ======= ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS AND BASIS OF PRESENTATION Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a leading provider of Web conferencing, audio conferencing and collaboration software and services. The Company develops and sells software that provides real-time collaboration and training using Web-based tools. Our four-product iLinc Suite, led by LearnLinc (which also includes MeetingLinc, ConferenceLinc, and SupportLinc), is an award winning virtual classroom, Web conferencing and collaboration suite of software. With its Web collaboration, conferencing and virtual classroom products, the Company provides simple, reliable and cost-effective tools for remote presentations, meetings and online events. The Company's software is based on a proprietary architecture and code that finds its origins as far back as 1994, in what the Company believes to be the beginnings of the Web collaboration industry. Versions of the iLinc Suite have been translated into six languages, and it is currently available in version 8.01. The Company's customers may choose from several different pricing options for the iLinc Suite, and may receive its products on a stand-alone basis or integrated with one or a number of its other award-winning products, depending upon their needs. Uses for the four-product suite of Web collaboration software include online business meetings, sales presentations, training sessions, product demonstrations and technical support assistance. The Company sells its software solutions to large and medium-sized corporations inside and outside of the Fortune 1000, targeting certain vertical markets. The Company markets its products using a direct sales force and a distribution channel consisting of agents and value added resellers. The Company allows customers to choose between purchasing a perpetual license and subscribing to a term license to its products, providing for flexibility in pricing and payment methods. The Company began operations in March of 1998. Its formation included the simultaneous rollup of fifty private businesses and an initial public offering. The Company's initial goals included providing training enhancement services over the Internet using a browser based system. In 2002, the Company began shifting its focus away from its legacy business, settling on its current focus of Web conferencing and audio conferencing and in doing so ultimately changed its name to iLinc Communications, Inc. in February 2004. The Company's consolidated financial statements for the year ended March 31, 2004 were prepared on a basis which assumed that it would continue as a going concern, and which contemplated the realization of its assets and the satisfaction of its liabilities and commitments in the normal course of business. 43 2. DISCONTINUED OPERATIONS Effective January 1, 2004, the Company discontinued its dental practice management services. In accordance with SFAS 144 "ACCOUNTING FOR IMPAIRMENT ON DISPOSAL OF LONG-LIVED ASSETS," the Company has restated its historical results to reflect its dental practice management service business segment as a discontinued operation. A summary of the results from discontinued operations for the years ended March 31, 2006, 2005, and 2004 are as follows: FOR THE YEARS ENDED MARCH 31, --------------------------------- 2006 2005 2004 ----- ----- ----- (IN THOUSANDS) Net revenue ................................................ $ -- $ -- $ 128 Operating expenses ......................................... 3 -- (87) ----- ----- ----- Income/ (loss) from operations ............................. (3) -- 215 Interest expense ........................................... (1) (36) (86) Interest income ............................................ -- -- 29 Gain on termination of service agreements with Affiliated Practices ................................................ 87 42 63 Gain on debt forgiveness ................................... -- 15 54 Loss on settlement of capital lease ........................ -- (149) -- Tax expense ................................................ -- -- ----- ----- ----- Net income/ (loss) from discontinued operations ............ $ 83 $(128) $ 275 ===== ===== ===== Interest expense of $1,000, $36,000, and $86,000 for fiscal years 2006, 2005, and 2004, respectively, was allocated to the discontinued dental practice management services business segment since it relates to specific debts that were incurred in order to provide the dental practice management services. Discontinued operations are expected to generate cash flows through the third quarter of fiscal 2007. A summary of the assets and liabilities of its discontinued operations are as follows: AS OF MARCH 31, 2006 2005 ------------ ------------ (IN THOUSANDS) Notes receivable, net........................... $ -- $ 114 Capital lease settlement liability.............. $ 53 $ 263
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The more significant areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable and notes receivable valuation reserves, realizability of intangible assets, realizability of deferred income tax assets and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. 44 REVENUE RECOGNITION Our revenues are generally classified into three main categories: license revenue, software and audio service revenue and maintenance and professional service revenue. License revenue is generated from the sale of its iLinc suite of Web conferencing software on a software purchase model basis under the traditional perpetual model or the iLinc Enterprise Unlimited model launched in fiscal 2006 and from the sale of its off-the-shelf courseware, primarily the online Bridge (Mini-MBA) program. Software and audio service revenue is generated from the sale of its iLinc Suite of Web conferencing software on an Application Service Provider ("ASP") model basis, the sale of its iLinc Suite software on a per-minute basis, and includes all revenue from the provision of audio conferencing services, as well as, all service contracts that might include hosting, and training services. Maintenance and professional service revenue is generated from the sale of maintenance contracts related to its iLinc suite of Web conferencing software on a purchase model basis, when hosted by the customer, and from the sale of professional services that are associated with its custom content development services. Sales of Software Licenses Because the Company offers the iLinc Suite software in one of two forms, the first being a purchase model and the second being an ASP or per-minute model, we have separate revenue recognition policies applicable to each licensing model. With each sale of its Web conferencing products and services, the Company executes written contracts with its customers that govern the terms and conditions of each software license sale, hosting agreement, maintenance and support agreement and other services arrangements. The Company does not typically execute written agreements for the sale of audio conferencing services. In connection with the Company's sales of software licenses, whether on a purchase model basis or periodic license basis, the Company adopted Statement of Position ("SOP") 97-2 "Software Revenue Recognition" as issued by the American Institute of Certified Public Accountants. In accordance with SOP 97-2, the Company recognizes revenue from the sale of software licenses if all of the following conditions are met: first, there is persuasive evidence of an arrangement with the customer; second, the product has been delivered to the customer; third, the amount of the fees to be paid by the customer is fixed or determinable; and, fourth, collection of the fee is probable. Each of these factors, particularly the determination of whether a fee is fixed and determinable and the collectability of the resulting receivable, requires the application of the judgment and the estimates of management. Therefore, significant management judgment is utilized and estimates must be made in connection with the revenue the Company recognizes in any accounting period. The Company analyzes various factors, including a review of the nature of the license or product sold, the terms of each specific transaction, the vendor specific objective evidence of the elements required by SOP 97-2, any contingencies that may be present, its historical experience with like transactions or with like products, the creditworthiness of the customer, and other current market and economic conditions. Changes in its judgment based upon these factors and others could impact the timing and amount of revenue that the Company recognizes, and ultimately the results of operations and its financial condition. Therefore, the recognition of revenue is a key component of its results of operations. At the time of the sale of its software license on a purchase license basis, we assess whether the fee associated with the transaction is fixed or determinable based on the payment terms associated with the transaction before recording immediate revenue recognition, assuming all other elements of revenue recognition are present. Billings to its customers are generally due within 30 to 90 days, with payment terms up to 180 days available to certain credit worthy customers. The Company believes that it has sufficient history of collecting all amounts within these normal payment terms and to conclude that the fee is fixed or determinable at the time of the perpetual license sale. The Company considers all arrangements with payment terms longer than 180 days not to be fixed or determinable and for arrangements involving the extended payment terms exceeding 180 days, revenue recognition occurs when payments are collected, assuming all other elements of revenue recognition are present. In addition, in assessing whether collection is probable or not for a given transaction, and therefore whether the Company should recognize the revenue, the Company makes estimates regarding the creditworthiness of the customer. Initial creditworthiness is assessed through internal credit check processes, such as credit applications or third party reporting agencies. Creditworthiness for transactions to existing customers primarily relies upon a review of their prior payment history. The Company does not request collateral or other security from its customers. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon the receipt of payment or other change in circumstance. 45 During Fiscal 2006, iLinc launched its Enterprise Unlimited perpetual licensing model, that enables customers to pay a one-time up-front fee for unlimited, organization-wide Web conferencing, with revenue recognized at the time of the sale of the Enterprise Unlimited perpetual license. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are based upon a fixed rate per seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement and that is approximately equivalent to the 15% to 18% charged for concurrent seat perpetual license contracts. Customers may expand the number of active seats available to them at any time with a corresponding increase in annual maintenance and hosting fees being charged with the additional revenue recognized on a straight-line basis over the period of the contract. Sales of Concurrent Licenses on an ASP and Per-minute Basis Historically and on a continuing basis, a majority of its license revenue has been generated under the software purchase model basis, with revenue recognized based on a one-time sale of a perpetual license. In addition to that purchase model software sale, the Company also offers a more flexible concurrent connection seat license and a pay-per-minute usage based model. Under its ASP model, a customer may subscribe to a certain number of concurrent connections or seats for a fixed period, often a year. Under this ASP method, the Company recognizes the revenue associated with these monthly, fixed-fee subscription arrangements each month on a straight-line basis over the term of the agreement. Other customers choose to avoid annual commitments and instead use its Web conferencing and audio conferencing products and services based upon a per-minute or usage-based pricing model. Per-minute customers may also include those customers on an ASP model that incur overage fees for usage in excess of the permitted number of seats or minutes in excess of the minimum commitment. The per-minute fees that include overage fees are charged at the end of each month and recorded as revenue at the end of each month as the services are provided. Customers with contractually established minimum per-minute fees are assessed the greater of the established minimum or the actual usage at the end of each month. Customers wishing to avoid monthly commitments may use the e-commerce portion of its Web site that permits the use of its Web conferencing services on a pay-per-use basis, with no monthly minimum, purchasing the services and paying for those services online by credit card. Sales of Maintenance, Hosting and other Related Services The Company offers with each sale of its software products a software maintenance, upgrade and support arrangement. These contracts may be elements in a multiple-element arrangement or may be sold in a stand-alone basis. Revenues from maintenance and support services are recognized ratably on a straight-line basis over the term that the maintenance service is provided. Maintenance contracts typically provide for 12-month terms with maintenance contracts available up to 36 months. The Company typically charges 15% to 18% of the software purchase price for a 12-month contract with discounts available for longer-term agreements. The Company also typically charges 5% to 10% of the software purchase price for hosting of purchase model software sales for customers who do not wish to install and host the iLinc Suite on their own premises or that of a co-location facility. Charges for hosting are likewise spread ratably over the term of the hosting agreement, with the typical hosting agreement having a term of 12 months, with renewal on an annual basis. The annual maintenance and support fees and hosting fees associated with an iLinc Enterprise Unlimited license are based upon a fixed rate per seat license that is active on each annual anniversary of the iLinc Enterprise Unlimited license agreement and that is approximately equivalent to the 15% to 18% charged for concurrent seat perpetual license contracts. Revenues from consulting, training and education services are recognized either as the services are performed, ratably over a subscription period, or upon completing a project milestone if defined in the agreement. These consulting, training and education services, are not considered essential to the functionality of its products as these services do not alter the product capabilities, do not require specialized skills, and are often performed by the customer or its VAR's customers without access to those services. Implementation, consulting, training, translation, and other event type services may also be sold in conjunction with the sale of its software products. Those services are generally recognized as the services are performed or earlier when all other revenue recognition criteria have been met. Although the Company may provide implementation, training and consulting services on a time and materials basis, a significant portion of these services have been provided on a fixed-fee basis. 46 Should the sale of its software involve an arrangement with multiple elements (for example, the sale of a software license along with the sale of maintenance and support to be delivered over the contract period), the Company allocates revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements. The Company defers revenue from the arrangement equivalent to the fair value of the undelivered elements and recognizes the remaining amount at the time of the delivery of the product or when all other revenue recognition criteria have been met. Fair values for the ongoing maintenance and support obligations are based upon separate sales of renewals of maintenance contracts. Fair value of services, such as training or consulting, is based upon separate sales of these services to other customers. Thus, these types of arrangements require us to make judgments about the fair value of undelivered arrangements. Sales of Custom Content Development Services A component of its maintenance and professional services revenue is derived from custom content development services. The sale of custom content development services often involves the execution of a master service agreement and corresponding work orders describing the deliverable due, the costs involved, the project milestones and the payments required. These custom content development services are primarily outsourced to a subcontractor, Interactive Alchemy. For contracts and revenues related exclusively to custom content development services, the Company recognizes revenue and profit as work progresses on custom content service contracts using the percentage-of-completion method. This method relies on estimates of total expected contract revenue and costs as each job progresses throughout the relevant contract period. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a custom content service contract can be made. Recognized revenues and profit are subject to revisions as the custom content service contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Customers sometimes request modifications to projects in progress which may result in significant revisions to cost estimates and profit recognition, and the Company may not be successful in negotiating additional payments related to the changes in scope of requested services. Should this arise, the provision for any estimated losses on uncompleted custom content service contracts are made in the period in which such losses become evident. There were no such losses at March 31, 2006, 2005, and 2004 for any custom content development services. For arrangements requiring customer acceptance, revenue is deferred until the earlier of the end of the acceptance period or until written notice of acceptance is received from the customer. Sales by VARs and Agents The Company has engaged organizations within the United States of America and in 12 other countries that market and sell its products and services through their sales distribution channels that are value added resellers (VARs). The VARs primarily sell, on a non-exclusive basis, its iLinc suite of Web conferencing products and predominately sell purchase-model perpetual licenses for installation and hosting by the VAR's customer. The Company's VAR contracts have terms of one to two years and are automatically renewed for an additional like term unless either party terminates the agreement for breach or other financial reasons. Each VAR purchases the product from the Company and resells the product to its customers. Under those VAR agreements, the Company records only the amount paid by the VAR as revenue and recognizes revenue when all revenue recognition criteria have been met. The Company also engages organizations that act as mere agents or distributors of its products ("Agents"), without title passing to the Agent and with the Agent only receiving a commission on the consummation of the sale to its customer. The Company records revenue on sales by Agents on a gross basis before commissions due to the Agent and only when all revenue recognition criteria are met as would be with a sale by the Company directly to a customer not involving an agent. Sales Reserve The sales reserve is an estimate for losses on receivables resulting from customer credits, cancellations and terminations and is recorded, if at all, as a reduction in revenue at the time of the sale. Increases to sales reserve are charged to revenue, reducing the revenue otherwise reportable. The sales reserve estimate is based on an analysis of the historical rate of credits, cancellations, and terminations. The accuracy of the estimate is dependent on the rate of future credits, cancellations and terminations being consistent with the historical rate. If the rate of actual credits, cancellations and terminations is different than the historical rate, revenue would be different from what was reported. As of March 31, 2006, the Company did not believe that an accrual for sales reserve was necessary, but continues to assess the adequacy of the sales reserve account balance on a quarterly basis. 47 Allowance for Doubtful Accounts The Company records an allowance for doubtful accounts to provide for losses on accounts receivable due to customer credit risk. Increases to the allowance for doubtful accounts are charged to general and administrative expense as bad debt expense. Losses on accounts receivable due to financial distress or failure of the customer are charged to the allowance for doubtful accounts. The allowance estimate is based on an analysis of the historical rate of credit losses. The accuracy of the estimate is dependent on the future rate of credit losses being consistent with the historical rate. If the rate of future credit losses is greater than the historical rate, then the allowance for doubtful accounts may not be sufficient to provide for actual credit losses. The allowance for doubtful accounts for iLinc Web collaboration product sales is $120,000 and $84,000, respectively, as of March 31, 2006 and 2005 and is based on its historical collection experience. Any adjustments to these accounts are reflected in the income statement for the current period, as an adjustment to revenue in the case of the sales reserve and as a general and administrative expense in the case of the allowance for doubtful accounts. SOFTWARE DEVELOPMENT COSTS The Company accounts for software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," whereby costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Technological feasibility is established upon completion of a working model. Costs of maintenance and customer support are charged to expense when related revenue is recognized or when those costs are incurred, whichever occurs first. Software development costs incurred subsequent to the establishment of technological feasibility have not been significant to date, and all software development costs have been charged to research and development expense in the accompanying consolidated statements of operations. ADVERTISING COSTS Advertising costs are expensed as incurred. The Company's advertising expense at March 31, 2006, 2005 and 2004 was $40,000, $22,000 and $122,000, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt investments with remaining maturities of three months or less at the date of acquisition to be cash equivalents. The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. At March 31, 2006 and 2005, the Company had approximately $350,000 and $403,000, respectively, in excess of FDIC insured limits. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful life of the various classes of depreciable assets as follows: Furniture & Fixtures 5 years Equipment 5 years Computer Equipment 3 years Leasehold improvements shorter of 5 years or lease term Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Gains and losses from dispositions are included in continuing operations. INTANGIBLE ASSETS On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and as a result, the Company's goodwill is no longer amortized. SFAS No. 142 requires that goodwill be tested annually (or more frequently if impairment indicators arise) for impairment. Upon initial application of SFAS No. 142, the Company determined there was no impairment of goodwill. The Company has established the date of March 31 on which to conduct its annual impairment test. 48 The Company has made acquisitions of companies having operations or technology in areas within its strategic focus and has recorded goodwill and other intangible assets associated with the acquisitions (see Note 8). Future adverse changes in market conditions or poor operating results of the underlying acquired operations could result in losses or an inability to recover the carrying value of the goodwill and other intangible assets thereby possibly requiring an impairment charge in the future. Based in part on a third party full scope valuation that was performed with the valuation date of March 31, 2006, the Company's management believes that no impairment exists at March 31, 2006. Debt issuance costs, which are included in other intangible assets, are amortized using the straight-line method over the term of the related debt obligations. At March 31, 2006 and 2005, debt issuance costs, net of accumulated amortization, were $587,000 and $784,000, respectively. Amortization of debt issuance costs have been reflected in interest expense in the accompanying consolidated statements of operations and total $229,000, $194,000, and $104,000 for the years ended March 31, 2006, 2005, and 2004, respectively. These intangibles are amortized over their expected lives of between 39 months and 120 months. The $229,000 of amortization includes $131,000 related to the March 2002 Convertible Note Offering and $98,000 related to the 2004 Private Placement Offering. Included in the March 2002 Convertible Note Offering, amortization of $50,000 was accelerated due to the conversion of $525,000 of the notes into 1,917,088 shares of the Company's common stock. Included in the April 2004 Private Placement Offering, amortization of $10,000 was accelerated due to the conversion of $225,000 or the offering debt into 903,205 shares of the Company's common stock. Other intangibles primarily consist of the Glyphics, Quisic and LearnLinc purchase consideration (see Note 8), that was allocated to purchased software and customer relationship intangibles (see Note 6). Such other intangibles are amortized over their expected benefit period of 24 to 72 months. LONG-LIVED ASSETS The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. No impairment charges were recorded for the years ended March 31, 2006, 2005 and 2004. CUSTOMER CONCENTRATIONS Accounts receivable represent license agreements entered into and services rendered by the Company with its customers. The Company performs periodic credit reports before recognizing sales to certain customers, but does not receive collateral related to the receivables. Revenues included one customer with transactions approximating 8%, 6%, and 24% of net revenues for the years ended March 31, 2006, 2005, and 2004, respectively of the trade accounts receivable balance. Revenues from international customers for the years ended March 31, 2006, 2005, and 2004 approximated $566,000, $391,000, and $975,000, respectively. Accounts receivable balances for two customers totaled approximately 9% and 7%, respectively, at March 31, 2006 and one customer approximated 7% as a percentage of the total balance outstanding at March 31, 2005. INCOME TAXES The Company utilizes the liability method of accounting for income taxes in accordance with SFAS No. 109 "Accounting for Income Taxes." Under this method, deferred taxes are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. The Company has recorded a full valuation allowance to reduce the carrying value of its net deferred tax assets because it has concluded that it is more likely than not that it will not be realized due to continuing operating losses. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such a determination was made. 49 STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method on accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 123 and accordingly, the implementation of SFAS No. 148 did not have a material effect on the Company's consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and to recognize the expense over the service period. SFAS 123R will be effective for periods beginning after March 31, 2006 and allows for several alternative transition methods. The Company expects to adopt SFAS 123R in its first quarter of fiscal 2007 on a prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. The Company is currently assessing the impact of this proposed Statement on our share-based compensation programs, however, it expects that the requirement to expense stock options and other equity interests that have been or will be granted to employees will increase its operating expenses and result in lower earnings per share. The fair value for options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended March 31, 2006, 2005, and 2004: 2006 2005 2004 ---- ---- ---- Risk free interest rate 4.18 - 4.55% 4.19 - 4.71% 3.73-4.40% Dividend yield 0% 0% 0% Volatility factors of the expected market price of the Company's common stock 110% - 125% 73-90% 70-139% Weighted-average expected life of Options 10 years 10 years 5-9 years For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS): 2006 2005 2004 ---- ---- ---- Net loss available to common shareholders, as reported $(1,356) $(5,432) $(2,340) Plus: Stock-based employee compensation expense included in reported net loss 40 40 -- Less: Total stock-based employee compensation expense determined using fair value based method (191) (352) (168) ------- ------- ------- Pro forma net loss $(1,507) $(5,744) $(2,508) ======= ======= ======= Loss per share Basic and Diluted - as reported $ (0.05) $ (0.23) $ (0.14) ======= ======= ======= Basic and Diluted - pro forma $ (0.06) $ (0.25) $ (0.15) ======= ======= =======
50 INCOME/LOSS PER SHARE Basic income/loss per share is computed by dividing net income/loss available to common stockholders by the weighted-average number of common shares outstanding for each reporting period presented. Diluted earnings per share are computed similar to basic earnings per share while giving effect to all potential dilutive common stock equivalents that were outstanding during each reporting period. For the twelve months ended March 31, 2006, 2005, and 2004, options and warrants to purchase 5,285,528, 4,524,137 and 9,930,519 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because of their anti-dilutive effect. Additionally, for the twelve months ended March 31, 2006, 2005 and 2004 preferred stock and debt convertible into 10,450,000, 8,175,000 and 8,175,000 shares of common stock, respectively, were excluded from the computation of diluted income/loss per share because inclusion of such would be antidilutive. Furthermore, a restricted stock grant of 450,000 shares has been excluded from the income/loss per share calculations. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivables and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying amounts of the Company's long-term borrowings and notes receivables (presented in assets both from continuing and discontinued operations) as of March 31, 2006 and 2005, approximate their fair value based on the Company's current incremental borrowing rates for similar type of borrowing arrangements. GUARANTEES AND INDEMNIFICATIONS The Company provides a limited 90-day warranty for certain of its software products. Historically, claims by customers under this limited warranty have been minimal, and as such, no warranty accrual have been provided for in the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of the Company's agreements that the Company has determined are within the scope of FIN No. 45. Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer's or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a director and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of March 31, 2006. The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2006. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"). Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and to recognize the expense over the service period. SFAS 123R will be effective for periods beginning after March 31, 2006 and allows for several alternative transition methods. The Company expects to adopt SFAS 123R in its first quarter of fiscal 2007 on a prospective basis, which will require recognition of compensation expense for all stock option or other equity-based awards that vest or become exercisable after the effective date. The Company is currently assessing the impact of this proposed Statement on its share-based compensation programs, however, we expect that the requirement to expense stock options and other equity interests that have been or will be granted to employees will increase its operating expenses and result in lower earnings per share. 51 RECLASSIFICATIONS Certain prior year balances in the consolidated financial statements have been reclassified to conform to the fiscal 2006 presentation. 4. NOTE RECEIVABLE Note receivable consisted of the following: MARCH 31, ----------------------- 2006 2005 ----------- ----------- (IN THOUSANDS) Note receivable.............................................................. $ 12 $ 25 Less: allowance for doubtful accounts........................................ -- -- ----------- ----------- 12 25 Less: note receivable, current............................................... (12) (25) ----------- ----------- $ -- $ -- =========== =========== In June 2005, a note receivable relating to the sale of software in the amount of $25,000 was settled for $17,500. The Company recognized a loss on settlement of $7,500. The remaining note receivable bears interest at 10%, with interest and principal due in monthly installments through October 31, 2006. This note relates to the September 2005 sale of software acquired during the acquisition of Quisic for $40,000, of which $20,000 was paid up front and the remainder recorded as a note receivable, which resulted in a gain on sale of software for $40,000. 5. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following: MARCH 31, ---------------------- 2006 2005 ----------- ---------- (IN THOUSANDS) Furniture and fixtures.................................................... $ 349 $ 349 Equipment................................................................. 298 294 Computer equipment........................................................ 2,400 2,354 Leasehold improvements.................................................... 29 24 ----------- ---------- Total property and equipment 3,076 3,021 Less: accumulated depreciation............................................ (2,740) (1,800) ----------- ---------- Property and equipment, net............................................ $ 336 $ 1,221 =========== ========== Depreciation expense for the years ended March 31, 2006, 2005, and 2004 was $940,000, $845,000, and $221,000, respectively. 6. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill consisted of the following: MARCH 31, ---------------------- 2006 2005 ---------- ---------- (IN THOUSANDS) Goodwill................................................................... $ 11,206 $ 10,797 ========== ========== The changes in the carrying amount of the goodwill for the years ended March 31, 2006 and 2005 (IN THOUSANDS): Balance, March 31, 2004.................................................... $ 9,190 Mentergy acquisition, royalty accrual................................... 618 Glyphics acquisition.................................................... 989 ---------- Balance, March 31, 2005.................................................... 10,797 Mentergy acquisition, royalty accrual................................... 280 Glyphics acquisition.................................................... 9 Issuance of Glyphics escrow shares...................................... 120 ---------- Balance, March 31, 2006.................................................... $ 11,206 ========== 52 During fiscal 2002, the Company acquired certain assets of LearnLinc Corporation, a wholly owned subsidiary of Mentergy, Inc. As part of the agreement, the Company agreed to pay a royalty of 20% for all cash revenues collected from the sale or license of LearnLinc software over a three-year period up to November 4, 2005. The offset to the royalty accrual was recorded as goodwill. The Company included $618,000 in fiscal 2005 and $280,000 in fiscal 2006 up to November 4, 2005. The Company acquired Glyphics in the first quarter of fiscal 2005, which resulted in the Company recording $989,000 of goodwill. See note 8 for further details. At March 31, 2006, the Company also recorded $120,000 to goodwill for the issuance of shares to the Glyphics shareholders that had been held in escrow. See note 10 for further details. In accordance with SFAS 142, the Company does not amortize goodwill. SFAS 142 requires that goodwill be tested annually (or more frequently if impairment indicators arise) for impairment. The Company has established the date of March 31 on which to conduct its annual impairment test. Future adverse changes in market conditions or poor operating results of the underlying acquired operations could result in losses or an inability to recover the carrying value or the goodwill and other intangible assets thereby possibly requiring an impairment charge in the future. Based in part on a third party full scope valuation that was performed with the valuation date of March 31, 2006, the Company's management believes that no impairment exists at March 31, 2006. ----------------------------------------------------------------- MARCH 31, 2006 ----------------------------------------------------------------- WEIGHTED AVERAGE REMAINING GROSS CARRYING ACCUMULATED LIVES AMOUNT AMORTIZATION NET ----------------------------------------------------------------- (YEARS) (IN THOUSANDS) AMORTIZED INTANGIBLE ASSETS: Deferred financing costs 5.10 $ 1,080 $ (493) $ 587 Purchased software 1.17 1,481 (1,169) 312 Customer relationships 4.17 1,230 (398) 832 ---------------------------------------------------- $ 3,791 $ (2,060) $ 1,731 ==================================================== ----------------------------------------------------------------- MARCH 31, 2005 ----------------------------------------------------------------- WEIGHTED AVERAGE REMAINING GROSS CARRYING ACCUMULATED LIVES AMOUNT AMORTIZATION NET ----------------------------------------------------------------- (YEARS) (IN THOUSANDS) AMORTIZED INTANGIBLE ASSETS: Deferred financing costs 5.84 $ 1,113 $ (329) $ 784 Purchased software 1.92 1,481 (792) 689 Customer relationships 4.46 1,230 (199) 1,031 ---------------------------------------------------- $ 3,824 $ (1,320) $ 2,504 ==================================================== AGGREGATE AMORTIZATION EXPENSE FOR INTANGIBLES (IN THOUSANDS) : For the year ended March 31, 2006 $744 For the year ended March 31, 2005 $812 For the year ended March 31, 2004 $241 ESTIMATED AMORTIZATION EXPENSE (IN THOUSANDS): Fiscal Year ----------- 2007 $655 2008 341 2009 276 2010 276 2011 108 Thereafter 75 ----------------- $1,731 ================= 53 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following: MARCH 31, ----------------------- 2006 2005 ---------- ----------- (IN THOUSANDS) Accounts payable trade...................................................... $ 1,257 $ 1,771 Accrued state sales tax..................................................... 233 119 Accrued interest............................................................ 343 241 Amount payable to Quisic shareholders ...................................... -- 450 Amounts related to acquisitions............................................. 8 315 Amounts payable to third party providers.................................... 1,006 1,000 Amounts payable to Interactive Alchemy...................................... 36 59 Accrued salaries and related benefits....................................... 453 422 Deferred rent liability..................................................... 27 54 Liabilities from discontinued operations.................................... 53 263 Other....................................................................... 54 37 ---------- ----------- Total accounts payable and accrued liabilities........................... $ 3,470 $ 4,731 ========== ===========
8. BUSINESS COMBINATIONS GLYPHICS CORPORATION The Company executed an agreement to acquire substantially all of the assets of and assume certain liabilities of Glyphics, a Utah based, private company. The acquisition had a stated effective date of June 1, 2004 and was fully consummated on June 14, 2004. The purchase price of $5.349 million was based on a multiple of the Glyphics' 2003 annual audio conferencing business revenues (as defined in the asset purchase agreement). The purchase price was paid with the assumption of specific liabilities, with the balance paid using its common stock at the fixed price of $1.05 per share. In exchange for the assets received, the Company assumed $2.466 million in debt and issued 3.1 million shares of its common stock at the date of acquisition. 704,839 shares of the Company's common stock were held in escrow subject to the claims of the Company for: (1) the amount, if any, that the audited audio conferencing business revenues (as defined in the asset purchase agreement) earned by the Company during the 12 months after the closing date are less than the audited audio conferencing business revenues (as defined in the asset purchase agreement) recorded by Glyphics during the 12 months ending December 31, 2003, (2) the representations and warranties made by Glyphics and its shareholders in the asset purchase agreement, and (3) the amount if any that the liabilities accrued or paid by the Company are in excess of those specifically scheduled and assumed as part of the asset purchase agreement. Subsequent to March 31, 2006, 704,839 shares were released from escrow related to the acquisition of Glyphics. Of that amount, 396,706 were returned to iLinc Communications due to the Company assuming obligations of $377,815 greater than scheduled in the purchase agreement. The remaining 308,133 shares were issued to the Glyphics shareholders at $0.39 per share based on the closing price of the agreement date of April 18, 2006. These shares were recorded as outstanding on March 31, 2006, pursuant to the terms of the Escrow Agreement. The Glyphics' shareholders receiving the Company's common stock as a result of the transaction have the right to demand registration of their common stock upon written notice, one year from the date of the transaction, to the Company and also have piggyback registration rights should the Company file a registration statement before the shares are otherwise registered. Operating results associated with audio conferencing operations are included as of June 1, 2004. The purchase price recorded was calculated as follows: AMOUNT ------------ Issuance of iLinc's common stock (valued at $0.98 per share using the five day average closing price) ............ $ 2,763 Issuance of iLinc's common stock (valued at $0.39 per share using the closing price at April 18, 2006............. 120 Assumed liabilities........................................... 2,466 ------------ Total purchase price....................................... $ 5,349 ============ 54 The total purchase price was allocated to assets acquired, in accordance with SFAS No. 141 "Business Combinations," based upon estimated fair market values as determined by an appraisal report obtained from an independent appraisal firm. The excess purchase price over the estimated fair market value of the tangible and intangible assets acquired was allocated to goodwill. As this transaction is intended to qualify as a tax-free acquisition, the tax bases of the acquired assets remain unchanged. As a result, a deferred tax liability of $1,132,000 has been established in an amount equal to the Company's statutory tax rate multiplied by the difference between the allocated book value of acquired non-goodwill assets and the tax bases of those assets. This increase to deferred tax liability resulted in a corresponding increase to the acquired goodwill. However, due to the presence of a valuation allowance against the net deferred tax asset, a second entry was then recorded to report the impact of the necessary decrease to the valuation allowance, with the offset being a reduction in acquired goodwill. The purchase price may change due to the ultimate resolution of charges against the escrow account, if any. The net result of these entries was to increase the deferred tax liability and decrease the valuation allowance by the same amount. The purchase price of Glyphics has been allocated as follows: PURCHASE PRICE ALLOCATION ---------------- (IN THOUSANDS) Current assets............................................... $ 618 Property and equipment....................................... 1,609 Goodwill .................................................... 1,118 Identifiable intangible assets .............................. 2,004 Current liabilities.......................................... (1,356) Notes payable................................................ (753) Capital leases............................................... (357) Common stock................................................. (3) Additional paid-in capital................................... (2,880) ---------------- Total $ -- ================ Operating results of Glyphics are included in the accompanying statement of operations for the year ended March 31, 2005 for the period June 1, 2004 through March 31, 2005. The following unaudited pro forma summary of condensed financial information presents the Company's combined results of operations as if the acquisition of Glyphics had occurred at the beginning of each period presented, after including the impact of certain adjustments including: (i) elimination of sales between the two companies and (ii) increase in amortization of the identifiable intangible assets and an increase in depreciation expense recorded as part of the acquisition. ---------------------------------- YEAR ENDED YEAR ENDED MARCH 31, 2005 MARCH 31, 2004 ---------------------------------- Revenues........................................................ $ 10,906 $ 10,026 Loss from continuing operations................................. (3,604) (3,157) Net loss from continuing operations............................ (5,440) (4,773) Loss per basic and diluted share from continuing operations..... $ (0.24) $ (0.25) Weighted average shares outstanding: Basic and diluted........................................... 23,328 19,562 55 The pro forma financial information presented does not purport to indicate what the combined results of operations would have been had the combination occurred at the beginning of the periods presented or the results of operations that may be obtained in the future. 9. LONG-TERM DEBT Long-term debt consisted of the following: MARCH 31, ------------------------ 2006 2005 ------------ ----------- (IN THOUSANDS) 2002 Convertible redeemable subordinated notes ............................. $ 5,100 $ 5,625 2004 Senior unsecured promissory notes....................................... 2,962 3,187 Shareholders' notes payable.................................................. 157 282 Notes payable................................................................ 447 613 ------------ ----------- 8,666 9,707 Less: Current portion of long-term debt................................... (199) (885) Discount............................................................. (896) (1,349) Beneficial conversion feature....................................... . (597) (771) ------------ ----------- Long-term debt, net of current portion....................................... $ 6,974 $ 6,702 ============ ===========
In March 2002, the Company completed a private placement offering (the "Convertible Note Offering") raising capital of $5,775,000. Under the terms of the Convertible Note Offering, the Company issued convertible redeemable subordinated notes and warrants to purchase 5,775,000 shares of the Company's common stock. The convertible notes bear interest at the rate of 12% per annum and require quarterly interest payments, with the principal due at maturity on March 29, 2012. The note holders may convert the principal into shares of the Company's common stock at the fixed price of $1.00 per share. The Company may force redemption by conversion of the principal into shares of the Company's common stock at the fixed conversion price, if at any time the 20 trading day average closing price of the Company's common stock exceeds $3.00 per share. These notes are subordinated to any present or future senior indebtedness with no waiver required. Those warrants expired on March 29, 2005 without exercise. The exercise price of the warrants was $3.00 per share. The Company could have forced exercise of the warrants at the exercise price, if at any time the closing price of the Company's common stock equaled or exceeded $5.50 per share for 20 consecutive trading days. The fair value of the warrants was estimated using the Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. The fair value was then used to calculate a discount of $1,132,000, which is being amortized to interest expense over the ten-year term of the notes. Since the carrying value of the notes was less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and is being amortized to interest expense over the ten year term of the notes. Upon conversion of these convertible notes, any remaining discount and beneficial conversion feature associated with these convertible notes will be expensed in full at the time of conversion. The common stock underlying these notes was registered with the SEC and may be sold if converted into common stock pursuant to a resale prospectus dated May 24, 2004. During fiscal 2004 holders with a principal balance totaling $150,000 converted their notes into 150,000 common shares of the Company. During fiscal 2006 holders with a principal balance of $525,000 converted their notes and $8,000 of accrued interest into 1,971,088 shares of the Company's common stock at a price of $0.25, $0.26 and $0.30 per share. Since the actual conversion price for the convertible debt was less than the fixed conversion price of $1.00, the Company recorded conversion expense of $338,000 for the period ending March 31, 2006. During fiscal 2006, the Company accelerated the amortization of the deferred offering costs and the discount and beneficial conversion feature associated with the debt by expensing $50,000 and $137,000, respectively at the time of conversion. In April of 2004, the Company completed a private placement offering of unsecured senior notes (the "2004 Senior Note Offering") that provided gross proceeds of $4.25 million. Under the terms of the 2004 Senior Note Offering, the Company issued $3,187,000 in unsecured senior notes and 1,634,550 shares of the Company's common stock. The senior notes were issued as a series of notes pursuant to a unit purchase and agency agreement. The senior notes are unsecured. The placement agent received a commission equal to 10% of the gross proceeds together with a warrant for the purchase of 163,455 shares of the 56 Company's common stock with an exercise price equal to 120% of the price paid by investors. The senior notes bear interest at a rate of 10% per annum and accrued interest is due and payable on a quarterly basis beginning July 15, 2004, with principal due at maturity on July 15, 2007. The senior notes are redeemable by the Company at 100% of the principal value at any time after July 15, 2005. The notes and common stock were issued with a debt discount of $768,000. The fair value of the warrants was estimated and used to calculate a discount of $119,000 of which $68,000 was allocated to the notes and $51,000 was allocated to equity. The total discount allocated to the notes of $836,000 is being amortized as a component of interest expense over the term of the notes which is approximately 39 months. The senior notes are unsecured obligations of the Company but are senior in right of payment to all existing and future indebtedness of the Company. The common stock issued in the 2004 Senior Note Offering was registered with the SEC pursuant to a resale prospectus dated August 2, 2005. Effective August 1, 2005, holders with a principal balance totaling $225,000 converted their senior notes and accrued interest of $800 into 903,205 shares of the Company's common stock at a price of $0.25 per share. Since the actual conversion price for the debt was greater than the market value of the stock at the date of conversion, the Company recorded a gain on conversion of $9,000 for the year ended March 31, 2006. During fiscal 2006, the Company accelerated the amortization of the deferred offering costs and the discount associated with the debt by expensing $10,000 and $35,000, respectively at the time of conversion. On November 9, 2005, placement agent warrants originally issued with an exercise price of $0.78 per common share were converted to 163,455 common shares at an exercise price of $0.25 per share, in which the Company received $41,000 in cash. The transaction resulted in an increase in deferred offering costs of $7,000 and an adjustment to additional paid-in capital of $7,000. In connection with the Company's initial public offering (IPO) in March of 1998, the Company issued notes to certain shareholders who had provided capital prior to the IPO. These notes were originally due in April of 2005 and required quarterly payments of interest only at the rate of 10%. During the first quarter of fiscal 2006, many of the noteholders agreed to extend the maturity date and accept installment payments that were due during the year ended March 31, 2006. The outstanding principal balance on these notes is $157,000 as of March 31, 2006. The Company has agreed to make installment payments for the outstanding principal balance plus accrued interest. As of March 31, 2006, the Company owed installment payments for principal of $87,000 on those IPO Notes, with no claims of default by the holders of the outstanding IPO notes. In connection with the Company's acquisition of Glyphics (Note 8), the Company assumed $753,000 in loan obligations, the unpaid balance of which $43,000 at March 31, 2006 is currently due in the short term. The rates of interest on such notes range from 6% to 9.5% per annum. Subsequent to March 31, 2006, the loan amount for $397,000 was extended to April 1, 2007 and was therefore recorded as long-term debt at March 31, 2006. The aggregate maturities of long-term debt excluding capital leases for each of the next five years subsequent to March 31, 2006 were as follows (IN THOUSANDS): 2007.............................................................. $ 199 2008.............................................................. 3,364 2009.............................................................. 2 2010.............................................................. 1 2011.............................................................. -- Thereafter........................................................ 5,100 ----------- $ 8,666 =========== 10. CAPITALIZATION PREFERRED STOCK The Company has the authority to issue ten million shares of preferred stock, par value $.001 per share. On September 16, 2003, the Company completed its private placement of Series A Preferred Stock with detachable warrants. The Company sold 30 units at $50,000 each and raised a total of $1,500,000. Each unit consisted of 5,000 shares of Series A Preferred Stock and a warrant to purchase 25,000 shares of common stock, par value $.001. The Series A Preferred Stock is convertible into the Company's common stock at a price of $0.50 per share, and the warrants are immediately exercisable at a price of $1.50 per share with a three-year term. Accordingly, each share of Series A Preferred Stock is convertible into 20 shares of common stock and retains a $10 liquidation preference. The Company pays an 8% dividend to holders of the Series 57 A Preferred Stock, and the dividend is cumulative. The Series A Preferred Stock is non-voting and non-participating. The shares of Series A Preferred Stock will not be registered under the Securities Act of 1933, as amended, and were offered in a private placement providing exemption from registration. The cash proceeds of the private placement of Series A Preferred Stock was allocated pro-rata between the relative fair values of the Series A Preferred Stock and warrants at issuance using the Black-Scholes valuation model for valuing the warrants. After allocating the proceeds between the Series A Preferred Stock and warrant, an effective conversion price was calculated for the Series A Preferred Stock to determine the beneficial conversion discount for each share. During the year ended March 31, 2004, the aggregate value of the warrants and the beneficial conversion discount of $247,000 were considered a deemed dividend in the calculation of loss per share. During fiscal 2005, holders of 22,500 shares converted to 450,000 shares of common stock. The underlying common stock that would be issued upon conversion of the preferred stock and upon exercise of the associated warrants have been registered with the SEC and may be sold pursuant to a resale prospectus dated May 24, 2004. On September 30, 2005, the Company executed definitive agreements with nine investors to issue 70,000 unregistered shares of its Series B Preferred Stock, par value $0.001 and warrants to purchase 700,000 shares of its common stock (the "Warrants") in a private transaction that was exempt from registration under Section 4(2) of the Securities Act of 1933. Of the total Series B Preferred Stock issued, 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to four individuals in exchange for their cash investment of $150,000; 15,000 shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of common stock were issued to two vendors in exchange for an offset of their accounts payable balance in the amount of $150,000; and 40,000 shares of Series B Preferred Stock with Warrants to purchase 400,000 shares of common stock (effective August 29, 2005 as previously disclosed on Form 8-K dated September 2, 2005) were issued to three institutional investors in exchange for the offset of accrued liabilities in the amount of $400,000 that arose from the Quisic acquisition. The Company recorded a gain on debt conversion of $50,000 associated with this transaction since the liabilities outstanding were $450,000 at the time of the transaction. The Series B Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share issue price, and is convertible into 2,800,000 shares of the Company's common stock using a conversion price of $0.25 per share. The Warrants that are exercisable at an exercise price equal to $0.50 per share expire on the third anniversary of the issue date of September 30, 2005. The aggregate value of the warrants of $55,000 is considered a deemed dividend in the calculation of loss per share. COMMON STOCK As of March 31, 2006, the Company is authorized to issue 100 million shares of common stock. The Company has acquired treasury stock from certain affiliated practices for the payment of receivables and purchase of property and equipment as a part of its discontinued operations. In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its Chief Executive Officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the Chief Executive Officer. The shares were valued at $405,000 based on the closing price of the stock on the date of grant, which is recorded as compensation expense ratably over the vesting period. The shares 100% vest after 10 years from the date of grant or upon attaining the following share price performance criteria: 150,000 shares vest if the share price trades for $4.50 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $8.50 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $12.50 per share for 20 consecutive days. Subsequent to March 31, 2006, the Compensation Committee of the Board of Directors amended the vesting performance criteria hurdles as follows: 150,000 shares vest if the share price trades for $1.00 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $2.00 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $3.00 per share for 20 consecutive days. All other aspects of the grant remained the same. In connection with the restricted stock grant, the Company loaned the Chief Executive Officer $179,000 to fund the immediate tax consequences of the grant. The Company recognized a $179,000 charge to income at the date of grant. 58 Subsequent to March 31, 2006, 704,839 shares were released from escrow related to the acquisition of Glyphics. Of that amount, 396,706 were returned to iLinc Communications due to the Company assuming obligations of $377,815 greater than scheduled in the purchase agreement. The remaining 308,133 shares were issued to the Glyphics shareholders at $0.39 per share based on the closing price of the agreement date of April 18, 2006. These shares were recorded as outstanding on March 31, 2006 pursuant to the terms of the Escrow Agreement. Subsequent to March 31, 2006, on June 9, 2006, the Company completed a private placement of 5,405,405 unregistered, restricted shares of common stock for approximately $1.7 million in net cash proceeds. The Company paid its placement agent an underwriting commission of $180,000 of which $25,000 was recorded as deferred offering costs at March 31, 2006 and incurred additional offering expenses of approximately $50,000. Within 30 days of the closing date, the Company will file a Registration Statement on Form S-3 to enable the resale of the shares by the Investors. The Company intends to use the proceeds for working capital and general corporate purposes. WARRANTS On November 19, 2003, the Company issued a warrant to purchase 250,000 shares of common stock to an advisor of the Company in exchange for certain advisory and consulting services pursuant to a written advisory agreement that will be provided to the Company over a three-year contractual period. The warrants are exercisable for shares of the Company's common stock at a price of $0.40. The warrants contain a provision that prohibited the delivery of shares even if exercised until after February 5, 2004. The warrants are currently treated as a variable plan grant; accordingly, the warrants will be revalued at each quarter end and the portion related to the cumulative expired services period less prior charges recorded will be recorded as a charge to expense during the period. The warrants were valued using the Black-Scholes model to calculate a fair value of $0.73 per share at March 31, 2004. A portion of the fair value totaling $20,000 was recognized for fiscal 2004. During fiscal 2005, the remaining balance of the warrants was expensed for $90,000. In January 2005, in connection with the restructuring of the payments on loan obligations due in connection with the acquisition of Glyphics, the Company issued a warrant for 50,000 shares with an exercise price of $0.55. The loan was guaranteed by Gary Moulton, the Company's senior vice president of audio services, as well as a shareholder of the Company, both of whom were formerly owners of Glyphics. The warrant expires in January 2007. The fair value of the warrant of $8,000 was estimated using the Black-Scholes pricing model with the following assumptions: contractual and expected life of two years, volatility of 72%, dividend yield of 0%, and a risk-free rate of 3.1%. In June 2005, in connection with the restructuring of the payments, the Company issued a warrant for 50,000 shares to the Glyphics shareholder with an exercise price of $0.32. The warrant expires in June 2007. The fair value of the warrant of $6,500 was estimated using the Black-Scholes pricing model with the following assumptions: contractual and expected life of two years, volatility of 71%, dividend yield of 0%, and a risk-free rate of 3.6%. Subsequent to yearend, on April 1, 2006, the Company issued an additional warrant for 50,000 shares with an exercise price of $0.40. The warrant expires in April 2009. The fair value of the warrant of $15,000 was estimated using the Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 125%, dividend yield of 0%, and a risk-free rate of 4.83%. Subsequent to yearend, the expiration dates of the warrants issued in January 2005 and August 2005 were extended to March 31, 2009. Based on an analysis using the Black-Scholes pricing model, no adjustment was made to the fair value of the two extended warrants. 11. INCOME TAXES Significant components of the provision for income taxes were as follows (IN THOUSANDS): YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, 2006 2005 ------------ ------------ Current tax expense: Federal........................................ (1,010) (2,033) State.......................................... (1,915) (359) ------------ ------------ Total current................................ (2,925) (2,392) ------------ ------------ Deferred tax expense: Federal........................................ 1,010 2,033 State.......................................... 1,915 359 ------------ ------------ Total deferred............................... 2,925 2,392 ------------ ------------ Expense for income taxes.......................... -- -- ============ ============ The Company incurred no tax expense for the years ending March 31, 2006 March 31, 2005 and March 31, 2004 due to the losses incurred in all periods presented. 59 Significant components of the Company's deferred tax assets (liabilities) were as follows (IN THOUSANDS): MARCH 31, ------------------------- 2006 2005 ----------- ------------ Deferred tax assets: Reserves for uncollectible accounts................................. $ 48 $ 34 Deferred revenue.................................................... 17 440 Accrued expenses.................................................... 194 200 Property and equipment.............................................. 269 -- Net operating loss carryforward..................................... 15,355 12,418 ----------- ------------ Total deferred tax assets........................................ $ 15,883 $ 13,092 ----------- ------------ Deferred tax liabilities: Glyphics book/tax differences....................................... (1,132) (1,132) Property and equipment.............................................. -- (47) Intangible assets................................................... (1,124) (199) ----------- ------------ Total deferred tax liabilities.................................... (2,256) (1,378) ----------- ------------ Net deferred tax asset................................................. 13,627 11,714 Less: valuation allowance........................................... (13,627) (11,714) ----------- ------------ Net deferred tax asset.......................................... $ -- $ -- =========== ============ The differences between the statutory federal tax rate and the Company's effective tax rate on continuing operations were as follows (IN THOUSANDS): YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2006 2005 2004 ----------- ---------- ----------- Tax (benefit) at U.S. Statutory rate (34%)............... $(398) $ (1,811) $ (780) State income taxes (benefit), net of federal tax......... (70) (319) (62) Non-deductible expenses and other........................ 6 (18) (68) Change in valuation allowance, net....................... 462 2,148 910 ----------- ---------- ----------- Total tax expense (benefit)........................... $ -- $ -- $ -- =========== ========== ===========
At March 31, 2006, the Company had federal and State of Arizona net operating loss carry-forwards available to reduce future taxable income of approximately $41,282,000 and $21,981,000, respectively, which begin to expire in 2013 and 2006, respectively. The Company has certain net operating losses in other states relating to its acquisitions (see Note 8). The Company is currently quantifying such net operating losses and evaluating the Company's ability to use them. The Company recorded a valuation allowance for its entire deferred tax asset because it concluded it is not likely it would be able to realize the tax assets due to the lack of profitable operating history of its implementation of the Web conferencing and audio conferencing business plan. In accordance with Internal Revenue Code Section 382, the annual utilization of net operating loss carry-forwards and credits existing prior to a change in control, as defined, in the Company or a company the Company has acquired may be substantially limited. Accordingly, the utilization of a substantial portion of the Company's net operating loss carry-forwards is limited, such as net operating loss carry-forwards are either related to the acquisition of ThoughtWare Technologies, Learning-Edge, Inc., Glyphics, and other acquired entities, or are related to current operations during which change in control events may have occurred. The net change in the valuation allowance for the year ended March 31, 2006 was $1,913,000. The net change in the valuation allowance for the year ended March 31, 2006 was $1,913,000. The net change in the valuation allowance for the year ended March 31, 2005 was $1,016,000 which includes the reduction for the $1,132,000 deferred tax liability assumed in the Glyphics acquisition. 60 12. STOCK OPTION PLANS AND WARRANTS The Company grants stock options under its amended and restated 1997 Stock Compensation Plan (the "Plan"). The Company recognizes stock-based compensation issued to employees at the intrinsic value between the exercise price of options granted and the fair value of stock for which the options may be exercised. However, pro forma disclosures as if the Company recognized stock-based compensation at the fair value of the options themselves are presented below. Under the Plan, as amended, the Company is authorized to issue 5,500,000 shares of common stock pursuant to "Awards" granted to officers and key employees in the form of stock options. The number of shares authorized as available for issue under the plan were increased from 3,500,000 at the 2005 Annual Meeting of Stockholders held on August 19, 2005. There were 2,637,864 and 2,438,018 options granted under the Plan, at March 31, 2006 and 2005, respectively. The Compensation Committee of the Board of Directors administers the Plan. Stock options granted to employees have a contractual term of 10 years (subject to earlier termination in certain events) and have an exercise price no less than the fair market value of the Company's common stock on the date grant. The options vest at varying rates over a one to five year period. Following is a summary of the status of the Company's stock options as of March 31, 2006: WEIGHTED NUMBER OF AVERAGE WEIGHTED AVERAGE SHARES UNDERLYING EXERCISE FAIR-VALUE OF OPTIONS PRICES OPTIONS GRANTED ------------------- ------------- --------------------- Outstanding at March 31, 2003................... 1,835,865 1.82 Granted......................................... 632,500 0.67 $ 0.56 ===================== Exercised....................................... -- -- Forfeited....................................... (185,510) 2.64 Expired......................................... -- -- ------------------- ------------- Outstanding at March 31, 2004................... 2,282,855 $ 1.43 Granted......................................... 702,900 0.66 $ 0.56 ===================== Exercised....................................... (151,160) 0.51 Forfeited....................................... (370,688) 0.72 Expired......................................... (25,889) 6.13 ------------------- ------------- Outstanding at March 31, 2005................... 2,438,018 $1.32 Granted......................................... 815,500 0.29 $ 0.22 ===================== Exercised....................................... -- -- Forfeited....................................... (606,307) 1.01 Expired......................................... (9,347) 1.05 ------------------- ------------- Outstanding at March 31, 2006................... 2,637,864 $1.07 =================== ============= 61 The following table summarizes information about stock options outstanding at March 31, 2006: OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE SHARES PRICE LIFE (YEARS) SHARES PRICE -------------- ------------- --------------------------- ------------- ------------- $ 0.01 - $ 0.99 2,013,349 $ 0.50 7.13 1,461,320 $ 0.55 $ 1.00 - $ 1.99 104,125 $ 1.61 4.78 96,688 $ 1.65 $ 2.00 - $ 2.99 430,000 $ 2.22 3.28 430,000 $ 2.22 $ 3.00 - $ 8.50 90,390 $ 7.70 2.43 90,390 $ 7.70 -------------- ------------- 2,637,864 2,078,398 ============== ============= During the 2006 fiscal year, no stock options were exercised by employees of the Company. The following table summarizes information about stock purchase warrants outstanding at March 31, 2006: WARRANTS OUTSTANDING WARRANTS EXERCISABLE ------------------------------------------------------ ---------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE SHARES PRICE LIFE (YEARS) SHARES PRICE -------------- ------------- ------------------------- ------------- ------------- $ 0.32 - $ 0.32 50,000 $ 0.32 1.19 50,000 $ 0.32 $ 0.40 -$ 0.40 250,000 $ 0.40 0.64 250,000 $ 0.40 $ 0.42 -$ 0.42 543,182 $ 0.42 5.39 543,182 $ 0.42 $ 0.44 -$ 0.44 132,972 $ 0.44 5.45 132,972 $ 0.44 $ 0.50 -$ 0.50 700,000 $ 0.50 2.50 700,000 $ 0.50 $ 0.55 -$ 0.55 50,000 $ 0.55 0.76 50,000 $ 0.55 $ 1.50 -$ 1.50 921,510 $ 1.50 1.39 921,510 $ 1.50 -------------- -------------- 2,647,664 2,647,664 ============== ==============
13. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases a portion of its property and equipment under the terms of capital and operating leases. The capital leases bear interest at varying rates ranging from 5.6% to 15.0% and require monthly payments. Assets recorded under capital leases, at March 31, 2006, consisted of the following (IN THOUSANDS): Cost.......................................................... $ 412 Less: accumulated amortization................................ (376) ------------- Total......................................................... $ 36 ============= 62 Future minimum lease payments under capital leases and non-cancelable operating leases with initial or remaining terms of one or more years consisted of the following at March 31, 2006 (IN THOUSANDS): CAPITAL OPERATING ----------- ------------- Amounts past due.................................... $ -- $ 7 2007................................................ 71 532 2008................................................ -- 412 2009................................................ -- 282 2010................................................ -- 279 2011................................................ -- 290 Thereafter.......................................... -- 269 ----------- ------------- Total minimum obligations........................... 71 $ 2,071 ============= Less: amount representing interest.................. (1) ----------- Present value of minimum obligations................ 70 Less: current portion............................... (70) ----------- Long-term obligation at March 31, 2006.............. $ 0 =========== The Company incurred rent expense of $604,000, $569,000, and $470,000 in fiscal 2006, 2005, and 2004, respectively. The Company occupies space in Phoenix, Arizona, where the Company is headquartered. The Company also leases space in Springville, Utah as a result of the acquisition of Glyphics, and space in Troy, New York, with an emphasis in that location on research and development and technical support. Subsequent to March 31, 2006, the Company amended the lease on its Phoenix location, which was set to expire February 28, 2007. The term was extended to February 28, 2012, and square footage and the related expense was reduced as a result of the amendment. In addition, a cancellation clause was added. Under the cancellation terms, the Company may cancel the lease, with nine months' notice effective February 28, 2009 or February 28, 2010 with a nine-month or six-month base rent penalty, respectively. SUBCONTRACTOR AGREEMENT Subsequent to March 31, 2006, the Company amended its agreement with its custom content subcontractor, Interactive Alchemy. The original agreement was a three-year agreement effective May 1, 2003. The amendment dated April 29, 2006 extends the agreement for an additional non-cancelable two-year term effective May 1, 2006. Under the revised agreement, Interactive Alchemy will continue to provide custom content development services to the Company for its customers in exchange for a fixed percentage of the Company's custom content fee. The Company will also receive a specified amount of fees from Interactive Alchemy limited to a cap of $200,000 in the first year and $450,000 in the second year of the amended agreement. ROYALTY AGREEMENTS In conjunction with the acquisition of certain assets from Mentergy, Inc. ("Mentergy"), the Company agreed to provide a royalty earn-out payment that is due upon collection of cash received from the sales of its Web conferencing software. The royalty earn-out was originally equal to 20% for all revenues collected from the sale of that Web conferencing software over a three-year period beginning November 4, 2002, with the first $600,000 of collected revenues not subject to the royalty, and the maximum amount being $5,000,000. After negotiating a settlement with one of the original participants in the Mentergy transaction during fiscal 2005, the royalty was reduced to 18.7%. The Company accounts for any such amounts collected as additional purchase consideration in accordance with EITF 95-8: "Accounting For Contingent Consideration Paid To The Shareholders Of An Acquired Enterprise In A Purchase Business Combination" at the time such amounts are accrued as revenue. The Company had accrued Mentergy royalties totaling $890,000 and $872,000 as of March 31, 2006 and March 31, 2005, respectively (the "Royalty Accrual Amount"). In the prior year, the royalty was calculated on the accrual basis for consistency with the Company's revenue recognition policies. Since the royalty agreement term ended on November 4, 2005 the obligation at March 31, 2006 has been adjusted to reflect amounts due on the collection of cash received on the sales of Web conferencing software through November 4, 2005. On October 10, 2005, Mentergy and the Company executed a payment agreement that provides, notwithstanding the termination of the 63 royalty accrual, negotiated payment terms that would require an initial payment of $100,000 within 15 days of approval of the agreement followed by 12 level installment payments of $76,212 plus interest per month and a balloon payment for the entire remaining balance due on November 15, 2006, but with the accrual of additional royalties terminating as originally intended on November 4, 2005. As of March 31, 2006, the Company paid $252,000, net of interest, to Mentergy in accordance with the payment agreement. Subsequent to March 31, 2006 through the date of this report, the Company paid an additional $229,000, net of interest, to Mentergy. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Mr. Powers, Mr. Dunn, Mr. Cocozza, and Mr. Moulton. All are or were officers, and Mr. Powers is also Chairman of the Board of Directors. Mr. Cocozza's employment agreement with the Company expired on January 6, 2006 and is currently being renegotiated. Each of these agreements provides for an annual base salary in an amount not less than the initial specified amount and entitles the employee to participate in all of the Company's compensation plans. Each agreement establishes a base annual salary and provides the eligibility for an annual award of bonuses based on the management incentive compensation plan (as adopted and amended by the Compensation Committee of the Board of Directors from year to year), and is subject to the right of the Company to terminate their respective employment at any time without cause. Mr. Powers' and Mr. Dunn's employment agreements provide for continuous employment for a one-year term that renews automatically unless otherwise terminated. Mr. Dunn's employment agreement permits Mr. Dunn to work outside the corporate offices, and Mr. Dunn relocated to Houston in June of 2005. Mr. Moulton's agreement provides for continuous employment for a two-year term. Under each of the employment agreements, if the Company terminates the employee's employment without cause (as therein defined), Mr. Powers, Mr. Dunn, and Mr. Moulton will be entitled to a payment equal to 12 months' salary. Additionally, Mr. Powers' and Mr. Dunn's employment agreements provide for a severance payment equal to one (1) year's compensation in the event of termination of employment following a "change in control" of the Company (as defined therein) except that should Mr. Dunn obtain employment with the successor organization in a comparable position, then the Company shall not be responsible for the severance payment. Each of the foregoing agreements also contains a covenant limiting competition with iLinc for one year following termination of employment except for Mr. Moulton's which limits competition with iLinc for nine months following termination. LITIGATION On June 14, 2002, the Company acquired the assets of Quisic. Subsequently, on November 4, 2002, two former employees of Quisic (Mr. Weathersby their former CEO and Mr. Alper their former CIO), filed a lawsuit in the Superior Court of the State of California styled George B. Weathersby, et al. vs. Quisic, et al. claiming damages against Quisic and the Board of Directors of Quisic arising from their employment termination by the Quisic Board. The Company was also added as a third party defendant with an allegation of successor liability, but only to the extent that Quisic is found liable, and then only to the extent the plaintiffs prove their successor liability claim against the Company. Subsequent to the defendants' answers being filed, the trial court ordered that an arbitration of the merits be held, which is currently pending. The claims of Alper and Weathersby were being arbitrated separately. As of the date of this report, the arbitrator dismissed all of Alper's claims against the defendants, except for the only remaining defamation claim. The Company is not liable for the defamation claim and therefore has no further liability to Alper. The Company only acquired certain assets of Quisic in an asset purchase transaction in exchange for 2,000,000 shares of the Company's common stock and the assumption of $223,000 of liabilities, together with an additional 500,000 shares of the Company's common stock that were placed into escrow to secure a revenue performance requirement. That revenue performance target was not achieved, and the Company demanded the return of the shares of common stock. The shareholders of Quisic do not dispute the right of the Company to obtain those shares. However, the shares will remain in escrow pending resolution of the party's respective claims. Based upon the facts and circumstances known, the Company believes that the plaintiffs' claims are without merit, and furthermore, that the Company is not the successor of Quisic, and therefore the Company intends to vigorously defend this aspect of the lawsuit. While in the opinion of management, resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur that awarded to the Plaintiffs against defendant Quisic large sums, and then the court determined that the Company is a successor to Quisic, then the impact is likely to be material to the Company. 64 14. RELATED PARTY TRANSACTIONS In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its Chief Executive Officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the Chief Executive Officer. The shares were valued at $405,000 based on the closing price of the stock on the date of grant, which is recorded as compensation expense ratably over the ten-year vesting period. The shares 100% vest after 10 years from the date of grant or upon attaining the following share price performance criteria: 150,000 shares vest if the share price trades for $4.50 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $8.50 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $12.50 per share for 20 consecutive days. Subsequent to March 31, 2006, the Compensation Committee of the Board of Directors amended the vesting performance criteria hurdles as follows: 150,000 shares vest if the share price trades for $1.00 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $2.00 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $3.00 per share for 20 consecutive days. All other aspects of the grant remained the same. In connection with the restricted stock grant, the Company loaned the Chief Executive Officer $179,000 to fund the immediate tax consequences of the grant. The Company recognized a $179,000 charge to income at the date of grant. During fiscal 2006, 2005 and 2004, the Company recognized $30, $900 and $18,200 respectively of legal expense to the Bogatin law firm of which a member of the Company's Board of Directors is a partner. In May of 2003, Barnhill's Buffet purchased 50 LearnLinc Core Licenses with Voice-over IP and 2- way Live Videoconferencing plus annual maintenance for $62,000. The remaining balance due under this contract was $0 at March 31, 2006 and 2005, respectively. The price paid and the payment terms granted to Barnhill's was consistent with price paid and the terms extended to other customers of the Company. During fiscal 2006, the Company recorded revenue of $31,000 in relationship to the maintenance contract for licenses sold to Barnhill's Buffet. James M. Powers, Jr. is a co-founder and was a director of Barnhill's Buffet. On July 21, 2005, James L. Dunn Jr., the Company's CFO, purchased a note from one of the IPO Note holders. The note had a principal balance of $8,375 and was purchased at a discount. Mr. Dunn extended the term of the note that was then due until April 1, 2006. On September 30, 2005, the father of James L. Dunn Jr. invested $25,000 in the Company's Series B Preferred Stock Offering and acquired 2,500 shares of iLinc Communications' Series B Preferred Stock and a Warrant to purchase 25,000 shares of the Company's common stock. The warrant is exercisable immediately at an exercise price of $0.50 and expires on September 30, 2008. Mr. James L. Dunn Jr. has no direct and beneficial interest in his father's investment. On July 31, 2005, the Company exchanged a convertible promissory note that had been issued in March of 2002 to Peldawn, LLC, of which Mr. Dan Robinson, a member of the Company's Board of Directors, is a partner. The note had an original principal balance of $25,000 and was originally convertible at $1.00 per share. As part of the Company's plan to decrease debt and increase shareholders' equity, in combination with holders of $525,000 principal balance of 2002 convertible redeemable notes, the note including principal and accrued interest was exchanged using a price of $0.30 per share into 84,183 shares of the Company's common stock. Due to the revised conversion terms of the convertible notes, the Company recorded $12,000 of conversion expense. The transaction resulted in accelerated amortization of the deferred offering costs and the discount and beneficial conversion features associated with the debt by expensing $2,400 and $6,500, respectively at the time of conversion. The conversion price was above the fair market value of the Company's common stock on the date of conversion and was on the same terms as like holders. On August 16, 2005, Dr. James Powers, the Company's CEO, and his wife, exchanged convertible promissory notes that had been issued in March 2002. The notes had an original balance of $50,000 and were originally convertible at $1.00 per share. As part of the Company's plan to decrease debt and increase shareholders' equity, in combination with holders of $525,000 principal balance of 2002 convertible redeemable notes, the notes were converted at a price of $0.26 per share into 192,308 share of the Company's common stock. Due to the revised conversion terms of the convertible notes, the Company recorded $36,000 of conversion expense. The transaction resulted in accelerated amortization of the deferred offering costs and the discount and beneficial conversion features associated with the debt by expensing $4,800 and $13,000, respectively at the time of conversion. The conversion price was above the market value of the Company's common stock on the date of the conversion and was on the same terms as like holders. 65 On September 30, 2005, Mr. Kent Petzold, a member of the Company's Board of Directors, invested in the Company's Series B Preferred Stock offering and acquired 5,000 shares of iLinc Communications Series B Preferred Stock and a Warrant exercisable for 50,000 shares of the Company's common stock. Mr. Petzold paid $50,000 in the aggregate for such securities on the same terms as all other investors in the offering. The Warrant is immediately exercisable at an exercise price of $0.50 and expires on September 30, 2008. At March 31, 2006, the Company owed the four Board of Directors' fees totaling $69,000 for services performed during the 2006 fiscal year. 15. SUPPLEMENTAL CASH FLOW INFORMATION YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2006 2005 2004 ------------ ------------- ------------- (IN THOUSANDS) Cash paid Interest...................................................... $ 933 $ 1,010 $ 1,047 Income taxes.................................................. -- -- -- Supplemental information on non-cash transactions Subordinated notes, Series A conversion into common shares.... -- -- 849 Debt conversion into common shares........................... 225 583 156 Convertible redeemable subordinated notes and accrued interest converted into common shares....................... 533 494 150 Issuance of common stock in connection with acquisitions...... 120 2,763 -- Accounts Payable and Accrued liabilities converted into common shares............................................... 550 -- -- Warrants issued with preferred stock.......................... 55 -- -- Warrant conversion expense due to warrant repricing........... 7 -- -- 66 16. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth summary quarterly results of operations for the Company for the years ended March 31, 2006 and 2005: FIRST SECOND THIRD FOURTH 2006 QUARTER QUARTER QUARTER QUARTER - -------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenue .................................................... $ 2,673 $ 3,005 $ 3,274 $ 3,580 Cost of revenues and operating expenses ........................ 3,131 2,693 2,855 3,110 Income/ (loss) from operations ................................. (458) 312 419 470 Income/ (loss) from continuing operations before income taxes .. (892) (526) 137 27 Income taxes ................................................... -- -- -- -- Income/ (loss) from continuing operations ...................... (892) (526) 137 27 Income from discontinued operations ............................ 7 5 70 1 Net income/ (loss) ............................................. $ (885) $ (521) $ 207 $ 28 Income/ (loss) available to common shareholders ................ $ (910) $ (602) $ 167 $ (11) Basic and diluted per share data: (1) Income/ (loss) per common share from continuing operations ... $ (0.04) $ (0.02) $ (0.01) $ (0.00) Income/ (loss) per common share from discontinued operations ............................................... -- -- -- -- Weighted average common share outstanding: Basic ........................................................ 24,145 25,855 27,114 27,186 Diluted ...................................................... 24,145 25,855 27,115 27,186 FIRST SECOND THIRD FOURTH 2005 QUARTER QUARTER QUARTER QUARTER - -------- --------- --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenue .................................................... $ 1,970 $ 2,734 $ 2,568 $ 3,096 Cost of revenues and operating expenses ........................ 2,824 4,100 3,315 3,503 Loss from operations ........................................... (854) (1,366) (747) (407) Loss from continuing operations before income taxes ............ (1,456) (1,802) (1,159) (782) Income taxes ................................................... -- -- -- -- Loss from continuing operations ................................ (1,456) (1,802) (1,159) (782) Income/ (loss) from discontinued operations .................... -- -- 15 (143) Net loss ....................................................... $ (1,456) $ (1,802) $ (1,144) $ (925) Loss available to common shareholders .......................... $ (1,485) $ (1,828) $ (1,170) $ (949) Basic and diluted per share data: (1) Loss per common share from continuing operations.............. $ (0.07) $ (0.08) $ (0.05) $ (0.03) Income/ (loss) per common share from discontinued operations ............................................... $ -- $ -- $ -- $ (0.01) Weighted average common share outstanding: Basic and diluted ............................................ 20,297 24,132 24,146 24,145 ____________ (1) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share does not equal the total computed for the year due to stock transactions that occurred.
67 17. SUBSEQUENT EVENTS Subsequent to March 31, 2006, the maturity date of a $400,000 note payable, assumed in the Glyphics acquisition with a principal balance of $397,000 was extended from April 1, 2006 to April 1, 2007, with quarterly interest-only payments at 7.5% due until maturity. Subsequent to year end, on April 1, 2006, the Company issued a warrant for 50,000 shares with an exercise price of $0.40 in connection with the extension of a $397,000 loan. The warrant expires in April 2009. The fair value of the warrant of $15,000 was estimated using the Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 125%, dividend yield of 0%, and a risk-free rate of 4.83%. Subsequent to year end, the expiration dates of the warrants issued in January 2005 and August 2005, also issued in connection with the $397,000 loan, were extended to March 31, 2009. Based on an analysis using the Black-Scholes pricing model, no adjustment was made to the fair value of the two extended warrants. On April 29, 2006, the Company amended its agreement with its custom content subcontractor, Interactive Alchemy. The original agreement was a three-year agreement effective May 1, 2003. The amendment extends the agreement for an additional non-cancelable two-year term effective May 1, 2006. Under the revised agreement, Interactive Alchemy will continue to provide custom content development services to the Company for its customers in exchange for a fixed percentage of the Company's custom content fee. The Company will also receive a specified amount of fees from Interactive Alchemy limited to a cap of $200,000 in the first year and $450,000 in the second year of the amended agreement. Subsequent to March 31, 2006, the Company amended the lease on its Phoenix location, which was set to expire February 28, 2007. The term was extended to February 28, 2012, and square footage and the related expense was reduced as a result of the amendment. In addition, a cancellation clause was added. Under the cancellation terms, the Company may cancel the lease, with nine months' notice effective February 28, 2009 or February 28, 2010 with a nine-month or six-month base rent penalty, respectively. Subsequent to March 31, 2006, on June 9, 2006, the Company completed a private placement of 5.4 million unregistered, restricted shares of common stock for approximately $2.0 million in gross proceeds. The Company paid its placement agent an underwriting commission of $180,000 of which $25,000 was recorded as deferred offering costs at March 31, 2006 and incurred additional offering expenses of approximately $50,000. Within 30 days of the closing date, the Company will file a Registration Statement on Form S-3 to enable the resale of the shares by the Investors. The Company intends to use the proceeds for working capital and general corporate purposes. Subsequent to March 31, 2006, the Compensation Committee of the Board of Directors amended the vesting performance criteria hurdles in the Restricted Stock Award issued to its Chief Executive Officer, James M. Powers, Jr., as follows: 150,000 shares vest if the share price trades for $1.00 per share for 20 consecutive days; 150,000 shares vest if the share price trades for $2.00 per share for 20 consecutive days; and 150,000 shares vest if the share price trades for $3.00 per share for 20 consecutive days. All other aspects of the grant remained the same.(For further information see the discussion in Item 5.) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES The Company evaluated the design and operation of its disclosure controls and procedures to determine whether they are effective in ensuring that it discloses the required information in a timely manner and in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and forms of the Securities and Exchange Commission. Management, including its principal executive officer and principal financial officer, supervised and participated in the evaluation. The principal executive officer and principal financial officer concluded, based on their review, that its disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), are effective and ensure that (i) it discloses the required information in reports that it files under the Exchange Act and that the filings are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) information required to be disclosed in reports that it files under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. During the fourth quarter ended March 31, 2006, no changes were made to its internal controls over financial reporting that materially affected or were reasonably likely to materially affect these controls subsequent to the date of their evaluation. 68 ITEM 9B. OTHER None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to the Company's directors and executive officers and compliance by the Company's directors, executive officers and certain beneficial owners of the Company's common stock with Section 16(a) of the Exchange Act will be set forth under the captions "Election of Directors' and "Section 16 Reports" in the Company's definitive Proxy Statement (the "2006 Proxy Statement") for its 2006 annual meeting of stockholders, which sections are incorporated herein by reference. The Company's Code of Ethics is incorporated herein by this reference and available at the Company' Website located at www.ilinc.com. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the section entitled "Executive Compensation" in the 2006 Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item will be set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2006 Proxy Statement, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be set forth in the section entitled "Certain Transactions" in the 2006 Proxy Statement, which section is incorporated herein by reference. 69 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Epstein, Weber & Conover, PLC audited the Company's consolidated financial statements for the years ended March 31, 2005 and 2006. BDO Seidman, LLP audited its consolidated financial statements for the year ended March 31, 2004. AUDIT AND NON-AUDIT FEES Aggregate fees for professional services rendered to the Company by Epstein, Weber & Conover, PLC, by BDO Seidman, LLP and by Evers & Company, LTD. for the year ended March 31, 2006 were $111,280, $30,350 and $3,500, respectively. Total aggregate fees for professional services for the years ended March 31, 2006 and 2005, respectively were as follows: SERVICES PROVIDED 2006 2005 ------------------------------- Audit Fees $109,600 $149,392 Audit Related Fees -- 13,474 Tax Fees 3,500 -- All Other Fees 1,680 -- ------------------------------- Total $114,780 $162,866 =============================== Audit Fees The aggregate fees billed for the years ended March 31, 2006 and 2005, were for the audits of the Company's consolidated financial statements and reviews of the Company's interim consolidated financial statements included in the Company's annual and quarterly reports, and for services provided with respect to the Company's other regulatory filings. The fees reflected above for 2006 do not include fees paid to BDO Seidman, LLP of $30,350 for the fiscal year ended March 31, 2006. Audit Related Fees The aggregate fees billed for the years ended March 31, 2006 and 2005 were primarily for services provided for review and consultation on acquisition, capital raising, and tender offer transactions. Tax Fees The aggregate fees billed for the years ended March 31, 2006 and 2005 were for miscellaneous tax consulting services performed by Evers and Company, LTD. Audit Committee Pre-Approval Policies and Procedures The Audit Committee has implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, the Audit Committee pre-approves both the type of services to be provided by its auditor and the estimated fees related to these services. During the approval process, the Audit Committee considers the impact of the types of services and the related fees on the independence of the auditor. The services and fees must be deemed compatible with the maintenance of the auditor's independence, including compliance with SEC rules and regulations. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firms. 70 Consolidated Balance Sheets as of March 31, 2006 and 2005. Consolidated Statements of Operations for the years ended March 31, 2006, 2005, and 2004. Consolidated Statements of Shareholders' Equity for the years ended March 31, 2006, 2005, and 2004. Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005, and 2004. Notes to the Consolidated Financial Statements. (a)(2) FINANCIAL STATEMENT SCHEDULES Reports of Independent Registered Public Accounting Firms The following financial statement schedule is filed as a part of this Report under Schedule II on page 76. Schedule II -- Valuation and Qualifying Accounts for the three fiscal years ended March 31, 2006. All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information is shown in the financial statements, or notes thereto, included herein. 71 (a)(3) EXHIBITS. EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 3.1(1) Restated Certificate of Incorporation of the Company 3.2(1) Bylaws of the Company 3.3(7) Restated Certificate of Incorporation of the Company 3.4(7) Amendment of Bylaws of the Company 3.5(8) Restated Certificate of Incorporation of the Company 3.6(14) Certificate of Designations of Series A Preferred Stock 3.7(15) Certificate of Amendment of Restated Certificate of Incorporation of the Company 3.8 Revised Certificate of Designations of Series B Preferred Stock 4.1(1) Form of certificate evidencing ownership of Common Stock of the Company 4.6(7) Form of certificate evidencing ownership of Common Stock of the Company 4.7(8) Form of Convertible Redeemable Subordinated Note 4.9(14) Form of Redeemable Warrant (2003 Private Placement Offering) *10.1(20) The Company's amended and restated stock compensation plan *10.9(7) Employment Agreement dated November 12, 2000 between the Company and James M. Powers, Jr. *10.11(21) Employment Agreement dated February 15, 2001 between the Company and James L. Dunn, Jr. with Amendments 10.14(9) Plan of Reorganization and Agreement of Merger by and among the Company, Edge Acquisition Subsidiary, Inc. and the Stockholders of Learning-Edge, Inc. 10.15(10) Plan of Reorganization and Agreement of Merger by and among the Company, TW Acquisition Subsidiary, Inc., ThoughtWare Technologies, Inc. and the Series B Preferred Stockholder of ThoughtWare Technologies, Inc. 10.16(11) Asset Purchase Agreement by and among the Company and Quisic Corporation. Common Stock Purchase Agreement by and between the Company, Investor Growth Capital Limited, A Guernsey Corporation and Investor Group, L.P., A Guernsey Limited Partnership and Leeds Equity Partners III, L.P. 10.16(12) Asset Purchase Agreement by and among the Company, and Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc Corp and Gilat-Allen Communications, Inc. +10.17 Subcontractor Agreement between the Company and Interactive Alchemy, Inc. with Amendments *10.18(17) Employment Agreement dated January 6, 2004 between the Company and Nathan Cocozza 10.19(17) Note Purchase Agreement dated February 12, 2004 between the Company and certain creditors 10.20(17) Unit Purchase and Agency Agreement dated April 19, 2004 between the Company and Cerberus Financial, Inc. 10.21(17) Placement Agency Agreement dated March 10, 2004 between the Company and Peacock, Hislop, Staley, and Given, Inc. 10.22(16) Asset Purchase Agreement and Plan of Reorganization by and between the Company and Glyphics Communications, Inc. *10.23(18) Employment Agreement dated June 1, 2004 between the Company and Gary L. Moulton *10.24(18) Employment Agreement dated July 19, 2004 between the Company and John S. Hodgson *10.25(19) Employment Agreement dated March 14, 2005 between the Company and David Iannini +10.26 Securities Purchase Agreements effective June 9, 2006 +10.27 Registration Rights Agreements effective June 9, 2006 +12Ratio of Earnings to Fixed Charges 14.1(18) Code of Ethics 16(13) Letter re Change in Certifying Accountant +21.1 Subsidiaries of the Registrant +23.1 Consent of Epstein, Weber & Conover, PLC +23.2 Consent of BDO Seidman, LLP +31.1 Chief Executive Officer Section 302 Certification +31.2 Principal Financial Officer Section 302 Certification +32.1 Chief Executive Officer Section 906 Certification +32.2 Principal Financial Officer Section 906 Certification ________________ 72 (1) Previously filed as an exhibit to iLinc's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to iLinc's Registration Statement on Form S-4 (No. 333-78535), and incorporated herein by reference. (3) Previously filed as an exhibit to iLinc's Registration Statement on Form S-4 (No. 333-64665), and incorporated herein by reference. (4) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998. (5) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998. (6) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K for the year ended March 31, 2000. (7) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K for the year ended March 31, 2001. (8) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K for the year ended March 31, 2002. (9) Previously filed as an exhibit to iLinc's Form 8-K filed October 16, 2001. (10) Previously filed as an exhibit to iLinc's Form 8-K filed January 30, 2002. (11) Previously filed as an exhibit to iLinc's Form 8-K filed July 2, 2002. (12) Previously filed as an exhibit to iLinc's Form 8-K filed December 20, 2002. (13) Previously filed as an exhibit to iLinc's Form 8-K filed April 3, 2003. (14) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003. (15) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003. (16) Previously filed as an exhibit to iLinc's Form 8-K filed June 14, 2004. (17) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K for the year ended March 31, 2004. (18) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004. (19) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K for the year ended March 31, 2005. (20) Previously filed as an exhibit to iLinc's Annual Proxy Statement dated July 14, 2005. (21) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 15 of Form 10-K. + Furnished herewith as an Exhibit 73 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Stockholders and Board of Directors of iLinc Communications, Inc. and Subsidiaries: In connection with our audit of the consolidated financial statements of iLinc Communications, Inc. and subsidiaries referred to in our report dated June 13, 2006, which is included in the Company's annual report on Form 10-K, we have also audited Schedule II for the year ended March 31, 2006. In our opinion, this schedule presents fairly, in all material respects, the information to be set forth therein. /s/ Epstein, Weber & Conover, PLC Scottsdale, Arizona June 13, 2006 74 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders iLinc Communications, Inc. and Subsidiaries The audit referred to in our report dated May 21, 2004 (which contains an explanatory paragraph indicating substantial doubt about iLinc Communications, Inc.'s ability to continue as a going concern), relating to the consolidated financial statements of iLinc Communications, Inc. as of March 31, 2004 and for the year ended March 31, 2004, which is contained in Item 8 of this Form 10-K included the audit of the consolidated financial statement schedule as of March 31, 2004 and for the year ended March 31, 2004 listed in the accompanying index. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based upon our audits. In our opinion such consolidated financial statement schedule for the year ended March 31, 2004 presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Costa Mesa, California May 21, 2004 75 ILINC COMMUNICATIONS, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II ADDITION DEDUCTIONS ------------ ---------------------------- BALANCE AT CHARGED THE TO BAD WRITE-OFFS BALANCE AT FISCAL BEGINNING OF DEBT RECOVERIES CHARGED TO END OF YEAR DESCRIPTION PERIOD EXPENSE (1) ALLOWANCE PERIOD - --------- ---------------------------------- ------------- ------------ ----------- ---------- --------- 2006 Accounts receivable - allowance for doubtful accounts........... $ 84 $ 114 $ 3 $ 75 $ 120 2005 Accounts receivable - allowance for doubtful accounts........... $ 24 $ 233 $ 5 $ 168 $ 84 2004 Accounts receivable - allowance for doubtful accounts........... $ 172 $ 24 $ 142 $ 30 $ 24 (1) This amount represents recoveries for accounts which were not charged off; accordingly, these recoveries are reflected as a decrease in allowance and decrease to bad debt expense as the collection of recoveries are reflected as applications to the respective accounts and notes receivable.
76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Phoenix, State of Arizona, on June 29, 2006. ILINC COMMUNICATIONS, INC. By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr., Chairman of the Board, President and Chief Executive Officer By: /s/ JAMES L. DUNN, JR. ------------------------------------ James L. Dunn, Jr. Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. NAME CAPACITY DATE - ---- -------- ---- /s/ JAMES M. POWERS, JR. Chairman of the Board, President and Chief June 29, 2006 - -------------------------------- Executive Officer (Principal Executive Officer) James M. Powers, Jr. /s/ JAMES H. COLLINS Director June 29, 2006 - -------------------------------- James H. Collins /s/ KENT PETZOLD Director June 29, 2006 - -------------------------------- Kent Petzold /s/ DANIEL T. ROBINSON, JR. Director June 29, 2006 - -------------------------------- Daniel T. Robinson, Jr. /s/ CRAIG W. STULL Director June 29, 2006 - -------------------------------- Craig W. Stull
77 EX-10.17 2 ilinc_ex10-17.txt EXHIBIT 10.17 EDT Learning [LOGO] The Power of e-learning Simplified SUBCONTRACTOR AGREEMENT This subcontractor agreement (the "Agreement"), is made to be effective on May 1, 2003 (the "Effective Date") by and between EDT Learning, Inc. ("EDT Learning"), a Delaware corporation and Interactive Alchemy, Inc. ("Contractor"). WHEREAS, EDT Learning is in the business of providing custom content development services to its customers (in the corporate, government and education customers sectors) and is the owner of certain proprietary techniques, methods and/or processes for developing and converting content into online and cd-rom based courses to individual end users and distributors; WHEREAS, EDT Learning and Contractor desire to enter into an agreement whereby Contractor will provide e-Learning custom content development and professional services to EDT Learning and indirectly to EDT Learning's Customers using among other things EDT Learning's Development Software; WHEREAS, EDT Learning and Contractor wish to execute this Agreement and certain subsequent statements of work, which will provide a description of each specific engagement or project, the associated fees, and the resulting work products or courses; NOW, THEREFORE, EDT Learning and Contractor, in exchange for the mutual promises and conditions contained herein and other good and valuable consideration the sufficiency of which is hereby acknowledged, do agree as follows: 1. DEFINITIONS: a. "Custom Services" shall mean any of the services provided by Contractor pursuant to a Statement of Work to EDT Learning and indirectly to EDT Learning's Customers, which may include but are not limited to: (i) development of Courses incorporating and combining Customer Source Material with EDT's Learning Products or EDT Learning's Development Software; (ii) customizing and creating a Customer's Course using EDT Learning's Development Software; (iii) the creation or customization of an existing Customer's Course using Customer Source Material and a third party's development software for EDT Learning; or, (iv) any other type of work or effort on behalf of EDT Learning or its Customer pursuant to a Statement of Work executed by the parties hereto. b. "Source Material" shall be the source materials that belong to EDT Learning or its Customers that will be used or incorporated into a Course as a part of a Statement of Work, including text, pictures, graphics, sound files and video files. c. "Customer" shall mean any person or entity that: (i) had prior to the Effective Date ever purchased, obtained or received any good, service or product from either EDT Learning or from entities that have engaged in a merger or asset purchase transaction with EDT Learning, (specifically LearningEdge, Inc., ThoughtWare Technologies, Inc., Quisic Corporation and Mentergy, Inc.) and (ii) any person or entity who does during the period beginning with the Effective Date and ending the with termination date of this Agreement purchase, obtain or receive any good, service or product from EDT Learning. d. A "Contractor Client" shall mean any person or entity with which Contractor does business who is not an EDT Learning Customer. If a person or entity does business with the Page 1 of 27 EDT Learning [LOGO] The Power of e-learning Simplified Contractor prior to becoming an EDT Learning Customer and then subsequently does business with EDT Learning then that person or entity will not become a "Customer." e. "Course" shall mean any computer based or web based training, instructional or demonstration course that Contractor develops for EDT Learning or an EDT Learning Customer and shall also mean the Derivative Work and Work Product Contractor creates on behalf of EDT Learning for its Customer using the EDT Learning Development Software and/or the Contractor Development Software to modify the Source Material from one or more Courses. f. "Derivative Work" shall mean any work that is based upon one or more preexisting works, EDT Learning Products, EDT Learning Development Software, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion, or any other form in which such preexisting works may be recast, transformed or adapted, and that, if prepared without authorization of the owner of the copyright in such preexisting work, would constitute copyright infringement. For purposes hereof, a Derivative Work shall also include any compilation or combination that incorporates such preexisting work. g. "EDT Learning Products" means the software and other proprietary products developed, owned, leased and /or licensed by EDT Learning, and/or the software and other proprietary products developed and owned by EDT Learning including LearnLic(R), or learning management systems, and any other software in which EDT Learning maintains a proprietary ownership interest. h. "Proprietary Rights" shall mean any and all ownership rights and other proprietary rights and interests, including but not limited to, patents, patent rights and published or unpublished U.S. and foreign patent applications, copyrights, copyrighted materials, unpublished research and development information, engineering, technical or product specification, designs, processes, un-patented inventions, mask ware, mask works, know-how, trade secrets, trademarks and their associated good will, trade names, service marks and their associated good will, logos, designs, technical data, licenses to practice any of the foregoing, and physical embodiments of any of the foregoing. i. "Development Software" shall mean the proprietary course development tool set and course player developed and owned by EDT Learning called i-CanvasTM and any software used or owned by EDT Learning and used in conjunction with i-Canvas for the development, creation or maintenance of a Course including EDT Learning's scripting tool and i-ReviewTM products, together with any documentation or materials provided therewith. J. "Statement of Work" shall mean the document between EDT Learning and Contractor in which Custom Services will be assigned by EDT Learning to Contractor. Each Statement of Work to this Agreement will define Custom Services to be provided and shall be mutually agreed to between EDT Learning and Contractor and will be executed by both parties and shall not be effective or binding upon EDT Learning or its Customer until signed by an authorized officer of EDT Learning and an authorized officer of Contractor. Each Statement of Work to this Agreement may include the description of Custom Services to be performed, the rate of compensation in hours and in total, expected start and completion date, any acceptance criteria, testing criteria, and delivery milestones. Where a Statement of Work contains provisions that are inconsistent with this Agreement, the inconsistent provisions of the Statement of Work shall govern, and all other provisions of this Agreement shall remain in full force and effect. Page 2 of 27 EDT Learning [LOGO] The Power of e-learning Simplified k. "Trademarks" shall mean the marks claimed in good faith by EDT Learning to be its proprietary marks (service and trade) which include, but are not limited to: "EDT Learning e-Learning Simplified" "EDT Learning", "EDT Learning Custom Services Group", i-CanvasTM, LearnLinc(R), TestLincTM, OfficeLincTM, SupportLincTM, MeetingLincTM, ThoughtWareTM, i-ReviewTM and any corresponding design or logo, associated with those Trademarks together with their respective stylistic markings and distinctive logotypes for such trademarks, trade names and service marks, along with all associated goodwill. 1. "Work Product" shall mean (i) all of the tangible product or result of Contractor's work, including work of Contractor's subcontractors, if any, pursuant to any Statement of Work issued hereunder or pursuant to any other agreement of EDT Learning and Contractor and (ii) all intellectual property and intellectual property rights that relate to the business and interests of EDT Learning that Contractor conceives, develops or delivers at any time during the course of Contractor's performance of any Statement of Work issued hereunder or pursuant to any other agreement of EDT Learning and Contractor. Notwithstanding the foregoing, "Work Product" shall not include Consultant Tools, and EDT Learning hereby disclaims any ownership or proprietary interest of any kind in any Consultant Tools. m. "Advance Deposits" shall mean monies EDT collects from EDT customers for work for which no Statement of Work" has been executed. n. "Consultant Tools" shall mean any method, process or technique designed and developed by Contractor and used by Contractor in connection with providing consulting services under a Statement of Work, whether any such method, process or technique was conceived, developed or delivered prior to this Agreement or in connection with providing services under a Statement of Work that are not directly related to, based upon or derived from EDT Learning Products, Derivative Work or Development Software. Contractor retains ownership of and all rights to any Consultant Tools. Except as otherwise expressly provided in a separate, written license agreement signed by Contractor, if any, no license or other right to the Tools is granted or transferred to any Customer or to EDT Learning by this Agreement, any Statement of Work, or any Customer Contract. o. "Customer Contract" shall mean any contract or agreement between EDT Learning and a Customer (including without limitation any master agreement, any amendments and all relevant statements of work, including amendments) to which Custom Services relate. 2. APPOINTMENT AS CONTRACTOR. EDT Learning hereby appoints Contractor, and Contractor hereby accepts appointment from EDT Learning, as its sole authorized Custom Services contractor, subject to the terms and conditions hereof. Contractor agrees to provide to EDT Learning and its Customers Custom Services that are described and jointly agreed upon in a Statement of Work, as provided in this Agreement, using approved development tools including the Development Software. EDT Learning agrees that from time to time Contractor may hire subcontractors to assist Contractor in providing Custom Services, provided however that the use of subcontractors shall not relieve Contractor of any obligation or liability under this Agreement or any Statement of Work. 3. CUSTOM SERVICES. This Agreement is a foundation document to establish the working relationship between EDT Learning and Contractor in an independent agent principal relationship. EDT Learning and Contractor will endeavor to use a Statement of Work in the form attached as EXHIBIT "A." Statements of Work will be agreed upon concerning each project obtained by EDT Learning from the Page 3 of 27 EDT Learning [LOGO] The Power of e-learning Simplified Customer pursuant to a Customer Contract and will be executed from time to time by the parties after the Effective Date. EDT Learning shall provide to Contractor, in connection with the negotiation of each Statement of Work, a copy of all relevant portions of the Customer Contract (including any amendments thereto). Any Statement of Work may be supplemented or modified by the parties from time to time, but any changes to a Statement of Work shall only be binding if made in writing and signed by both parties. The parties will further refine the scope of work and the timetables associated with any particular project through the development of a project plan and scope document which may supplement and/or amend the Statement of Work. Contractor will not attempt to negotiate any Statement of Work directly with a Customer and accordingly will not attempt to negotiate the price to be paid by the Customer or the payment terms available to the Customer. However, Contractor may assist EDT Learning in preparation of the Statement of Work by discussing the project with the Customer including the nature of the work, the type of deliverable, and the timelines associated with the project. Contractor will not be authorized to begin the delivery of Custom Services to EDT Learning unless and until a Statement of Work is executed by EDT Learning and by Contractor authorizing the work. 4. CONTRACTOR OBLIGATIONS. Upon execution of a relevant Statement of Work, issued by EDT Learning to Contractor and agreed to by Contractor in writing, Contractor warrants and represents that it will identify and allocate the resources required to design, develop and deliver the Custom Services to EDT Learning for timely delivery to Customer in accordance with the Statement of Work. Contractor shall be fully responsible for, and shall exercise all due diligence with respect to, the care and protection of any Source Materials which may be in Contractor's possession, custody, or control, including but not limited to maintaining the confidentiality thereof and preventing any unauthorized access or use thereof. Contractor shall ensure that all Courses developed and delivered to EDT Learning or its Customers are fully tested and comply with the Statement of Work pursuant to which they were developed and delivered. Within 30 days after termination of this Agreement Contractor and any third parties to whom Contractor has disseminated such Source Materials shall provide written verification that all such Source Materials have been returned to EDT Learning or its Customers, and neither Contractor nor its subcontractors will retain any copies of such Source Materials. Contractor agrees that the quality control of the Course and the Custom Services provided shall be the sole responsibility of Contractor. Subject to Contractor's rights to pursue its remedies under this Agreement, Contractor shall perform all Custom Services in a professional and expeditious manner and warrants that its services will be of a professional quality conforming to generally accepted industry standards and procedures. Contractor will conduct its business with EDT Learning Customers in a manner that reflects favorably at all times on EDT Learning and the good name, goodwill and reputation of EDT Learning. Contractor will avoid materially deceptive, misleading or unethical practices that are or might be detrimental to EDT Learning or its Products. Contractor will make no materially false or misleading representations with regard to EDT Learning or the Custom Services and will not: (i) employ or cooperate in the publication or employment of any materially misleading or deceptive advertising with regard to the Custom Services or Products; (ii) make representations, warranties or guarantees to the Customers with respect to the specifications, features or capabilities of the Custom Services or Courses other than those which are consistent with the Statement of Work (or any amendment thereof); or, (iii) enter into any contract or engage in any practice in conflict with its obligations under this Agreement. 5. EDT LEARNING OBLIGATIONS. EDT Learning will conduct its business activities in a professional and expeditious manner. EDT Learning will avoid materially deceptive, misleading or unethical practices that are or might be detrimental to Contractor. EDT Learning will make no materially false or misleading representations with regard to Contractor or the Custom Services and will not: (i) employ or cooperate in the publication or employment of any materially misleading or deceptive advertising with regard to the Custom Services or Products or (ii) make representations, warranties or guarantees Page 4 of 27 EDT Learning [LOGO] The Power of e-learning Simplified to the Customers with respect to the specifications, features or capabilities of the Custom Services or Courses other than those which are consistent with the Statement of Work. 6. GRANT OF SOFTWARE LICENSE. Subject to the terms and conditions contained herein, EDT Learning hereby grants to Contractor while this Agreement remains in effect a non-exclusive, non-transferable, limited license to use the Development Software and the EDT Learning Trademarks to provide Custom Services to EDT Learning's Customers and to Contractor Clients. It is agreed and accepted by the parties that any licenses granted by EDT Learning to Contractor herein are limited personal licenses with no right to sublicense or sell that license. All proprietary rights in and to the Development Software, EDT Learning Products and Trademarks not granted herein shall remain fully and exclusively vested in EDT Learning. The limited license rights granted pursuant to this Agreement are the only rights that Contractor has to the EDT Learning Development Software, EDT Learning Products and Trademarks. During the term of this Agreement and in consideration for its execution, Contractor will be provided a fifty (50) user license to the i-Canvas software, including maintenance, support and upgrades without charge to Contractor. Upon termination of this Agreement, Contractor will have the right during the ninety (90) day period following the termination date to purchase licenses of the i-Canvas software at the lesser of the then current price or 80% of the price of i-Canvas at the Effective Date of this Agreement with the i-Canvas license purchased by Contractor being granted on EDT Learning's standard end user license terms. Unless and until this Agreement is terminated, Contractor may modify the source code of the i-Canvas software from time to time for use on a Customer's or Contractor Client's project. Prior to modification, Contractor will notify EDT Learning of the proposed change. Any changes to the i-Canvas software or any other EDT Learning Products or Development Software made by Contractor, regardless of the nature of the change or the timing of the change, will at all times exclusively vest in EDT Learning with all right title and interest in and to the i-Canvas software or any other EDT Learning Products or Development Software, and such changes shall be considered work-for-hire by Contractor on EDT Learning's behalf, without compensation of any nature to Contractor for the work performed or the value of the resulting modified software or product. Except and expressly authorized in writing by EDT Learning, Contractor shall not modify, translate, reverse engineer, de-compile or disassemble the Development Software or the EDT Learning Products or any portion thereof. Contractor agrees that is will use the Development Software only for the purposes of performing Custom Services or developing Courses for Contractor Clients and EDT Learning's Customers. Unless a license is purchased, Contractor agrees that within 30 days after termination of this Agreement, then Contractor will immediately return to EDT Learning all copies of Development Software or the EDT Learning Products, whether in the possession of Contractor or any subcontractor, and the license granted will immediately cease. Contractor will also receive such concurrent user licenses as EDT Learning reasonably determines necessary to use the LearnLic(R) virtual classroom software for the exclusive purpose of internal use (the "Internal Use License") by Contractor while this Agreement remains in effect. The Internal Use Licenses will include free maintenance, support and upgrades while this Agreement remains in effect. Contractor will be able to use the Internal Use Licenses for the exclusive purpose of: (a) training its own employees; (b) providing training and support to those person who will be using the Courses created by Contractor; or (c) providing to Customers and Contractor Clients ongoing review and modification of the Courses while in development or during maintenance periods. Contractor shall not use the Internal Use Licenses to compete with EDT Learning and shall not directly or indirectly sell, re-sell, deliver, distribute, transfer, lease, sub-lease, sub-license or otherwise make available for use by an End User the Internal Use Licenses other than those in the direct employment of Contractor. 7. OFFICE SHARING ARRANGEMENT. Unless and until this Agreement is terminated and in consideration for the Contractor Payments (hereinafter defined), EDT Learning will provide to Contractor use of an appropriate amount of square feet of EDT Learning's premises (located at 2999 N. 44th Street, Suite 650. Page 5 of 27 EDT Learning [LOGO] The Power of e-learning Simplified 620, Phoenix, Arizona) (the "Premises") and facilities for the support of up to 45 fulltime employees who work for Contractor (the "Contractor Space"). Should Contractor need more square footage than the Contractor Space provided then Contractor and EDT Learning may engage in a separate sublease agreement concerning some other portion of EDT Learning's Premises or Contractor may seek other additional premises outside of the EDT Learning's Premises. Unless and until this Agreement is terminated and in consideration for the Contractor Payments, EDT Learning will provide to Contractor use of its office equipment, office furniture and general office suite services (the "Executive Suite Services") which is necessary to provide the Custom Services to EDT Learning that will include at no additional cost to Contractor office cubicles, desks, computers, software, telephones, internet access, long distance, fax, copier, office supplies and postage without itemization. Should EDT Learning vacate the Premises for any reason and not provide equivalent space reasonably acceptable to Contractor, then, on and after the date of vacancy of the Premises, the obligation to provide Contractor Space and the obligations related to the Executive Suite Services shall terminate and the Percentage (as defined below) shall be reduced by one-half and the fees due to Contractor under Section 9b shall be increased to 90% from 80% of the Net Fees as defined therein. In the event of vacancy of the Premises, other than the foregoing changes in the Percentage and the amount due to Contractor the obligations of Contractor to EDT Learning concerning the Contractor Payments shall continue during the Term hereof. In consideration for the Executive Suite Services and use of the Contractor Space provided and other good and valuable consideration, then Contractor will (the "Contractor Payments"): (a) provide to EDT Learning each month that this Agreement remains in effect, at no additional charge, 80 hours of Custom Services for the creation of product demonstration, sales and marketing literature, web site enhancements and other creative services for use by EDT Learning, but not as part of the Custom Services provided to Customers; (b) reimburse one half of the base compensation of the sales executive which is focused on the sale of Custom Services (currently Ms. Sue Leff) in an amount up to $2,500 per month; (c) pay a percentage (the "Percentage") of the collected revenues associated with the sale of Custom Services to Contractor's Clients (i.e., revenues to persons other than EDT Learning Customers, the "Collected Revenues") based upon the following table: - ---------------------------------------------------------------------------------------- COLLECTED REVENUES BY DURING THE FIRST 12 DURING THE SECOND AFTER THE SECOND CONTRACTOR MONTHS FROM THE 12 MONTHS FROM THE ANNIVERSARY OF THE EFFECTIVE DATE EFFECTIVE DATE EFFECTIVE DATE - ---------------------------------------------------------------------------------------- LESS THAN $2 MILLION 20% 20% 20% - ---------------------------------------------------------------------------------------- BETWEEN $2 AND $4 MILLION 15% 15% 15% - ---------------------------------------------------------------------------------------- BETWEEN $4 AND $5 MILLION 10% 10% 10% - ---------------------------------------------------------------------------------------- OVER $5 MILLION 10% 5% 0% - ----------------------------------------------------------------------------------------
EDT Learning will maintain a fulltime sales representative who is dedicated to the sale of Custom Services (the "Contractor Payments"). However, should EDT Learning terminate that sales associate and no longer employ a person who is dedicated to the sale of Custom Services, then Contractor on the termination date of that dedicated sales person will no longer provide to EDT Learning reimbursement of any sales person's compensation. If EDT Learning desires to hire and/or assign a new salesperson dedicated to the sale of Custom Services then Contractor will have the right to approve or disapprove the assignment/hire and upon their hiring the obligation to reimburse for one half of their compensation shall again resume. Page 6 of 27 EDT Learning [LOGO] The Power of e-learning Simplified 8. LOYALTY AND EXCLUSIVITY. A. Each party warrants and represents to the other party that: i. During the term of this Agreement and for the one (1) year period after termination of this Agreement, neither party will solicit for hire or hire any employee of the other party. ii. During the term of this Agreement and for the three (3) year period after termination of this Agreement, Contractor will not solicit any Customer of EDT Learning (or facilitate the solicitation of any Customer by any third party) for the purpose of the sale of the Custom Services or other product or service which is competitive with that of the products and services sold by EDT Learning as of the termination date of this Agreement other than pursuant to the terms and conditions of this Agreement, and EDT Learning will not solicit any Contractor Client for the purpose of the sale of the Custom Services.. iii. During the term of this Agreement and for the one (1) year period after termination of this Agreement, Contractor will not solicit any Value Added Reseller or referral partner of EDT Learning (or facilitate the solicitation by any third party), including but not limited to SkillSoft, for the purpose of the sale of the Custom Services or other product or service which is competitive with that of the products and services sold by EDT Learning as of the termination date of this Agreement, other than pursuant to the terms and conditions of this Agreement. During the term of this Agreement and for the one (1) year period after termination of this Agreement, EDT Learning will not solicit any distribution or referral partner of Contractor (or facilitate the solicitation by any third party), for the purpose of the sale of the Custom Services, other than pursuant to the terms and conditions of this Agreement iv. During the term of this Agreement and for the three (3) year period after termination of this Agreement, each party represents and covenants that it will not (either personally, or through any individual association, partnership, corporation or other entity) intentionally disclose any Trade Secret or Confidential Information of the other party to any person, (or any association, partnership, corporation or other entity) for any reason or purpose whatsoever, except as may be required by this Agreement, a Statement of Work or operation and compulsion of law. B. Each party represents and warrants that its training and experience are such that the restrictions contained in this section, in general and in this paragraph specifically, shall not result in an inability on its part to pursue a livelihood, and that other alternatives or employment or business endeavors are reasonably available with these covenants fully enforced. Each party expressly agrees that the duration, geographical limitations and description of the prohibited conduct described in these representations and covenants are reasonable and that such party has given valuable consideration for the representations and covenants contained in this section. Each party agrees that the representations and covenants contained in this section are a material inducement for the other party to enter into this Agreement. Because each party has negotiated and agreed to the limitations and restrictions contained in this section, such Party expressly waives the right to later protest the reasonableness of the limitations, warranties, geographical limitations and prohibited conduct specified in these restrictive representations and covenants. Each party agrees that any Page 7 of 27 EDT Learning [LOGO] The Power of e-learning Simplified compensation or fee due to such party may be offset by any damages sustained by the other party should Contractor materially breach the foregoing restrictive covenants after notice and failure to cure such breach. Each party agrees that the other party would be immediately and irreparably harmed in the event of breach by it and therefore enforcement by immediately obtaining an injunction would be proper; and each party agrees that the amount of surety bond if any required shall not exceed $500.00. 9. FEES, PAYMENT TERMS AND CANCELLATION. a. EDT Learning and Contractor agree that the fees charged to Customers for the Custom Services shall be mutually agreed upon by both parties prior to the execution of a Statement of Work between EDT Learning and the Customer. Attached hereto in EXHIBIT "B" is Contractor's current standard fee schedule for the provision of Custom Services. EXHIBIT "B" is subject to modification by Contractor on at least 90 days prior written notice by Contractor. Any deviation from the standard rates for any Statement of Work shall be mutually agreed upon by both parties prior to quotation of the prices for the Custom Services to the Customer. b. Only EDT Learning will bill and collect from the EDT Learning Customer and accordingly Contractor will only look to EDT Learning for collection of any fees and charges due to Contractor from such Customer, including for work performed pursuant to this Agreement or any applicable Statement of Work. EDT Learning shall make reasonable commercial efforts to collect such fees and charges, and in connection therewith and will provide to Contractor a weekly written report of EDT Learning's aged accounts receivable, cash collections and such other related information that Consultant reasonably requests concerning Custom Services. EDT Learning represents that it shall not write off its accounts receivable arising from Custom Services performed by Contractor except for appropriate reserves and write offs due to uncollectability. Notwithstanding the foregoing, Contractor may bill and collect from any Contractor Client who is not an EDT Learning Customer. The fees due to Contractor will be equal to eighty percent (80%) of the Net Fee received by EDT Learning from the Customer for the Custom Services provided by EDT Learning to Customer. The term "Net Fee" shall mean the amount of the fee paid by Customer to EDT Learning after deduction of the sales commission (the amount of which is subject to mutual agreement by EDT Learning and Contractor) due to the EDT Learning sales executive who was responsible for the sale of the Statement of Work and shall not include any sales or other taxes collected by EDT Learning and remitted to any taxing authority. By way of example but not limitation, should EDT Learning's sales person receive 10% of the total revenue earned and a project derive revenue of $100,000, then Contractor shall be due a cash fee equal to $72,000 with EDT Learning retaining the remaining cash associated with the revenue of $18,000. c. Payments to Contractor of the Net Fee will be due upon the collection of cash from the Customer and which is earned revenue on an accrual basis in 'accordance with GAAP (matching the payments from the customer) and will be tendered to Contractor within three (3) business days of its receipt by EDT Learning. However, EDT Learning will have no obligation to tender to Contractor any portion of any Advance Deposits received by EDT Learning. If EDT Learning receives a deposit of money from a Customer in advance of the Net Fee being due and payable, then EDT Learning will advance to Contractor an amount equal to eighty percent (80%) of that deposit after deduction of the sales commission (the "Deposit"), provided, however, that such Deposit shall remain a liability of Contractor to EDT Learning unless and until earned by Contractor under the applicable accrual rules. By way of example but not limitation, should EDT Learning's sales person receive 10% of the Page 8 of 27 EDT Learning [LOGO] The Power of e-learning Simplified total revenue earned and the Customer tenders a deposit of $10,000, then Contractor will receive a cash Deposit equal to $7,200 with EDT Learning retaining the remaining cash associated with the deposit of $1,800. Only Custom Services which are resulting from executed Statements of Work on and after the Effective Date of this Agreement will result in a Net Fee due to Contractor. Contractor will not be entitled to any portion of any accounts receivable on EDT Learning's books prior to the Effective Date. Contractor and EDT Learning will apportion any work in process which is ongoing (i.e., partially completed projects prior to the Effective Date) and only the agreed upon un-completed portion of any work in progress will be subject to any Net Fee or sharing between EDT Learning and Contractor. EDT Learning and Contractor will execute separate Statements of Work for projects that are in partial completion and for which a Net Fee is due. All payments to Contractor shall be made in United States dollars. EDT Learning will provide to Contractor a weekly written report in reasonable detail itemizing cash receipts for payments received for Custom Services. Contractor will have right to audit upon reasonable notice and during normal business hours EDT's books and records concerning custom content development services that are provided to Customers. EDT Learning will be responsible for the collection of and payment of all taxes that are imposed on the Custom Services delivered to Customer, including any sales taxes. Notwithstanding any other provision of this Agreement, if EDT Learning fails to make any payment of the Net Fee within the three (3) days specified above, then in addition to any other remedies available under this Agreement Contractor shall have the right, but not the obligation, to immediately suspend all work under the Statement of Work and/or terminate the Statement of Work in its entirety. 10. CHANGE MANAGEMENT PROCEDURES. a. Cancellation of Statements of Work. Once a Statement of Work has been executed by the parties, then EDT Learning may cancel such outstanding Statement of Work by providing to Contractor written notice of such cancellation in the event that: (i) the Customer cancels the Customer Contract to for which the Statement of Work provides Custom Services; (ii) the Contractor and EDT Learning mutually cancel the Statement of Work; or, (iii) Contractor breaches the Statement of Work and fails to cure such breach pursuant to Section 18b. hereof Cancellation of a Statement of Work will be effective on the later of the date provided in the notice or the date Contractor receives written notice of cancellation. In the event of a cancellation of a Statement of Work, EDT Learning shall reimburse Contractor for all expenses incurred and for all Custom Services performed through and including the effective date of the cancellation. The fee due at cancellation for the services performed shall be based upon the hours expended and rates provided in the applicable Statement of Work (or if the specific hourly rates are not provided in the Statement of Work then the fee due to Contractor shall be based upon Contractor's standard hourly rate schedule). b. Requirement of Change Orders. Any changes, modifications, or additions to the obligations of either party or to any other material aspect of a Statement of Work will require a written Change Order prepared by either party and mutually agreed to by the parties. Either party may initiate a Change Order by sending the Change Order to the other party for review and approval. All Change Orders will conform to the template set forth in EXHIBIT "C" and may contain, but will not be limited to, the following information, as applicable: i. A description of any additional work to be performed and/or changes to the performance required of either party, including the estimated number and skill level of personnel necessary to make such changes and/or additions and the availability of such personnel over the ensuing period; Page 9 of 27 EDT Learning [LOGO] The Power of e-learning Simplified ii. A statement of the impact of the work or changes on the services or other requirements of this Agreement; iii. The estimated timetable to complete the work specified in the Change Order; iv. The impact, if any, on the schedule or fees; v. Acceptance criteria for such work; and, vi. Signatures of both parties. c. Acceptance of Change Order. Within five (5) days of the submission of a Change Order to either party, the other party will notify the party submitting the Change Order of its acceptance or rejection of the proposed change or addition in writing. Failure to respond to such a request will not be deemed to constitute acceptance of such Change Order request. 11. WARRANTY. a. Contractor represents and warrants that: i. All work undertaken by it to provide Custom Services, all Courses, and all Work Product shall be accomplished in a professional and workmanlike manner, and in accordance with industry standards, and in accordance with this Agreement and the applicable Statement of Work; and, ii. All software, content and other material provided to EDT Learning or EDT Learning Customer, including Contractor Work Product and covered Derivative Works do not and will not, to its knowledge, violate any copyright, trademark, service mark, trade secrets, U.S. patents, proprietary right or personal right of any third party, including any right of privacy or publicity and will not contain any defamatory or obscene statement or material. b. EDT Learning represents and warrants that the Development Software and EDT Learning Products and other material provided to Contractor for a Customer do not and will not, to its knowledge, violate any copyright, trademark, service mark, trade secrets, U.S. patents, proprietary right or personal right of any third party, including any right of privacy or publicity, and that they are original works for which EDT Learning has the right, power and authority to convey the licenses to Contractor or Contractor's subcontractors contemplated by this Agreement. 12. LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, EDT LEARNING AND CONTRACTOR MAKE AND RECEIVE EACH TO THE OTHER NO WARRANTIES, EXPRESS, IMPLIED, STATUTORY, ARISING FROM THE COURSE OF DEALING OR USEAGE OF TRADE, OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY WARRANTIES OF TITLE, QUIET ENJOYMENT, ABSENCE OF SECURITY INTEREST, LIEN OR ENCUMBRANCE, NONINFRINGEMENT, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN (INDEMNIFICATION), NEITHER EDT LEARNING NOR CONTRACTOR SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL EXEMPLARY, OR PUNITIVE DAMAGES RELATING TO OR ARISING FROM ANY BREACH OR ALLEGED BREACH OF THIS AGREEMENT, OR Page 10 of 27 EDT Learning [LOGO] The Power of e-learning Simplified FROM ANY PRODUCTS, SERVICES OR OTHER ACTIONS OR OMISSIONS CONNECTED WITH OR UNDERTAKEN PURSUANT TO THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, (WHETHER BASED UPON BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE, TORT OR OTHERWISE), INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR INJURY TO BUSINESS, REGARDLESS OF WHETHER THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EDT LEARNING'S LIABILITY FOR DAMAGES RELATING TO OR ARISING FROM ANY ALLEGED BREACH OF THIS AGREEMENT, OR PRODUCT, SERVICE ACT OR OMISSION IN CONNECTION WITH THIS AGREEMENT SHALL NOT EXCEED THE BALANCE OF PROJECT PRICE PAYABLE TO CONTRACTOR WITH RESPECT TO COMPLETED COURSES PREVIOUSLY DEVELOPED PURSUANT TO THE STATEMENT OF WORK DELIVERED BY EDT LEARNING TO CONTRACTOR PURSUANT TO THIS AGREEMENT AND PRIOR TO EXPIRATION OR TERMINATION OF THIS AGREEMENT. CONTRACTOR'S LIABILITY FOR DAMAGES RELATING TO OR ARISING FROM ANY ALLEGED BREACH OF THIS AGREEMENT SHALL NOT EXCEED THE AMOUNT OF PROJECT PRICE ALREADY PAID BY EDT LEARNING WITH RESPECT TO STATEMENT OF WORK ISSUED PURSUANT TO THIS AGREEMENT. IN NO EVENT SHALL EDT LEARNING'S OR CONTRACTOR'S RESPECTIVE AFFILIATES, OR THE RESPECTIVE SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF EDT LEARNING OR CONTRACTOR, BE LIABLE FOR ANY CLAIMS OR DAMAGES RELATING TO OR ARISING FROM ANY BREACH OR ALLEGED BREACH OF THIS AGREEMENT, OR FROM ANY PRODUCTS, SERVICES OR OTHER ACTIONS OR OMISSIONS CONNECTED WITH OR UNDERTAKEN PURSUANT TO THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, (WHETHER BASED UPON BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE, TORT OR OTHERWISE), INCLUDING, BUT NOT LIMITED TO, INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL, EXEMPLARY, OR PUNITIVE DAMAGES, OR THIRD PARTY CLAIMS, INCLUDING WITHOUT LIMITATION LOST PROFITS OR INJURY TO BUSINESS, REGARDLESS OF WHETHER SUCH INDIVIDUALS OR ENTITIES HAVE BEEN OR ARE ADVISED OR KNOW OR SHOULD KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 13. INDEMNIFICATION. A. BY CONTRACTOR. Contractor hereby agrees to indemnify, defend and hold harmless EDT Learning, its affiliates, and their respective shareholders, officers, directors, employees, agents and representatives from and against any and all third party claims or proceedings ("Claims") for causes of action, demands, liabilities, obligations, losses, damages, judgments, costs and expenses (including reasonable attorney's fees and expert witness fees) of any kind whatsoever: (a) which arise directly or indirectly out any breach of a Statement of Work by Contractor or its subcontractors; (b) which arise directly or indirectly under any agreement between Contractor and any Contractor Client; (c) which are based on an allegation that any materials, Custom Services, covered Derivative Works, Customer's Courses, or Work Product provided by Contractor hereunder infringe any Proprietary Rights of third parties provided that such infringement in not caused in whole or in part by EDT Learning Products; or, (d) which are claims by Contractor's employees for any wage, compensation, taxes, benefits, vacation pay, insurance, workman's compensation or other employment claims based upon the employment of such person by Contractor. B. BY EDT LEARNING.EDT Learning hereby agrees to indemnify, defend and hold harmless Contractor, its affiliates, and their respective shareholders, officers, directors, Page 11 of 27 EDT Learning [LOGO] The Power of e-learning Simplified employees, agents and representatives from and against any and all Claims of any kind whatsoever: (a) which arise directly or indirectly out any breach of a Statement of Work by EDT Learning; (b) which arise directly or indirectly under any Customer Contract (other than a breach of the related Statement of Work by Contractor or its subcontractors); (c) which are based on an allegation that any EDT Learning Products infringe any Proprietary Rights of third parties; or, (d) which are claims by EDT Learning's employees for any wage, compensation, taxes, benefits, vacation pay, insurance, workman's compensation or other employment claims based upon the employment of such person by EDT Learning. C. PROCEDURES. A party's obligation to indemnify the other party hereunder is conditioned upon such other party providing prompt written notice to the indemnifying party of an Claim and cooperating (at no out-of-pocket cost) with the indemnifying party in all reasonable respects. 14. INDEPENDENT CONTRACTOR RELATIONSHIP BETWEEN PARTIES. Contractor represents and warrants that it, and not EDT Learning, is the employer of Contractor's employees and that it is solely responsible for complying with all laws, rules and regulations of any governmental authority having appropriate jurisdiction relating to such employment, including, but not limited to, immigration, taxation, worker compensation and unemployment compensation. EDT Learning and Contractor are independent contractors, and neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. The parties agree that Contractor shall retain sole discretion and judgment in the manner the services are to be performed. Neither party is, nor shall be considered to be, an agent, distributor, partner, joint venture or representative of the other party for any purpose. 15. CONFIDENTIAL INFORMATION. The term "Confidential Information" means, with respect to each party information which relates to a party's business, research, development, programs, costs, customers or general activities that is held in confidence by such party, including information that is designated as confidential or that, by its nature, should be considered confidential, including the terms of this Agreement, information relating to the Development Software, Source Material, EDT Learning Products, Work Products, Custom Services and Customers.. Each party (and its agents and licensors) will not disclose to any third party (except as required by law or government requests/orders or to its attorneys, accountants and other advisors as reasonably necessary), any of the Confidential Information. If law requires disclosure of Confidential Information, the party receiving the request will give prior written notice to the other to permit the other to contest such disclosure. Each party agrees to protect the confidentiality of the Confidential Information with at least the same degree of care it takes to protect its own Confidential Information. Neither party has any confidentiality obligations regarding information that enters into the public domain without breach of this Agreement; that it receives from a third party without restrictions on disclosure and without breach of a nondisclosure obligation; or that it has developed internally. 16. RIGHTS IN WORK PRODUCT. a. Work Product. All Work Product created or prepared by Contractor for EDT Learning pursuant to this Agreement whether or not prepared on or off the premises of EDT Learning or during regular work hours shall be the sole and exclusive property of EDT Learning. b. Excluded Items. EDT Learning hereby disclaims any ownership in, and Contractor shall not be required to assign to EDT Learning, any invention, discovery, innovation or improvement of Contractor which does not involve any of EDT Learning Products or Development Page 12 of 27 EDT Learning [LOGO] The Power of e-learning Simplified Software or Contractor Tools (the "Excluded Inventions"). In any Dispute with respect to these exclusions, the burden of proof will be on Contractor to show that the exclusion applies. 17. INSURANCE. Contractor agrees to obtain and maintain insurance which is required by any Statement of Work or that is required by the Customer of EDT Learning, including the following: a. Workers' Compensation insurance in an amount sufficient by virtue of the laws of the State of Arizona; b. General Liability insurance in which the limit of liability for injuries, including accidental death, and property damage is no less than U.S. $1,000,000 for any one occurrence; c. Professional Liability (errors & omissions): with limits of not less than $1,000,000 each occurrence; and, d. Automobile insurance in which the limit of liability for injuries, including accidental death, and property damage is no less than U.S. $1,000,000 for any one occurrence. 18. TERM AND TERMINATION. a. Term. The initial term of this Agreement will be thirty-six (36) months from the Effective Date of this Agreement (the "Initial Term"), unless terminated as provided herein with the date upon which termination is to occur provided in the Notice of Termination (the "Termination Date"). b. Breach. In the event that either party hereto breaches in the substantial performance of any material obligation specified herein or in any Statement of Work, the non-breaching party shall notify the other party hereof in writing and, if such breach is not remedied within thirty (30) days from the date of such notice, then the non-breaching party shall have the right to terminate this Agreement and all outstanding Statements of Work immediately. c. Financial Difficulty. This Agreement shall automatically terminate if any of the following take place with regard to the other party: such party makes a general assignment or general arrangement for the benefit of its creditors; the filing by or against such party of a petition to have it adjudged bankrupt or of a petition for reorganization or arrangement of such party under any law relating to bankruptcy or insolvency unless, in the case of a filing against such party, the same is dismissed within thirty (30) days; the appointment of a trustee or a receiver to take possession of substantially all of such party's assets or its interests in this Agreement, where such possession is not restored within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of such party's assets or its interests in this Agreement, where such seizure is not discharged within thirty (30) days. d. Voluntary Termination. After the Initial Term, this Agreement shall continue from month to month unless and until terminated upon delivery by either party of thirty (30) days prior written notice of a party's intent to terminate (the "Termination Date"). e. Effect Upon Termination. No new Statements of Work may be entered into after the Termination Date, but termination of this Agreement by either party will not cause the automatic cancellation of any pending Statement of Work signed by both parties prior to the Termination Date (the "Remaining Statements of Work"). Services to be performed under Remaining Statements of Work will continue until completion, unless Customer cancels any Page 13 of 27 EDT Learning [LOGO] The Power of e-learning Simplified or all of the Remaining Statements of Work as provided herein. This Agreement will remain in effect with respect to the Remaining Statements of Work until their completion, at which time this Agreement will automatically terminate. 19. MISCELLANEOUS PROVISIONS. a. Force Majeure. Either party's non-performance shall be excused to the extent that performance is impossible due to reasons beyond such party's control. b. Government Regulations. Contractor will not export, re-export, transfer, or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. government and any country or organization of nations within whose jurisdiction Customer operates or does business. c. Governing Law. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of Arizona (except that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sale of Goods. Notwithstanding the foregoing, claims seeking injunctive relief for Services in accordance with this Agreement may be brought in any state or federal court of competent jurisdiction. The prevailing party in any litigation between the parties shall recover its reasonable attorneys' fees and costs from the non-prevailing party. d. Severability; Waiver. In the event any provision of this Agreement is held to be unenforceable, the remaining provisions of this Agreement will remain in full force and effect, and the unenforceable provisions will be construed in accordance with applicable law as nearly as possible to reflect the original intention of the parties. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. e. Assignment. Contractor may not assign this Agreement, whether by operation of law or otherwise, without the prior written consent of EDT Learning, and any purported assignment without such consent will be void. The rights and obligations of EDT Learning hereunder may be assigned to an EDT Learning affiliate, or to an individual or entity that acquires all or substantially all of the assets or shares of EDT Learning, or with whom EDT Learning merges. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns. f. Notices. Any written notices, demands or other communications required or permitted by this Agreement must be given in English language and delivered via registered or certified air mail, return receipt requested, postage prepaid or by overnight courier or transmitted via telegraph, telex or telefax as follows: If to EDT Learning at 2999 N. 44th Street, Suite 650, Phoenix, AZ 85018, (602-952-0544 - FAX) or if to Contractor at the address identified as Contractor's principal place of business. Delivery shall be deemed to have occurred upon receipt and/or transmission validation for telex and telefax. All notices are to be forwarded to the parties at their respective addresses stated hereinabove, unless either party furnishes written notice as to a change of its address in the manner provided hereinabove. g. Contrary, Inconsistent, or Additional Terms. Any contrary, inconsistent, or additional terms contained in a mutually executed Statement of Work between EDT Learning and Contractor Page 14 of 27 EDT Learning [LOGO] The Power of e-learning Simplified securing such services, as compared to the terms and conditions contained in this Agreement, will be governed, interpreted, and construed in the following order of precedence: (i) the applicable Statement of Work and (ii) this Agreement. Any pre-printed terms and conditions on any materials, which EDT Learning regularly uses with its other customers, will be null and void and of no consequence whatsoever in interpreting the parties' legal rights and responsibilities as they pertain to any of the contemplated services provided hereunder. Should the terms of this Agreement or the existence of this Agreement itself cause a change in the ability of EDT Learning to recognize revenue from the sale of Custom Services or cause any change in the value of any of EDT Learning's assets, then the parties agree that they will either modify this Agreement to avoid that occurrence or will mutually terminate this Agreement. h. Entire Agreement; Counterparts; Originals. This Agreement, including all documents incorporated herein by reference, constitutes the entire agreement between the parties with respect to the Custom Services, and supersedes all prior or contemporaneous agreements, written and oral, regarding the Custom Services. This Agreement may be executed in counterparts, each of which will be deemed an original, but both of which together shall constitute one and the same instrument. This Agreement may be changed only by a written document signed by authorized representatives of both parties. i. Authority. Authorized representatives of EDT Learning and Contractor have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date set forth beneath such party's signature. Executed as indicated below to be effective as indicated on the first date written above. INTERACTIVE ALCHEMY, INC. EDT LEARNING, INC. By: Donald C. Pierson, III By: James M. Powers, Jr. -------------------------------- ------------------------------ Printed Name: Donald C. Pierson, III Printed Name: James M. Powers, Jr. Title: President Title: President ----------------------------- --------------------------- Date: 5-13-05 Date: 5-13-05 ------------------------------ ---------------------------- Page 15 of 27 EDT Learning [LOGO] The Power of e-learning Simplified EXHIBIT "A" FORM OF STATEMENT OF WORK The following document is the form of Statement of Work that will be the basis for any work performed by Contractor for EDT Learning, with the actual terms and conditions varying from project to project as needed. [The remainder of this page intentionally left blank.] Page 16 of 27 WORK ORDER FORM (ASSOCIATED WITH SUBCONTRACTOR AGREEMENT BETWEEN INTERACTIVE ALCHEMY, INC. AND EDT LEARNING, INC.) This Work Order defines certain Services to be performed by Interactive Alchemy, Inc. ("Subcontractor") in accordance with the terms and conditions of the Subcontractor Agreement ("Agreement") dated May 1, 2003 by and between Subcontractor and EDT Learning, Inc. The EDT Learning client associated with this Work Order is________________("Client") - -------------------------------------------------------------------------------- EDT CUSTOMER NUMBER: - -------------------------------------------------------------------------------- EDT CUSTOMER NAME: - -------------------------------------------------------------------------------- EDT CUSTOMER CONTACT Name: INFORMATION: ------------------------------------------- Contact: ------------------------------------------- Title: ------------------------------------------- Address: ------------------------------------------- Phone: ------------------------------------------- Fax: ------------------------------------------- Email: - -------------------------------------------------------------------------------- DOCUMENTS NEEDED: o Services Agreement o Work Order - -------------------------------------------------------------------------------- BACKGROUND: SCOPE OF WORK (DELIVERABLES): o ____ hours of training o Training will be delivered in the following formats: |_| Web-based |_| Computer-based |_| Instructor-led |_| Other Comments:______________________________________________________________ _______________________________________________________________________ o Training will be developed from the following materials to be provided by the Customer |_| On-Line (WBT) |_| Self-paced (CBT) |_| Instructor-led |_| None |_| Other Comments:______________________________________________________________ _______________________________________________________________________ o The training will be developed by adapting existing content in the following manners |_| Repurpose |_| Rewrite/Produce new |_| Not applicable Comments:______________________________________________________________ _______________________________________________________________________ o Tier: |_| 1 |_| 2 |_| 3 |_| Other Comments:______________________________________________________________ _______________________________________________________________________ o Development platform: |_| i-Canvas |_| MacroMedia Flash |_| Other |_| Not applicable Comments:______________________________________________________________ _______________________________________________________________________ - ---------------- 1. If "Repurpose" is selected existing content (text, media and graphics) will be used to the maximum degree possible. If "Rewrite/Produce New" is selected, substantial portions of the existing content will be written or produced anew. Page 17 of 27 o Delivery platform: |_| EDT LMS (specify) |_| Docent (specify version) |_| Other LMS (specify below) |_| Not applicable Comments:______________________________________________________________ _______________________________________________________________________ ASSUMPTIONS: TIMING OR SPECIAL ISSUES: A general timeline has been indicated and will be considered until otherwise indicated by Customer: o Execution of this agreement is dependant on o Estimated project kickoff is___________________________________________ o Estimated course delivery date is______________________________________ o Other significant milestone dates (estimated): Comments: LOCATION WHERE SERVICES WILL BE PERFORMED: Interactive Alchemy's offices in Arizona. FEES & CHARGES: DELIVERABLES DETAILS UNIT PRICE EXTENDED PRICE Sub-Total: Sales & Use Taxes: TOTAL DUE: - -------------------------------------------------------------------------------- Expense Reimbursement: Approved Travel expenses, if any reimbursed by Client. PAYMENT TERMS: AS DEFINED IN THE AGREEMENT_____________________________________ Please sign where indicated below to acknowledge acceptance of the terms of this Work Order and provide authorization to begin the project provided herein. This Work Order may be executed in counterparts and by facsimile, each of which when so executed, will be deemed an original, and all of which together shall constitute one and the same instrument. Page 18 of 27 EDT LEARNING, INC INTERACTIVE ALCHEMY, INC Signature:______________________________ Signature: _____________________ Title:__________________________________ Title: _________________________ Date:___________________________________ Date: __________________________ Tel: (602) 952-1200 Fax: (602) 952-0544 Page 19 of 27 EDT Learning [LOGO] The Power of e-learning Simplified EXHIBIT "B" CONTRACTOR'S STANDARD HOURLY RATES ---------------------------------- THE FOLLOWING ATTACHMENT WILL BE THE BASIS FOR ANY WORK PERFORMED BY CONTRACTOR FOR EDT LEARNING, WITH THE ACTUAL HOURS AND RATES VARYING FROM PROJECT TO PROJECT AS NEEDED AND REFLECTED IN THE APPROPRIATE STATEMENT OF WORK. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] ------------------------------------------------------ Page 20 of 27 CUSTOM TIERS Tier 1 Tier 2 Tier 3 INTERFACE Branding Logo Only Custom Custom Graphical Menus No Yes Yes NAVIGATION Linear Yes Yes Yes Non-Linear No Yes Yes MEDIA Static Graphics 2-D Up to 8 Up to 8 Up to 12 3-D No Up to 2 Up to 4 Animated Graphics 2-D No Up to 2 Up to 4 3-D No No Up to 2 Total Graphics Up to 8 Up to 12 Up to 20 Flash Elements No Yes Yes Audio Yes Yes Yes Video No Add'l Chg Add'l Chg PRESENTATION & INTERACTIVITY Rollovers Up to 2 Up to 4 Up to 8 Popups Up to 2 Up to 4 Up to 8 Timed Bullets No Up to 4 Up to 8 Timed Highlighting No Up to 4 Up to 8 Remediation Yes Yes Yes INSTRUCTIONAL TECHNIQUES Presentation Yes Yes Yes Demonstration Yes Yes Yes Practice Yes Yes Yes Software Simulations Yes Yes Yes Scenarios/case studies No Up to 2 Up to 4 Page 21 of 27 Pricing STANDARD HOURLY RATE $120 FIRST HOUR ADDITIONAL HOURS (SAME PROJECT) STARTING POINT STARTING POINT TIER 1 OLT SPT ILT NO EXISTING OLT SPT ILT NO EXISTING REPURPOSE $ 9,000 $11,250 n/a n/a $ 7,200 $ 9,000 n/a n/a REWRITE $11,250 $14,063 $16,875 $22,500 $ 9,000 $11,250 $13,500 $18,000 TIER 2 OLT SPT ILT NO EXISTING OLT SPT ILT NO EXISTING REPURPOSE $13,800 $17,250 n/a n/a $11,040 $13,800 n/a n/a REWRITE $17,250 $21,563 $25,875 $34,500 $13,800 $17,250 $20,700 $27,600 TIER 3 OLT SPT ILT NO EXISTING OLT SPT ILT NO EXISTING REPURPOSE $18,600 $23,250 n/a n/a $14,880 $18,600 n/a n/a REWRITE $23,250 $29,063 $34,875 $46,500 $18,600 $23,250 $27,900 $37,200
DEFINITIONS OLT Customer has existing on-line, web based training that will provide the basis for the course SPT Customer has existing self-paced, computer-based training that will provide the basis for the course ILT Customer has existing instructor-led training that will provide the basis for the course NO EXISTING Customer does not have a current course, but will provide us with the content in another form REPURPOSE The new web-based course will be produced by adapting the existing content, sticking closely to the original REWRITE The new web-based course will be produced by significantly re-writing the current course or material Page 22 of 27 EDT Learning [LOGO] The Power of e-learning Simplified EXHIBIT "C" CHANGE ORDER Change Order No.___________________________________entered into pursuant to the Subcontractor Agreement dated May 1, 2003 by and between EDT Learning, Inc. and Contractor ("Contractor ") and the Statement of Work or Statement of Work executed on_________________pertaining to_______________________________________ 1. Describe changes, modifications, or additions to the services. 2. Necessity, availability and assignment of requisite EDT personnel and/or resources to make requested modifications or additions. 3. Impact on Costs, Performance Period, and other requirements. a. Changes in Costs: b. Changes in Performance Period: c. Changes to any other requirements: 4. Describe any revisions in acceptance test procedures. - ---------------------------------- -------------------------- Signature of Contractor Date - ---------------------------------- -------------------------- Signature of EDT Learning, Inc. Date Page 23 of 27 iLinc COMMUNICATIONS AMENDMENT TO SUBCONTRACTOR AGREEMENT This amendment to subcontractor agreement (the "Amendment") is made to be effective on April 1, 2004 (the "Effective Date") by and between iLinc Communications, Inc. (formerly known as EDT Learning, Inc.) ("iLinc Communications"), a Delaware corporation and Interactive Alchemy, Inc. ("Contractor"). WHEREAS, iLinc Communications and Contractor entered into a subcontractor agreement dated May 1, 2003 (the "Agreement") whereby Contractor provides e-Learning custom content development and professional services to iLinc Communications and indirectly to iLinc Communications' Customers using among other things iLinc Communications' Development Software; WHEREAS, iLinc Communications and Contractor wish to modify that Agreement; NOW, THEREFORE, iLinc Communications and Contractor, in exchange for the mutual promises and conditions contained herein and other good and valuable consideration the sufficiency of which is hereby acknowledged, do agree as follows: 1. Section 19(e) of the Agreement "Assignment" shall be amended and replaced in its entirety to read as follows: "19(e) Assignment. Contractor may not assign this Agreement, whether by operation of law or otherwise, without the prior written consent of iLinc Communications, however, such approval of cannot be unreasonably withheld or delayed. The rights and obligations of iLinc Communications hereunder may be assigned to an iLinc Communications affiliate, or to an individual or entity that acquires all or substantially all of the assets or shares of iLinc Communications, or with whom iLinc Communications merges. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns." 2. The Agreement shall be hereby amended to reflect the foregoing agreement of the Parties on and after the Effective Date, and except as amended hereby and any other preceding amendments, the Agreement shall remain otherwise unchanged. Executed as indicated below to be effective as indicated on the first date written above. INTERACTIVE ALCHEMY, INC. ILINC COMMUNICATIONS, INC. By: /s/ Donald C. Pierson, III By: /s/ James M. Powers Jr. --------------------------------- ------------------------------ Donald C. Pierson, III, President James M. Powers Jr., President Date: 4/22/04 Date: 4/22/04 --------------------------------- ------------------------------ Page 24 of 27 Amendment No. 2 to Sub-Contractor Agreement Between iLinc Communications, Inc. and Interactive Alchemy, Inc. This second amendment (the "Amendment") to that sub-contractor agreement dated May 1, 2003 (the "Agreement"), (together with and as amended by the first amendment dated April 1, 2004) by and between iLinc Communications, Inc. (formerly EDT Learning, Inc.), a Delaware corporation (the "iLinc"), and Interactive Alchemy, Inc. ("Contractor"). Whereas, iLinc wishes to continue to provide custom content development services to its customers while fostering the business opportunity of Interactive Alchemy; and Whereas, Contractor wishes to continue to provide outsourced custom content services to iLinc's customers while it continues to build its own custom content business to its own Contractor customers pursuant to the existing Sub-contractor Agreement; and, Now Therefore, in exchange for the mutual promises contained in the Agreement and herein, iLinc and Contractor agree as follows: 1. This amendment shall be effective on April 29, 2006 (the "Amendment's Effective Date"), and all capitalized terms not defined herein shall have the meaning given them in the Agreement 2. Section 18 titled Term and Termination of the Agreement shall be modified so that the Initial Term of the Agreement shall be extended for an additional twenty-four (24) months (with the modified Initial Term being a total of sixty (60) months from the effective date of the Agreement) and, unless earlier terminated pursuant to Section 18, the Agreement shall expire on its own terms on May 1, 2008. 3. Beginning on May 1, 2006, iLinc will no longer be responsible for providing the full range of Executive Suite Services that are described in the Agreement and not as part and parcel of payment of Contractor Fees. Therefore, from May 1, 2006 until July 15, 2006 Contractor will remain in the Premises while other facilities are being prepared by Contractor (the "Occupancy Period") and during the Occupancy Period Contractor will pay to iLinc a rental fee in the fixed and determined amount of $11,140 per month (the "Rent"), (with a prorated amount per day for any partial month). The so-called Rent payment will be due on the first day of each month that the Contractor remains in the Premises beginning May 1, 2006 and will be specifically for: use of the premises (including CAM and taxes), office equipment, office furniture, telephone (excluding long distance and audio conferencing), and parking; but, will not be for office supplies, regular and express mail, coffee and water, and all other "services" not listed above. Finally, on or after July 15, 2006, Contractor will vacate the Premises (Suite 620), and Contractor thereafter will no longer pay Rent (unless held over after July 15, 2006 in which case Rent will continue until the Premises are vacated), and iLinc will no longer be responsible for providing, Premises, or the Executive Suite Services to Contractor. By way of clarification, after July 15, 2006, Contractor will be responsible for obtaining its own premises, parking, office Page 25 of 27 supplies, internet connectivity, IT staffing, computers, office equipment, and telephone systems. 4. Beginning on May 1, 2006 and during the first twelve (12) months of this Amendment, the Percentage that will be paid to Contractor for work performed by Contactor under Section 9(b) shall be increased to 90% of the Net Fee. During the second twelve (12) months of this Amendment, the Percentage that will be paid to Contractor for work performed by Contactor under Section 9(b) shall be decreased to 87.5% of the Net Fee, (with the amount being retained by iLinc during year one and year two being called the "iLinc Retained Portion"). Furthermore, the amount due to iLinc from Contractor for work performed on Contractor's Client under Section 7 (see inset table) shall be stricken. Instead, in consideration for access to iLinc's Development Software, Derivative Works and the continued relationship as iLinc's custom content supplier, Contractor agrees to pay a fee equal to ten percent (10%) of all Contractor's sales from work performed on Contractor's Clients during the first twelve (12) months of this Amendment; and, a fee equal to twelve and one half percent (12.5%) of all Contractor's sales from work performed on Contractor's Clients during the second twelve (12) months of this Amendment (with the amount paid by Contractor called the "Royalty Fee"). Notwithstanding the foregoing, in no event, during the first twelve (12) months of this Amendment, shall the total of the iLinc Retained Portion and the Royalty Fee together exceed two hundred thousand dollars ($200,000) (i.e., as an annual maximum); and in no event, during the second twelve (12) months of this Amendment, shall the total of the iLinc Retained Portion and the Royalty Fee together exceed four hundred fifty thousand dollars ($450,000), so that during the two year term of this Amendment, the total of the iLinc Retained Portion and the Royalty Fee shall not exceed a total of six hundred and fifty thousand dollars ($650,000). To assure that cash collections are acknowledged and payments made on a timely basis by both parties, when a payment is received from an iLinc Customer or a Contractor Client, then evidence of the receipt of payment (e.g. a copy of the check or wire transfer documentation) shall be delivered to the other party within 24 hours of receipt and payment of the corresponding amount due to Contractor or the Royalty Fee shall be delivered within seventy-two (72) hours of receipt of payment. 5. At the end of the amended Initial Term and upon termination of the Agreement, then the covenants of Section 8(a)(ii) and 8(a)(iii) are terminated without further effect; but provided for clarity Section 8(a)(i) and Section 8(a)(iv) shall remain unchanged and in full affect notwithstanding termination of the Agreement, provided further that Sue Leff shall be considered an employee of both Contractor and iLinc for purposes of Section 8(a)(i). Furthermore, at the end of the amended Initial Term and upon termination of the Agreement then the license granted in Section 6 to the Development Software (e.g. i-Canvas software) shall continue on a perpetual basis from the termination date of the Agreement but the internal use license for all other software (e.g. LearnLinc software) shall terminate. Page 26 of 27 6. Conflicts between the provisions of this Amendment and the Agreement shall be resolved in favor of the spirit, intent, terms and provision of this Amendment. All other provisions not directly modified by this Amendment contained within the Agreement shall remain unchanged and in full force and effect. iLinc Communications, Inc. Interactive Alchemy, Inc.: By: /s/ James M. Powers Jr. By: /s/ Donald C. Pierson, III ------------------------------ --------------------------------- James M. Powers Jr., President Donald C. Pierson, III, President Date: 5/5/06 Date: 5/5/06 ------------------------------ --------------------------------- Page 27 of 27 EX-10.26 3 ilinc_ex10-26.txt EXHIBIT 10.26 SECURITIES PURCHASE AGREEMENT ILINC COMMUNICATIONS, INC. JAMES M. POWERS, JR., PRESIDENT 2999 NORTH 44TH STREET, SUITE 650 PHOENIX, AZ 85016 The undersigned investor (the "INVESTOR") hereby confirms Investor's agreement with iLinc Communications, Inc. ("iLinc" or the "Company") as follows: 1. This Securities Purchase Agreement is made as of the date set forth below between the Company and the Investor. 2. The Company has authorized the sale and issuance of up to 5,400,000 shares (the "SHARES") of the common stock of the Company, $0.001 par value per share (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"). 3. The Company and the Investor agree that the Investor will purchase from the Company and the Company will issue and sell to the Investor 2,702,703 Shares at a purchase price of $0.37 per Share, for an aggregate purchase price of $1,000,000 (the "PURCHASE PRICE"), subject to the Terms and Conditions for Purchase of Shares attached hereto as Annex I and incorporated herein by reference as if fully set forth herein. Unless otherwise requested by the Investor in Exhibit "A", certificates representing the Shares purchased by the Investor will be registered in the Investor's name and address as set forth below. 4. The Investor represents that, except as set forth below, (a) it has had no position, office or other material relationship within the past three (3) years with the Company or its affiliates, (b) neither it, nor any group of which it is a member or to which it is related, beneficially owns (including the right to acquire or vote) any securities of the Company, and (c) it has no direct or indirect affiliation or association with any National Association of Securities Dealers, Inc. ("NASD") member. Exceptions: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (If no exceptions, write "none." If left blank, response will be deemed to be "none.") Securities Purchase Agreement Page 1 of 12 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 6, 2006 Herald Investment Management Limited on behalf of Herald Investment Trust PLC By: /s/ Fraser Elms ------------------------------------- Name: Fraser Elms Title: Fund Manager Herald Investment Management Ltd. Address: 10-11 Charterhouse Square -------------------------------- London, ECIM 6AX ----------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ----------------------------------- Name: James M. Powers, Jr. Title: President [SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE] Securities Purchase Agreement - Subscription Letter Page 2 of 12 ANNEX I TERMS AND CONDITIONS FOR PURCHASE OF SHARES 1. AGREEMENT TO SELL AND PURCHASE THE SHARES; SUBSCRIPTION DATE. 1.1 PURCHASE AND SALE. At the Closing (as defined in Section 2), the Company will sell to the Investor, and the Investor will purchase from the Company, upon the terms and subject to the conditions set forth herein, and at the Purchase Price, the number of Shares described in paragraph 3 of the Securities Purchase Agreement attached hereto (collectively with this Annex I and the other exhibits attached hereto, this "Agreement"). 1.2 OTHER INVESTORS. As part of the Offering, the Company proposes to enter into Securities Purchase Agreements in the same form as this Agreement with certain other investors (the "OTHER INVESTORS"), and the Company expects to complete sales of Shares to them. The Investor and the Other Investors are sometimes collectively referred to herein as the "INVESTORS," and this Agreement, the Registration Rights Agreement and the Securities Purchase Agreements executed by the Other Investors are sometimes collectively referred to herein as the "AGREEMENTS." The Company may accept executed Agreements from Investors for the purchase of Shares commencing upon the date on which the Company provides the Investors with the proposed purchase price per Share and concluding upon the date (the "SUBSCRIPTION DATE") on which the Company has notified Canaccord Adams, Inc. (in its capacity as placement agent for the Shares, the "PLACEMENT AGENT") in writing that it will no longer accept Agreements for the purchase of Shares in the Offering, but in no event shall the Subscription Date be later than JUNE 8, 2006. Each Investor must execute and deliver a Securities Purchase Agreement and a Registration Rights Agreement and must complete a Stock Certificate Questionnaire (in the form attached as Exhibit "A" hereto) and an Investor Questionnaire (in the form attached as Exhibit "B" hereto) in order to purchase Shares in the Offering. 1.3 PLACEMENT AGENT FEE. The Investor acknowledges that the Company intends to pay to the Placement Agent a fee in respect of the sale of Shares to the Investor from the proceeds of the Offering. 2. DELIVERY OF THE SHARES AT CLOSING. The completion of the purchase and sale of the Shares (the "CLOSING") shall occur on a date specified by the Company and the Placement Agent that is anticipated to be June 9, 2006 (the "CLOSING DATE"), but which date shall not be later than June 16, 2006 (the "OUTSIDE DATE"), and of which the Investors will be notified in writing in advance by the Placement Agent. At the Closing, the Company shall deliver to the Investor one or more stock certificates representing the number of Shares set forth in paragraph 3 of the Stock Purchase Agreement, each such certificate to be registered in the name of the Investor or, if so indicated on the Stock Certificate Questionnaire, in the name of a nominee designated by the Investor. In exchange for the delivery of the subscription agreements, the Investor shall deliver the Purchase Price to the Placement Agent by wire transfer of immediately available funds pursuant to written instructions to be held in escrow pending closing of the Offering. On the Closing Date, the Company shall cause counsel to the Company to deliver to the Investors a legal opinion, dated the Closing Date, substantially in the form attached hereto as Exhibit "C" (the "LEGAL OPINION"). The Company's obligation to issue and sell the Shares to the Investor shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) prior receipt by the Company of an executed copy of this Securities Purchase Agreement; (b) completion of purchases and sales of Shares under the Agreements with the Other Investors; (c) the accuracy of the representations and warranties made by the Investor in this Agreement and the Securities Purchase Agreement Page 3 of 12 fulfillment of the obligations of the Investor to be fulfilled by it under this Agreement on or prior to the Closing; and (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby. The Investor's obligation to purchase the Shares shall be subject to the following conditions, any one or more of which may be waived by the Investor: (a) the completion, execution and return of the completed Securities Purchase Agreement (with exhibits thereto) by all Investors and the funding into escrow of no less than one million dollars ($1,000,0000); (b) the delivery of the Legal Opinion to the Investor by counsel to the Company; (c) the accuracy of the representations and warranties made by the Company in this Agreement on the Closing Date; (c) the execution and delivery by the Company of the Registration Rights Agreement, (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby; and (e) the delivery to the Investor by the Secretary or Assistant Secretary of the Company of a certificate stating that the conditions specified in this paragraph have been fulfilled. In the event that the Closing does not occur on or before the Outside Date as a result of the Company's failure to satisfy any of the conditions set forth above (and such condition has not been waived by the Investor), the Company shall return any and all funds paid hereunder to the Investor no later than one Business Day following the Outside Date and the Investors shall have no further obligations hereunder. For purposes of this Agreement, "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which the New York Stock Exchange are permitted or required by law to close. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. Except as otherwise described in the Company's Annual Report on Form 10-K for the year ended March 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), Company's most recent Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders, and any of the Company's Current Reports on Form 8-K filed since December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date) (all collectively, the "SEC REPORTS"), the Company hereby represents and warrants to, and covenants with, the Investor as of the date hereof and the Closing Date, as follows: 3.1 ORGANIZATION. The Company is duly incorporated and validly existing in good standing under the laws of the State of Delaware. The Company has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and is registered or qualified to do business and in good standing in each jurisdiction in which it owns property or transacts business and where the failure to be so qualified would have a material adverse effect upon the Company and its subsidiaries as a whole or the business, financial condition, properties, operations or assets of the Company and its subsidiaries as a whole or the Company's ability to perform its obligations under the Agreements in all material respects ("MATERIAL ADVERSE EFFECT"), and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. 3.2 DUE AUTHORIZATION. The Company has all requisite power and authority to execute, deliver and perform its obligations under the Agreements. The execution and delivery of the Agreements, and the consummation by the Company of the transactions contemplated hereby, have been duly authorized by all necessary corporate action and no further action on the part of the Company or its Board of Directors or stockholders is required. The Agreements have been validly executed and delivered by the Company and constitute legal, valid and Securities Purchase Agreement Page 4 of 12 binding agreements of the Company enforceable against the Company in accordance with their terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3 NO CONFLICT OR DEFAULT. The execution and delivery of the Agreements, the issuance and sale of the Shares to be sold by the Company under the Agreements, the fulfillment of the terms of the Agreements and the consummation of the transactions contemplated thereby will not: (A) result in a conflict with or constitute a material violation of, or material default (with the passage of time or otherwise) under, (i) any bond, debenture, note, loan agreement or other evidence of indebtedness, or any material lease, or contract to which the Company is a party or by which the Company or their respective properties are bound, (ii) the Certificate of Incorporation, by-laws or other organizational documents of the Company, as amended, or (iii) any law, administrative regulation, or existing order of any court or governmental agency, or other authority binding upon the Company or the Company's respective properties; or, (B) result in the creation or imposition of any lien, encumbrance, claim, or security interest upon any of the material assets of the Company or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or any material indenture, mortgage, deed of trust or any other agreement or instrument to which the Company is a party or by which it is bound or to which any of the property or assets of the Company is subject. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body is required for the execution and delivery of the Agreements by the Company and the valid issuance or sale of the Shares by the Company pursuant to the Agreements, other than such as have been made or obtained, and except for any filings required to be made under federal or state securities laws. 3.4 CAPITALIZATION. The outstanding capital stock of the Company is as described in the Company's Quarterly Report on Form 10-Q for the three month period ending December 31, 2005 and the private placement memorandum dated May 31, 2006 (the "Memorandum") provided to Investor. The Company has not issued any capital stock since December 31, 2005, other than pursuant to the purchase of shares under the Company's employee stock option plan and the exercise of outstanding warrants or stock options, in each case as disclosed in the Memorandum or the SEC Reports. The Shares to be sold pursuant to the Agreements have been duly authorized, and when issued and paid for in accordance with the terms of the Agreements, will be duly and validly issued, fully paid and nonassessable, subject to no lien, claim or encumbrance (except for any such lien, claim or encumbrance created, directly or indirectly, by the Investor). The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with the registration requirements of federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. The Company owns one hundred percent of all of the outstanding capital stock of each of its subsidiaries, free and clear of all liens, claims and encumbrances. There are not (i) any outstanding preemptive rights, or (ii) any rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company not disclosed in the SEC Reports or Memorandum, or (iii) any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party that would provide for the issuance or sale of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options not disclosed in the SEC Reports or the Memorandum. There are no shareholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party. Securities Purchase Agreement Page 5 of 12 3.5 LEGAL PROCEEDINGS. There is no material legal or governmental proceeding pending, or to the knowledge of the Company, threatened, to which the Company is a party or of which the business or property of the Company is subject that is required to be disclosed and that is not so disclosed in the SEC Reports. Other than the information disclosed in the SEC Reports, the Company is not subject to any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other government body. 3.6 NO VIOLATIONS. The Company is not in violation of its Certificate of Incorporation, bylaws or other organizational documents, as amended. The Company is not in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company, which violation, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. The Company is not in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in the performance of any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or any other material agreement or instrument to which the Company is a party or by which the Company is bound, which such default would have a Material Adverse Effect upon the Company. 3.7 GOVERNMENTAL PERMITS, ETC. Each of the Company has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department or body that are currently necessary for the operation of the business of the Company as currently conducted, except where the failure to currently possess such franchises, licenses, certificates and other authorizations is not reasonably likely to have a Material Adverse Effect. 3.8 INTELLECTUAL PROPERTY. (a) Except for matters which are not reasonably likely to have a Material Adverse Effect, (i) each of the Company has ownership of, or a license or other legal right to use, all patents, copyrights, trade secrets, trademarks, customer lists, designs, manufacturing or other processes, computer software, systems, data compilation, research results or other proprietary rights used in the business of the Company (collectively, "INTELLECTUAL PROPERTY") and (ii) all of the Intellectual Property owned by the Company consisting of patents, registered trademarks and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights or the corresponding offices of other jurisdictions and have been maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and/or such other jurisdictions. (b) Except for matters which are not reasonably likely to have a Material Adverse Effect, all material licenses or other material agreements under which (i) the Company employs rights in Intellectual Property, or (ii) the Company has granted rights to others in Intellectual Property owned or licensed by the Company are in full force and effect, and there is no default by the Company with respect thereto. (c) The Company believes that it has taken all steps reasonably required in accordance with sound business practice and business judgment to establish and preserve the ownership of the Company's material Intellectual Property. (d) Except for matters which are not reasonably likely to have a Material Adverse Effect, to the knowledge of the Company, (i) the present business, activities and products of the Company do not infringe any intellectual property of any other person; (ii) neither the Company is making unauthorized use of any confidential information or trade secrets of any person; Securities Purchase Agreement Page 6 of 12 and (iii) the activities of any of the employees of the Company, acting on behalf of the Company, do not materially violate any agreements or arrangements related to confidential information or trade secrets of third parties. (e) Except for matters which are not reasonably likely to have a Material Adverse Effect, and except as disclosed in the SEC Reports, no proceedings are pending, or to the knowledge of the Company, threatened, which challenge the rights of the Company to the use the Company's Intellectual Property. 3.9 FINANCIAL STATEMENTS. The financial statements of the Company and the related notes contained in the SEC Reports present fairly and accurately in all material respects the financial position of the Company as of the dates therein indicated, and the results of its operations, cash flows and the changes in shareholders' equity for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. Such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis at the times and throughout the periods therein specified, except that unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. 3.10 NO MATERIAL ADVERSE CHANGE. Except as disclosed in the SEC Reports or in any press releases issued by the Company prior to the Closing Date, there has not been (i) an event, circumstance or change that has had or is reasonably likely to have a Material Adverse Effect upon the Company, (ii) any obligation incurred by the Company that is material to the Company, (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any loss or damage (whether or not insured) to the physical property of the Company which has had a Material Adverse Effect. 3.11 AMEX COMPLIANCE. The Company's Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is listed on the American Stock Exchange (the "AMEX"), and the Company has taken no action intended to, or which to its knowledge could have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Amex. The issuance of the Shares does not require shareholder approval, including, without limitation, pursuant to Section 713 of the Amex Company Guide. 3.12 REPORTING STATUS. The Company has timely made all filings required under the Exchange Act during the twelve (12) months preceding the date of this Agreement, and all of those documents complied in all material respects with the SEC's requirements as of their respective filing dates, and the information contained therein as of the respective dates thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The Company is currently eligible to register the resale of Common Stock by the Investors pursuant to a registration statement on Form S-3 under the Securities Act (the "REGISTRATION STATEMENT"). 3.13 NO MANIPULATION; DISCLOSURE OF INFORMATION. The Company has not taken and will not take any action designed to or that might reasonably be expected to cause or result in an unlawful manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. Securities Purchase Agreement Page 7 of 12 3.14 ACCOUNTANTS. Epstein Weber & Conover, PLC, who expressed their opinion with respect to the consolidated financial statements to be incorporated by reference from the Company's Annual Report on Form 10-K for the year ended March 31, 2005 into the Registration Statement and the prospectus which forms a part thereof (the "PROSPECTUS"), have advised the Company that they are, and to the knowledge of the Company they are, independent accountants as required by the Securities Act and the rules and regulations promulgated thereunder. 3.15 CONTRACTS. Except for matters which are not reasonably likely to have a Material Adverse Effect and those contracts that are substantially or fully performed or expired by their terms, the contracts listed as exhibits to or described in the SEC Reports that are material to the Company and all amendments thereto, are in full force and effect on the date hereof, and neither the Company nor, to the Company's knowledge, any other party to such contracts is in breach of or default under any of such contracts. 3.16 TAXES. Except for tax matters which are not reasonably likely to have a Material Adverse Effect, each of the Company and each of its Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon. 3.17 TRANSFER TAXES. On the Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares hereunder will be, or will have been, fully paid or provided for by the Company and the Company will have complied with all laws imposing such taxes. 3.18 INVESTMENT COMPANY. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, within the meaning of the Investment Company Act of 1940, as amended, and will not be deemed an "investment company" as a result of the transactions contemplated by this Agreement. 3.19 INSURANCE. The Company maintains insurance of the types and in the amounts that the Company reasonably believes is adequate for its businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect. 3.20 OFFERING PROHIBITIONS. Neither the Company nor any person acting on its behalf or at its direction has in the past or will in the future take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer or sale of the Shares as contemplated by this Agreement within the provisions of Section 5 of the Securities Act. 3.21 LISTING. The Company shall comply with all requirements with respect to the issuance of the Shares and the listing thereof on Amex. 3.22 RELATED PARTY TRANSACTIONS. Other than described in the SEC Reports, to the knowledge of the Company, no transaction has occurred between or among the Company or any of its affiliates, officers or directors or any affiliate or affiliates of any such officer or director that with the passage of time are reasonably likely be required to be disclosed pursuant to Section 13, 14 or 15(d) of the Exchange Act. Securities Purchase Agreement Page 8 of 12 3.23 BOOKS AND RECORDS. The books, records and accounts of the Company accurately and fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the operations of, the Company. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.24 ADDITIONAL CONTINGENT CONSIDERATION. The Company expects that with the funding of the Offering and the additional capital provided thereby, that the Company's auditor will not express doubt about the company's ability to continue as a going concern (i.e. provided a so-called "Clean Opinion"). However, should the auditor again express such doubt and not provide a Clean Opinion despite the additional capital as a part of the annual report for the fiscal year ending March 31, 2006 on Form 10-K, then the Company will issue to Investors additional cash consideration ("Additional Consideration") equal to five percent (5.000%) of the gross proceeds. By way of example, should the Company raise $2,000,000, and the Company's auditor not provide a Clean Opinion, then iLinc will owe to Investors $100,000, with such Additional Consideration, if due, paid to within fifteen (15) days of the filing of the Company's Form 10-K in which the opinion expressing doubt is included. Provided however, that should the auditor issue an opinion that is a Clean Opinion then the obligation to provide Contingent Consideration under this Section 3.24 shall forever expire without further obligation to Investors. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR. 4.1 INVESTOR KNOWLEDGE AND STATUS. The Investor represents and warrants to, and covenants with, the Company that: (i) the Investor is an "accredited investor" as defined in Regulation D under the Securities Act, is knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to, investments in securities presenting an investment decision similar to that involved in the purchase of the Shares, and has requested, received, reviewed and considered all information it deemed relevant in making an informed decision to purchase the Shares; (ii) the Investor understands that the Shares are "restricted securities" and have not been registered under the Securities Act and is acquiring the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement in the ordinary course of its business and for its own account for investment only, has no present intention of distributing any of such Shares and has no arrangement or understanding with any other persons regarding the distribution of such Shares (this representation and warranty not limiting the Investor's right to sell Shares pursuant to a Registration Statement filed under the Registration Rights Agreement or otherwise, or other than with respect to any claim arising out of a breach of this representation and warranty, the Investor's right to indemnification under Section 3 of the Registration Rights Agreement); (iii) the Investor will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares except in compliance with the Securities Act, applicable state securities laws and the respective rules and regulations promulgated thereunder; (iv) the Investor has answered all questions in paragraph 4 of the Securities Purchase Agreement and the Investor Questionnaire attached hereto as Exhibit B for use in preparation of the Registration Statement and the answers thereto are true and correct as of the date hereof and will be true and correct as of the Closing Date; (v) the Investor will notify the Company promptly of any change in any of such information until such time as the Investor has sold all of its Shares or until the Company is no longer required to keep the Registration Statement effective; and (vi) the Investor has, in connection with its decision to purchase the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement, relied upon the representations and warranties of the Company contained herein Securities Purchase Agreement Page 9 of 12 and the information contained in the SEC Reports. The Investor understands that the issuance of the Shares to the Investor has not been registered under the Securities Act, or registered or qualified under any state securities law, in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the representations made by the Investor in this Agreement. No person (including without limitation the Placement Agent) is authorized by the Company to provide any representation that is inconsistent with or in addition to those contained herein or in the SEC Reports, and the Investor acknowledges that it has not received or relied on any such representations. 4.2 TRANSFER OF SHARES. The Investor agrees that it will not make any sale, transfer or other disposition of the Shares (a "DISPOSITION") other than Dispositions that are made pursuant to the Registration Statement in compliance with any applicable prospectus delivery requirements or that are exempt from registration under the Securities Act. Investor has not taken and will not take any action designed to or that might reasonably be expected to cause or result in manipulation of the price of the Common Stock to facilitate the subscription to, or the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. 4.3 POWER AND AUTHORITY. The Investor represents and warrants to the Company that (i) the Investor has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) this Agreement constitutes a valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.4 NO SHORT POSITION. The Investor has not prior to the Closing Date, and will not for the one (1) year period beginning with the Closing Date, established any hedge or other position in the Common Stock that is issued and outstanding, and that is designed to or could reasonably be expected to lead to or result in a sale, transfer or other disposition by the Investor or any other person or entity under the control or direction of Investor. For purposes hereof, a "hedge or other position" would include, without limitation, effecting any short sale or having in effect any short position (whether or not such sale or position is against the box and regardless of when such position was entered into) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to the Common Stock or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock. 4.5 NO INVESTMENT, TAX OR LEGAL ADVICE. The Investor understands that nothing in the SEC Reports, this Agreement, or any other materials presented to the Investor in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of Shares. 4.6 ACKNOWLEDGMENTS REGARDING PLACEMENT AGENT. The Investor acknowledges that the Placement Agent has acted solely as placement agent for the Company in connection with the Offering of the Shares by the Company, and that the Placement Agent has made no representation or warranty whatsoever with respect to the accuracy or completeness of information, data or other related disclosure material that has been provided to the Investor. The Investor further acknowledges that in making its decision to enter into this Agreement and purchase the Shares, it has relied on its own examination of the Company and the terms of, and consequences of holding, the Shares. The Investor further Securities Purchase Agreement Page 10 of 12 acknowledges that the provisions of this Section 4.7 are for the benefit of, and may be enforced by, the Placement Agent. Investor has not received any general solicitation or advertising regarding the Offering and Investor has not been furnished with any oral or written representation or information in connection with the Offering which is not contained in the SEC Reports or set forth in the Memorandum. 4.7 ADDITIONAL ACKNOWLEDGEMENT. Investor has thoroughly reviewed and the SEC Reports and the Memorandum (the "Disclosure Documents") prior to making this investment. Investor has been granted a reasonable time prior to the date hereof during which we have had the opportunity to obtain such additional information as Investor deems necessary to permit Investor to make an informed decision with respect to the purchase of the Common Stock. After examination of the SEC Reports and other information available, Investor is fully aware of the business prospects, financial condition, risks associated with investment and the operating history relating to the Company, and therefore in subscribing for the purchase of the Shares, Investor is not relying upon any information other than information contained in the Disclosure Documents. The Investor acknowledges that it has independently evaluated the merits of the transactions contemplated by this Agreement, that it has independently determined to enter into the transactions contemplated hereby, that it is not relying on any advice from or evaluation by any Other Investor, and that it is not acting in concert with any Other Investor in making its purchase of the Shares hereunder. The Investor and, to its knowledge, the Company acknowledge that the Investors have not taken any actions that would deem the Investors to be members of a "group" for purposes of Section 13(d) of the Exchange Act. 5. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants, agreements, representations and warranties made by the Company and the Investor herein shall survive the execution of this Agreement, the delivery to the Investor of the Shares being purchased and the payment therefor, and a party's reliance on such representations and warranties shall not be affected by any investigation made by such party or any information developed thereby. 6. REGISTRATION OF SHARES; PUBLIC STATEMENTS. 6.1 In connection with the purchase and sale of the Shares by the Investors contemplated hereby, the Company has entered into a Registration Rights Agreement with each Investor providing for the filing by the Company of a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time. 6.2 The Company agrees to disclose on a Current Report on Form 8-K the existence of the Offering and the material terms, thereof, including pricing, within four (4) days after the Closing. The Company will not issue any public statement, press release or any other public disclosure listing the Investor as one of the purchasers of the Shares without the Investor's prior review of the statement and prior consent thereto, except as may be required by applicable law or rules of any exchange on which the Company's securities are listed. 7. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to Securities Purchase Agreement Page 11 of 12 such carrier, (iv) if delivered by facsimile, upon electric confirmation of receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85016 Attention: James L. Dunn, Jr. Telephone: 602-952-1200 Fax: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (516) 433-1200 Fax: (214) 661-6688 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 8. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 9. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 10. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Securities Purchase Agreement Page 12 of 12 SECURITIES PURCHASE AGREEMENT ILINC COMMUNICATIONS, INC. JAMES M. POWERS, JR., PRESIDENT 2999 NORTH 44TH STREET, SUITE 650 PHOENIX, AZ 85016 The undersigned investor (the "INVESTOR") hereby confirms Investor's agreement with iLinc Communications, Inc. ("iLinc" or the "Company") as follows: 1. This Securities Purchase Agreement is made as of the date set forth below between the Company and the Investor. 2. The Company has authorized the sale and issuance of up to 5,400,000 shares (the "SHARES") of the common stock of the Company, $0.001 par value per share (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"). 3. The Company and the Investor agree that the Investor will purchase from the Company and the Company will issue and sell to the Investor 1,621,621 Shares at a purchase price of $0.37 per Share, for an aggregate purchase price of $600,000 (the "PURCHASE PRICE"), subject to the Terms and Conditions for Purchase of Shares attached hereto as Annex I and incorporated herein by reference as if fully set forth herein. Unless otherwise requested by the Investor in Exhibit "A", certificates representing the Shares purchased by the Investor will be registered in the Investor's name and address as set forth below. 4. The Investor represents that, except as set forth below, (a) it has had no position, office or other material relationship within the past three (3) years with the Company or its affiliates, (b) neither it, nor any group of which it is a member or to which it is related, beneficially owns (including the right to acquire or vote) any securities of the Company, and (c) it has no direct or indirect affiliation or association with any National Association of Securities Dealers, Inc. ("NASD") member. Exceptions: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (If no exceptions, write "none." If left blank, response will be deemed to be "none.") Securities Purchase Agreement Page 1 of 12 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 8, 2006 Sophrosyne Technology Fund Ltd. ----------------------------------------------- By: /s/ Benjamin James Taylor ------------------------------------------- Name: Benjamin James Taylor Title: Director Address: Ogier Fiduciary Services (Cayman) Ltd. -------------------------------------- Queensgate House, South Church St. ----------------------------------------- P.O. Box 1234 GT, Grand Cayman ----------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ----------------------------------- Name: James M. Powers, Jr. Title: President [SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE] Securities Purchase Agreement - Subscription Letter Page 2 of 12 ANNEX I TERMS AND CONDITIONS FOR PURCHASE OF SHARES 1. AGREEMENT TO SELL AND PURCHASE THE SHARES; SUBSCRIPTION DATE. 1.1 PURCHASE AND SALE. At the Closing (as defined in Section 2), the Company will sell to the Investor, and the Investor will purchase from the Company, upon the terms and subject to the conditions set forth herein, and at the Purchase Price, the number of Shares described in paragraph 3 of the Securities Purchase Agreement attached hereto (collectively with this Annex I and the other exhibits attached hereto, this "Agreement"). 1.2 OTHER INVESTORS. As part of the Offering, the Company proposes to enter into Securities Purchase Agreements in the same form as this Agreement with certain other investors (the "OTHER INVESTORS"), and the Company expects to complete sales of Shares to them. The Investor and the Other Investors are sometimes collectively referred to herein as the "INVESTORS," and this Agreement, the Registration Rights Agreement and the Securities Purchase Agreements executed by the Other Investors are sometimes collectively referred to herein as the "AGREEMENTS." The Company may accept executed Agreements from Investors for the purchase of Shares commencing upon the date on which the Company provides the Investors with the proposed purchase price per Share and concluding upon the date (the "SUBSCRIPTION DATE") on which the Company has notified Canaccord Adams, Inc. (in its capacity as placement agent for the Shares, the "PLACEMENT AGENT") in writing that it will no longer accept Agreements for the purchase of Shares in the Offering, but in no event shall the Subscription Date be later than JUNE 8, 2006. Each Investor must execute and deliver a Securities Purchase Agreement and a Registration Rights Agreement and must complete a Stock Certificate Questionnaire (in the form attached as Exhibit "A" hereto) and an Investor Questionnaire (in the form attached as Exhibit "B" hereto) in order to purchase Shares in the Offering. 1.3 PLACEMENT AGENT FEE. The Investor acknowledges that the Company intends to pay to the Placement Agent a fee in respect of the sale of Shares to the Investor from the proceeds of the Offering. 2. DELIVERY OF THE SHARES AT CLOSING. The completion of the purchase and sale of the Shares (the "CLOSING") shall occur on a date specified by the Company and the Placement Agent that is anticipated to be June 9, 2006 (the "CLOSING DATE"), but which date shall not be later than June 16, 2006 (the "OUTSIDE DATE"), and of which the Investors will be notified in writing in advance by the Placement Agent. At the Closing, the Company shall deliver to the Investor one or more stock certificates representing the number of Shares set forth in paragraph 3 of the Stock Purchase Agreement, each such certificate to be registered in the name of the Investor or, if so indicated on the Stock Certificate Questionnaire, in the name of a nominee designated by the Investor. In exchange for the delivery of the subscription agreements, the Investor shall deliver the Purchase Price to the Placement Agent by wire transfer of immediately available funds pursuant to written instructions to be held in escrow pending closing of the Offering. On the Closing Date, the Company shall cause counsel to the Company to deliver to the Investors a legal opinion, dated the Closing Date, substantially in the form attached hereto as Exhibit "C" (the "LEGAL OPINION"). The Company's obligation to issue and sell the Shares to the Investor shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) prior receipt by the Company of an executed copy of this Securities Purchase Agreement; (b) completion of purchases and sales of Shares under the Agreements with the Other Investors; (c) the accuracy of the representations and warranties made by the Investor in this Agreement and the Securities Purchase Agreement Page 3 of 12 fulfillment of the obligations of the Investor to be fulfilled by it under this Agreement on or prior to the Closing; and (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby. The Investor's obligation to purchase the Shares shall be subject to the following conditions, any one or more of which may be waived by the Investor: (a) the completion, execution and return of the completed Securities Purchase Agreement (with exhibits thereto) by all Investors and the funding into escrow of no less than one million dollars ($1,000,0000); (b) the delivery of the Legal Opinion to the Investor by counsel to the Company; (c) the accuracy of the representations and warranties made by the Company in this Agreement on the Closing Date; (c) the execution and delivery by the Company of the Registration Rights Agreement, (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby; and (e) the delivery to the Investor by the Secretary or Assistant Secretary of the Company of a certificate stating that the conditions specified in this paragraph have been fulfilled. In the event that the Closing does not occur on or before the Outside Date as a result of the Company's failure to satisfy any of the conditions set forth above (and such condition has not been waived by the Investor), the Company shall return any and all funds paid hereunder to the Investor no later than one Business Day following the Outside Date and the Investors shall have no further obligations hereunder. For purposes of this Agreement, "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which the New York Stock Exchange are permitted or required by law to close. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. Except as otherwise described in the Company's Annual Report on Form 10-K for the year ended March 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), Company's most recent Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders, and any of the Company's Current Reports on Form 8-K filed since December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date) (all collectively, the "SEC REPORTS"), the Company hereby represents and warrants to, and covenants with, the Investor as of the date hereof and the Closing Date, as follows: 3.1 ORGANIZATION. The Company is duly incorporated and validly existing in good standing under the laws of the State of Delaware. The Company has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and is registered or qualified to do business and in good standing in each jurisdiction in which it owns property or transacts business and where the failure to be so qualified would have a material adverse effect upon the Company and its subsidiaries as a whole or the business, financial condition, properties, operations or assets of the Company and its subsidiaries as a whole or the Company's ability to perform its obligations under the Agreements in all material respects ("MATERIAL ADVERSE EFFECT"), and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. 3.2 DUE AUTHORIZATION. The Company has all requisite power and authority to execute, deliver and perform its obligations under the Agreements. The execution and delivery of the Agreements, and the consummation by the Company of the transactions contemplated hereby, have been duly authorized by all necessary corporate action and no further action on the part of the Company or its Board of Directors or stockholders is required. The Agreements have been validly executed and delivered by the Company and constitute legal, valid and Securities Purchase Agreement Page 4 of 12 binding agreements of the Company enforceable against the Company in accordance with their terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3 NO CONFLICT OR DEFAULT. The execution and delivery of the Agreements, the issuance and sale of the Shares to be sold by the Company under the Agreements, the fulfillment of the terms of the Agreements and the consummation of the transactions contemplated thereby will not: (A) result in a conflict with or constitute a material violation of, or material default (with the passage of time or otherwise) under, (i) any bond, debenture, note, loan agreement or other evidence of indebtedness, or any material lease, or contract to which the Company is a party or by which the Company or their respective properties are bound, (ii) the Certificate of Incorporation, by-laws or other organizational documents of the Company, as amended, or (iii) any law, administrative regulation, or existing order of any court or governmental agency, or other authority binding upon the Company or the Company's respective properties; or, (B) result in the creation or imposition of any lien, encumbrance, claim, or security interest upon any of the material assets of the Company or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or any material indenture, mortgage, deed of trust or any other agreement or instrument to which the Company is a party or by which it is bound or to which any of the property or assets of the Company is subject. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body is required for the execution and delivery of the Agreements by the Company and the valid issuance or sale of the Shares by the Company pursuant to the Agreements, other than such as have been made or obtained, and except for any filings required to be made under federal or state securities laws. 3.4 CAPITALIZATION. The outstanding capital stock of the Company is as described in the Company's Quarterly Report on Form 10-Q for the three month period ending December 31, 2005 and the private placement memorandum dated May 31, 2006 (the "Memorandum") provided to Investor. The Company has not issued any capital stock since December 31, 2005, other than pursuant to the purchase of shares under the Company's employee stock option plan and the exercise of outstanding warrants or stock options, in each case as disclosed in the Memorandum or the SEC Reports. The Shares to be sold pursuant to the Agreements have been duly authorized, and when issued and paid for in accordance with the terms of the Agreements, will be duly and validly issued, fully paid and nonassessable, subject to no lien, claim or encumbrance (except for any such lien, claim or encumbrance created, directly or indirectly, by the Investor). The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with the registration requirements of federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. The Company owns one hundred percent of all of the outstanding capital stock of each of its subsidiaries, free and clear of all liens, claims and encumbrances. There are not (i) any outstanding preemptive rights, or (ii) any rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company not disclosed in the SEC Reports or Memorandum, or (iii) any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party that would provide for the issuance or sale of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options not disclosed in the SEC Reports or the Memorandum. There are no shareholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party. Securities Purchase Agreement Page 5 of 12 3.5 LEGAL PROCEEDINGS. There is no material legal or governmental proceeding pending, or to the knowledge of the Company, threatened, to which the Company is a party or of which the business or property of the Company is subject that is required to be disclosed and that is not so disclosed in the SEC Reports. Other than the information disclosed in the SEC Reports, the Company is not subject to any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other government body. 3.6 NO VIOLATIONS. The Company is not in violation of its Certificate of Incorporation, bylaws or other organizational documents, as amended. The Company is not in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company, which violation, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. The Company is not in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in the performance of any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or any other material agreement or instrument to which the Company is a party or by which the Company is bound, which such default would have a Material Adverse Effect upon the Company. 3.7 GOVERNMENTAL PERMITS, ETC. Each of the Company has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department or body that are currently necessary for the operation of the business of the Company as currently conducted, except where the failure to currently possess such franchises, licenses, certificates and other authorizations is not reasonably likely to have a Material Adverse Effect. 3.8 INTELLECTUAL PROPERTY. (a) Except for matters which are not reasonably likely to have a Material Adverse Effect, (i) each of the Company has ownership of, or a license or other legal right to use, all patents, copyrights, trade secrets, trademarks, customer lists, designs, manufacturing or other processes, computer software, systems, data compilation, research results or other proprietary rights used in the business of the Company (collectively, "INTELLECTUAL PROPERTY") and (ii) all of the Intellectual Property owned by the Company consisting of patents, registered trademarks and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights or the corresponding offices of other jurisdictions and have been maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and/or such other jurisdictions. (b) Except for matters which are not reasonably likely to have a Material Adverse Effect, all material licenses or other material agreements under which (i) the Company employs rights in Intellectual Property, or (ii) the Company has granted rights to others in Intellectual Property owned or licensed by the Company are in full force and effect, and there is no default by the Company with respect thereto. (c) The Company believes that it has taken all steps reasonably required in accordance with sound business practice and business judgment to establish and preserve the ownership of the Company's material Intellectual Property. (d) Except for matters which are not reasonably likely to have a Material Adverse Effect, to the knowledge of the Company, (i) the present business, activities and products of the Company do not infringe any intellectual property of any other person; (ii) neither the Company is making unauthorized use of any confidential information or trade secrets of any person; Securities Purchase Agreement Page 6 of 12 and (iii) the activities of any of the employees of the Company, acting on behalf of the Company, do not materially violate any agreements or arrangements related to confidential information or trade secrets of third parties. (e) Except for matters which are not reasonably likely to have a Material Adverse Effect, and except as disclosed in the SEC Reports, no proceedings are pending, or to the knowledge of the Company, threatened, which challenge the rights of the Company to the use the Company's Intellectual Property. 3.9 FINANCIAL STATEMENTS. The financial statements of the Company and the related notes contained in the SEC Reports present fairly and accurately in all material respects the financial position of the Company as of the dates therein indicated, and the results of its operations, cash flows and the changes in shareholders' equity for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. Such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis at the times and throughout the periods therein specified, except that unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. 3.10 NO MATERIAL ADVERSE CHANGE. Except as disclosed in the SEC Reports or in any press releases issued by the Company prior to the Closing Date, there has not been (i) an event, circumstance or change that has had or is reasonably likely to have a Material Adverse Effect upon the Company, (ii) any obligation incurred by the Company that is material to the Company, (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any loss or damage (whether or not insured) to the physical property of the Company which has had a Material Adverse Effect. 3.11 AMEX COMPLIANCE. The Company's Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is listed on the American Stock Exchange (the "AMEX"), and the Company has taken no action intended to, or which to its knowledge could have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Amex. The issuance of the Shares does not require shareholder approval, including, without limitation, pursuant to Section 713 of the Amex Company Guide. 3.12 REPORTING STATUS. The Company has timely made all filings required under the Exchange Act during the twelve (12) months preceding the date of this Agreement, and all of those documents complied in all material respects with the SEC's requirements as of their respective filing dates, and the information contained therein as of the respective dates thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The Company is currently eligible to register the resale of Common Stock by the Investors pursuant to a registration statement on Form S-3 under the Securities Act (the "REGISTRATION STATEMENT"). 3.13 NO MANIPULATION; DISCLOSURE OF INFORMATION. The Company has not taken and will not take any action designed to or that might reasonably be expected to cause or result in an unlawful manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. Securities Purchase Agreement Page 7 of 12 3.14 ACCOUNTANTS. Epstein Weber & Conover, PLC, who expressed their opinion with respect to the consolidated financial statements to be incorporated by reference from the Company's Annual Report on Form 10-K for the year ended March 31, 2005 into the Registration Statement and the prospectus which forms a part thereof (the "PROSPECTUS"), have advised the Company that they are, and to the knowledge of the Company they are, independent accountants as required by the Securities Act and the rules and regulations promulgated thereunder. 3.15 CONTRACTS. Except for matters which are not reasonably likely to have a Material Adverse Effect and those contracts that are substantially or fully performed or expired by their terms, the contracts listed as exhibits to or described in the SEC Reports that are material to the Company and all amendments thereto, are in full force and effect on the date hereof, and neither the Company nor, to the Company's knowledge, any other party to such contracts is in breach of or default under any of such contracts. 3.16 TAXES. Except for tax matters which are not reasonably likely to have a Material Adverse Effect, each of the Company and each of its Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon. 3.17 TRANSFER TAXES. On the Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares hereunder will be, or will have been, fully paid or provided for by the Company and the Company will have complied with all laws imposing such taxes. 3.18 INVESTMENT COMPANY. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, within the meaning of the Investment Company Act of 1940, as amended, and will not be deemed an "investment company" as a result of the transactions contemplated by this Agreement. 3.19 INSURANCE. The Company maintains insurance of the types and in the amounts that the Company reasonably believes is adequate for its businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect. 3.20 OFFERING PROHIBITIONS. Neither the Company nor any person acting on its behalf or at its direction has in the past or will in the future take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer or sale of the Shares as contemplated by this Agreement within the provisions of Section 5 of the Securities Act. 3.21 LISTING. The Company shall comply with all requirements with respect to the issuance of the Shares and the listing thereof on Amex. 3.22 RELATED PARTY TRANSACTIONS. Other than described in the SEC Reports, to the knowledge of the Company, no transaction has occurred between or among the Company or any of its affiliates, officers or directors or any affiliate or affiliates of any such officer or director that with the passage of time are reasonably likely be required to be disclosed pursuant to Section 13, 14 or 15(d) of the Exchange Act. Securities Purchase Agreement Page 8 of 12 3.23 BOOKS AND RECORDS. The books, records and accounts of the Company accurately and fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the operations of, the Company. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.24 ADDITIONAL CONTINGENT CONSIDERATION. The Company expects that with the funding of the Offering and the additional capital provided thereby, that the Company's auditor will not express doubt about the company's ability to continue as a going concern (i.e. provided a so-called "Clean Opinion"). However, should the auditor again express such doubt and not provide a Clean Opinion despite the additional capital as a part of the annual report for the fiscal year ending March 31, 2006 on Form 10-K, then the Company will issue to Investors additional cash consideration ("Additional Consideration") equal to five percent (5.000%) of the gross proceeds. By way of example, should the Company raise $2,000,000, and the Company's auditor not provide a Clean Opinion, then iLinc will owe to Investors $100,000, with such Additional Consideration, if due, paid to within fifteen (15) days of the filing of the Company's Form 10-K in which the opinion expressing doubt is included. Provided however, that should the auditor issue an opinion that is a Clean Opinion then the obligation to provide Contingent Consideration under this Section 3.24 shall forever expire without further obligation to Investors. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR. 4.1 INVESTOR KNOWLEDGE AND STATUS. The Investor represents and warrants to, and covenants with, the Company that: (i) the Investor is an "accredited investor" as defined in Regulation D under the Securities Act, is knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to, investments in securities presenting an investment decision similar to that involved in the purchase of the Shares, and has requested, received, reviewed and considered all information it deemed relevant in making an informed decision to purchase the Shares; (ii) the Investor understands that the Shares are "restricted securities" and have not been registered under the Securities Act and is acquiring the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement in the ordinary course of its business and for its own account for investment only, has no present intention of distributing any of such Shares and has no arrangement or understanding with any other persons regarding the distribution of such Shares (this representation and warranty not limiting the Investor's right to sell Shares pursuant to a Registration Statement filed under the Registration Rights Agreement or otherwise, or other than with respect to any claim arising out of a breach of this representation and warranty, the Investor's right to indemnification under Section 3 of the Registration Rights Agreement); (iii) the Investor will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares except in compliance with the Securities Act, applicable state securities laws and the respective rules and regulations promulgated thereunder; (iv) the Investor has answered all questions in paragraph 4 of the Securities Purchase Agreement and the Investor Questionnaire attached hereto as Exhibit B for use in preparation of the Registration Statement and the answers thereto are true and correct as of the date hereof and will be true and correct as of the Closing Date; (v) the Investor will notify the Company promptly of any change in any of such information until such time as the Investor has sold all of its Shares or until the Company is no longer required to keep the Registration Statement effective; and (vi) the Investor has, in connection with its decision to purchase the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement, relied upon the representations and warranties of the Company contained herein Securities Purchase Agreement Page 9 of 12 and the information contained in the SEC Reports. The Investor understands that the issuance of the Shares to the Investor has not been registered under the Securities Act, or registered or qualified under any state securities law, in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the representations made by the Investor in this Agreement. No person (including without limitation the Placement Agent) is authorized by the Company to provide any representation that is inconsistent with or in addition to those contained herein or in the SEC Reports, and the Investor acknowledges that it has not received or relied on any such representations. 4.2 TRANSFER OF SHARES. The Investor agrees that it will not make any sale, transfer or other disposition of the Shares (a "DISPOSITION") other than Dispositions that are made pursuant to the Registration Statement in compliance with any applicable prospectus delivery requirements or that are exempt from registration under the Securities Act. Investor has not taken and will not take any action designed to or that might reasonably be expected to cause or result in manipulation of the price of the Common Stock to facilitate the subscription to, or the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. 4.3 POWER AND AUTHORITY. The Investor represents and warrants to the Company that (i) the Investor has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) this Agreement constitutes a valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.4 NO SHORT POSITION. The Investor has not prior to the Closing Date, and will not for the one (1) year period beginning with the Closing Date, established any hedge or other position in the Common Stock that is issued and outstanding, and that is designed to or could reasonably be expected to lead to or result in a sale, transfer or other disposition by the Investor or any other person or entity under the control or direction of Investor. For purposes hereof, a "hedge or other position" would include, without limitation, effecting any short sale or having in effect any short position (whether or not such sale or position is against the box and regardless of when such position was entered into) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to the Common Stock or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock. 4.5 NO INVESTMENT, TAX OR LEGAL ADVICE. The Investor understands that nothing in the SEC Reports, this Agreement, or any other materials presented to the Investor in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of Shares. 4.6 ACKNOWLEDGMENTS REGARDING PLACEMENT AGENT. The Investor acknowledges that the Placement Agent has acted solely as placement agent for the Company in connection with the Offering of the Shares by the Company, and that the Placement Agent has made no representation or warranty whatsoever with respect to the accuracy or completeness of information, data or other related disclosure material that has been provided to the Investor. The Investor further acknowledges that in making its decision to enter into this Agreement and purchase the Shares, it has relied on its own examination of the Company and the terms of, and consequences of holding, the Shares. The Investor further Securities Purchase Agreement Page 10 of 12 acknowledges that the provisions of this Section 4.7 are for the benefit of, and may be enforced by, the Placement Agent. Investor has not received any general solicitation or advertising regarding the Offering and Investor has not been furnished with any oral or written representation or information in connection with the Offering which is not contained in the SEC Reports or set forth in the Memorandum. 4.7 ADDITIONAL ACKNOWLEDGEMENT. Investor has thoroughly reviewed and the SEC Reports and the Memorandum (the "Disclosure Documents") prior to making this investment. Investor has been granted a reasonable time prior to the date hereof during which we have had the opportunity to obtain such additional information as Investor deems necessary to permit Investor to make an informed decision with respect to the purchase of the Common Stock. After examination of the SEC Reports and other information available, Investor is fully aware of the business prospects, financial condition, risks associated with investment and the operating history relating to the Company, and therefore in subscribing for the purchase of the Shares, Investor is not relying upon any information other than information contained in the Disclosure Documents. The Investor acknowledges that it has independently evaluated the merits of the transactions contemplated by this Agreement, that it has independently determined to enter into the transactions contemplated hereby, that it is not relying on any advice from or evaluation by any Other Investor, and that it is not acting in concert with any Other Investor in making its purchase of the Shares hereunder. The Investor and, to its knowledge, the Company acknowledge that the Investors have not taken any actions that would deem the Investors to be members of a "group" for purposes of Section 13(d) of the Exchange Act. 5. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants, agreements, representations and warranties made by the Company and the Investor herein shall survive the execution of this Agreement, the delivery to the Investor of the Shares being purchased and the payment therefor, and a party's reliance on such representations and warranties shall not be affected by any investigation made by such party or any information developed thereby. 6. REGISTRATION OF SHARES; PUBLIC STATEMENTS. 6.1 In connection with the purchase and sale of the Shares by the Investors contemplated hereby, the Company has entered into a Registration Rights Agreement with each Investor providing for the filing by the Company of a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time. 6.2 The Company agrees to disclose on a Current Report on Form 8-K the existence of the Offering and the material terms, thereof, including pricing, within four (4) days after the Closing. The Company will not issue any public statement, press release or any other public disclosure listing the Investor as one of the purchasers of the Shares without the Investor's prior review of the statement and prior consent thereto, except as may be required by applicable law or rules of any exchange on which the Company's securities are listed. 7. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to Securities Purchase Agreement Page 11 of 12 such carrier, (iv) if delivered by facsimile, upon electric confirmation of receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85016 Attention: James L. Dunn, Jr. Telephone: 602-952-1200 Fax: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (516) 433-1200 Fax: (214) 661-6688 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 8. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 9. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 10. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Securities Purchase Agreement Page 12 of 12 SECURITIES PURCHASE AGREEMENT ILINC COMMUNICATIONS, INC. JAMES M. POWERS, JR., PRESIDENT 2999 NORTH 44TH STREET, SUITE 650 PHOENIX, AZ 85016 The undersigned investor (the "INVESTOR") hereby confirms Investor's agreement with iLinc Communications, Inc. ("iLinc" or the "Company") as follows: 1. This Securities Purchase Agreement is made as of the date set forth below between the Company and the Investor. 2. The Company has authorized the sale and issuance of up to 5,400,000 shares (the "SHARES") of the common stock of the Company, $0.001 par value per share (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"). 3. The Company and the Investor agree that the Investor will purchase from the Company and the Company will issue and sell to the Investor 1,081,081 Shares at a purchase price of $0.37 per Share, for an aggregate purchase price of $400,000 (the "PURCHASE PRICE"), subject to the Terms and Conditions for Purchase of Shares attached hereto as Annex I and incorporated herein by reference as if fully set forth herein. Unless otherwise requested by the Investor in Exhibit "A", certificates representing the Shares purchased by the Investor will be registered in the Investor's name and address as set forth below. 4. The Investor represents that, except as set forth below, (a) it has had no position, office or other material relationship within the past three (3) years with the Company or its affiliates, (b) neither it, nor any group of which it is a member or to which it is related, beneficially owns (including the right to acquire or vote) any securities of the Company, and (c) it has no direct or indirect affiliation or association with any National Association of Securities Dealers, Inc. ("NASD") member. Exceptions: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (If no exceptions, write "none." If left blank, response will be deemed to be "none.") Securities Purchase Agreement Page 1 of 12 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 8, 2006 Benjamin James Taylor and Diane Wong Shoda --------------------------------------------- By: /s/ Benjamin James Taylor ----------------------------------------- Name: Benjamin James Taylor, individually By: /s/ Diane Wong Shoda ----------------------------------------- Name: Diane Wong Shoda, individually Address: 54 E. Allendale Avenue ------------------------------------ Allendale, NJ 07401 --------------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ----------------------------------- Name: James M. Powers, Jr. Title: President [SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE] Securities Purchase Agreement - Subscription Letter Page 2 of 12 ANNEX I TERMS AND CONDITIONS FOR PURCHASE OF SHARES 1. AGREEMENT TO SELL AND PURCHASE THE SHARES; SUBSCRIPTION DATE. 1.1 PURCHASE AND SALE. At the Closing (as defined in Section 2), the Company will sell to the Investor, and the Investor will purchase from the Company, upon the terms and subject to the conditions set forth herein, and at the Purchase Price, the number of Shares described in paragraph 3 of the Securities Purchase Agreement attached hereto (collectively with this Annex I and the other exhibits attached hereto, this "Agreement"). 1.2 OTHER INVESTORS. As part of the Offering, the Company proposes to enter into Securities Purchase Agreements in the same form as this Agreement with certain other investors (the "OTHER INVESTORS"), and the Company expects to complete sales of Shares to them. The Investor and the Other Investors are sometimes collectively referred to herein as the "INVESTORS," and this Agreement, the Registration Rights Agreement and the Securities Purchase Agreements executed by the Other Investors are sometimes collectively referred to herein as the "AGREEMENTS." The Company may accept executed Agreements from Investors for the purchase of Shares commencing upon the date on which the Company provides the Investors with the proposed purchase price per Share and concluding upon the date (the "SUBSCRIPTION DATE") on which the Company has notified Canaccord Adams, Inc. (in its capacity as placement agent for the Shares, the "PLACEMENT AGENT") in writing that it will no longer accept Agreements for the purchase of Shares in the Offering, but in no event shall the Subscription Date be later than JUNE 8, 2006. Each Investor must execute and deliver a Securities Purchase Agreement and a Registration Rights Agreement and must complete a Stock Certificate Questionnaire (in the form attached as Exhibit "A" hereto) and an Investor Questionnaire (in the form attached as Exhibit "B" hereto) in order to purchase Shares in the Offering. 1.3 PLACEMENT AGENT FEE. The Investor acknowledges that the Company intends to pay to the Placement Agent a fee in respect of the sale of Shares to the Investor from the proceeds of the Offering. 2. DELIVERY OF THE SHARES AT CLOSING. The completion of the purchase and sale of the Shares (the "CLOSING") shall occur on a date specified by the Company and the Placement Agent that is anticipated to be June 9, 2006 (the "CLOSING DATE"), but which date shall not be later than June 16, 2006 (the "OUTSIDE DATE"), and of which the Investors will be notified in writing in advance by the Placement Agent. At the Closing, the Company shall deliver to the Investor one or more stock certificates representing the number of Shares set forth in paragraph 3 of the Stock Purchase Agreement, each such certificate to be registered in the name of the Investor or, if so indicated on the Stock Certificate Questionnaire, in the name of a nominee designated by the Investor. In exchange for the delivery of the subscription agreements, the Investor shall deliver the Purchase Price to the Placement Agent by wire transfer of immediately available funds pursuant to written instructions to be held in escrow pending closing of the Offering. On the Closing Date, the Company shall cause counsel to the Company to deliver to the Investors a legal opinion, dated the Closing Date, substantially in the form attached hereto as Exhibit "C" (the "LEGAL OPINION"). The Company's obligation to issue and sell the Shares to the Investor shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) prior receipt by the Company of an executed copy of this Securities Purchase Agreement; (b) completion of purchases and sales of Shares under the Agreements with the Other Investors; (c) the accuracy of the representations and warranties made by the Investor in this Agreement and the Securities Purchase Agreement Page 3 of 12 fulfillment of the obligations of the Investor to be fulfilled by it under this Agreement on or prior to the Closing; and (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby. The Investor's obligation to purchase the Shares shall be subject to the following conditions, any one or more of which may be waived by the Investor: (a) the completion, execution and return of the completed Securities Purchase Agreement (with exhibits thereto) by all Investors and the funding into escrow of no less than one million dollars ($1,000,0000); (b) the delivery of the Legal Opinion to the Investor by counsel to the Company; (c) the accuracy of the representations and warranties made by the Company in this Agreement on the Closing Date; (c) the execution and delivery by the Company of the Registration Rights Agreement, (d) the absence of any order, writ, injunction, judgment or decree that questions the validity of the Agreements or the right of the Company or the Investor to enter into such Agreements or to consummate the transactions contemplated hereby and thereby; and (e) the delivery to the Investor by the Secretary or Assistant Secretary of the Company of a certificate stating that the conditions specified in this paragraph have been fulfilled. In the event that the Closing does not occur on or before the Outside Date as a result of the Company's failure to satisfy any of the conditions set forth above (and such condition has not been waived by the Investor), the Company shall return any and all funds paid hereunder to the Investor no later than one Business Day following the Outside Date and the Investors shall have no further obligations hereunder. For purposes of this Agreement, "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which the New York Stock Exchange are permitted or required by law to close. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. Except as otherwise described in the Company's Annual Report on Form 10-K for the year ended March 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), Company's most recent Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date), the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders, and any of the Company's Current Reports on Form 8-K filed since December 31, 2005 (and any amendments thereto filed at least two (2) Business Days prior to the Closing Date) (all collectively, the "SEC REPORTS"), the Company hereby represents and warrants to, and covenants with, the Investor as of the date hereof and the Closing Date, as follows: 3.1 ORGANIZATION. The Company is duly incorporated and validly existing in good standing under the laws of the State of Delaware. The Company has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and is registered or qualified to do business and in good standing in each jurisdiction in which it owns property or transacts business and where the failure to be so qualified would have a material adverse effect upon the Company and its subsidiaries as a whole or the business, financial condition, properties, operations or assets of the Company and its subsidiaries as a whole or the Company's ability to perform its obligations under the Agreements in all material respects ("MATERIAL ADVERSE EFFECT"), and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. 3.2 DUE AUTHORIZATION. The Company has all requisite power and authority to execute, deliver and perform its obligations under the Agreements. The execution and delivery of the Agreements, and the consummation by the Company of the transactions contemplated hereby, have been duly authorized by all necessary corporate action and no further action on the part of the Company or its Board of Directors or stockholders is required. The Agreements have been validly executed and delivered by the Company and constitute legal, valid and Securities Purchase Agreement Page 4 of 12 binding agreements of the Company enforceable against the Company in accordance with their terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3 NO CONFLICT OR DEFAULT. The execution and delivery of the Agreements, the issuance and sale of the Shares to be sold by the Company under the Agreements, the fulfillment of the terms of the Agreements and the consummation of the transactions contemplated thereby will not: (A) result in a conflict with or constitute a material violation of, or material default (with the passage of time or otherwise) under, (i) any bond, debenture, note, loan agreement or other evidence of indebtedness, or any material lease, or contract to which the Company is a party or by which the Company or their respective properties are bound, (ii) the Certificate of Incorporation, by-laws or other organizational documents of the Company, as amended, or (iii) any law, administrative regulation, or existing order of any court or governmental agency, or other authority binding upon the Company or the Company's respective properties; or, (B) result in the creation or imposition of any lien, encumbrance, claim, or security interest upon any of the material assets of the Company or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or any material indenture, mortgage, deed of trust or any other agreement or instrument to which the Company is a party or by which it is bound or to which any of the property or assets of the Company is subject. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body is required for the execution and delivery of the Agreements by the Company and the valid issuance or sale of the Shares by the Company pursuant to the Agreements, other than such as have been made or obtained, and except for any filings required to be made under federal or state securities laws. 3.4 CAPITALIZATION. The outstanding capital stock of the Company is as described in the Company's Quarterly Report on Form 10-Q for the three month period ending December 31, 2005 and the private placement memorandum dated May 31, 2006 (the "Memorandum") provided to Investor. The Company has not issued any capital stock since December 31, 2005, other than pursuant to the purchase of shares under the Company's employee stock option plan and the exercise of outstanding warrants or stock options, in each case as disclosed in the Memorandum or the SEC Reports. The Shares to be sold pursuant to the Agreements have been duly authorized, and when issued and paid for in accordance with the terms of the Agreements, will be duly and validly issued, fully paid and nonassessable, subject to no lien, claim or encumbrance (except for any such lien, claim or encumbrance created, directly or indirectly, by the Investor). The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with the registration requirements of federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. The Company owns one hundred percent of all of the outstanding capital stock of each of its subsidiaries, free and clear of all liens, claims and encumbrances. There are not (i) any outstanding preemptive rights, or (ii) any rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company not disclosed in the SEC Reports or Memorandum, or (iii) any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party that would provide for the issuance or sale of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options not disclosed in the SEC Reports or the Memorandum. There are no shareholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party. Securities Purchase Agreement Page 5 of 12 3.5 LEGAL PROCEEDINGS. There is no material legal or governmental proceeding pending, or to the knowledge of the Company, threatened, to which the Company is a party or of which the business or property of the Company is subject that is required to be disclosed and that is not so disclosed in the SEC Reports. Other than the information disclosed in the SEC Reports, the Company is not subject to any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other government body. 3.6 NO VIOLATIONS. The Company is not in violation of its Certificate of Incorporation, bylaws or other organizational documents, as amended. The Company is not in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company, which violation, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. The Company is not in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in the performance of any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or any other material agreement or instrument to which the Company is a party or by which the Company is bound, which such default would have a Material Adverse Effect upon the Company. 3.7 GOVERNMENTAL PERMITS, ETC. Each of the Company has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department or body that are currently necessary for the operation of the business of the Company as currently conducted, except where the failure to currently possess such franchises, licenses, certificates and other authorizations is not reasonably likely to have a Material Adverse Effect. 3.8 INTELLECTUAL PROPERTY. (a) Except for matters which are not reasonably likely to have a Material Adverse Effect, (i) each of the Company has ownership of, or a license or other legal right to use, all patents, copyrights, trade secrets, trademarks, customer lists, designs, manufacturing or other processes, computer software, systems, data compilation, research results or other proprietary rights used in the business of the Company (collectively, "INTELLECTUAL PROPERTY") and (ii) all of the Intellectual Property owned by the Company consisting of patents, registered trademarks and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights or the corresponding offices of other jurisdictions and have been maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and/or such other jurisdictions. (b) Except for matters which are not reasonably likely to have a Material Adverse Effect, all material licenses or other material agreements under which (i) the Company employs rights in Intellectual Property, or (ii) the Company has granted rights to others in Intellectual Property owned or licensed by the Company are in full force and effect, and there is no default by the Company with respect thereto. (c) The Company believes that it has taken all steps reasonably required in accordance with sound business practice and business judgment to establish and preserve the ownership of the Company's material Intellectual Property. (d) Except for matters which are not reasonably likely to have a Material Adverse Effect, to the knowledge of the Company, (i) the present business, activities and products of the Company do not infringe any intellectual property of any other person; (ii) neither the Company is making unauthorized use of any confidential information or trade secrets of any person; Securities Purchase Agreement Page 6 of 12 and (iii) the activities of any of the employees of the Company, acting on behalf of the Company, do not materially violate any agreements or arrangements related to confidential information or trade secrets of third parties. (e) Except for matters which are not reasonably likely to have a Material Adverse Effect, and except as disclosed in the SEC Reports, no proceedings are pending, or to the knowledge of the Company, threatened, which challenge the rights of the Company to the use the Company's Intellectual Property. 3.9 FINANCIAL STATEMENTS. The financial statements of the Company and the related notes contained in the SEC Reports present fairly and accurately in all material respects the financial position of the Company as of the dates therein indicated, and the results of its operations, cash flows and the changes in shareholders' equity for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. Such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis at the times and throughout the periods therein specified, except that unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. 3.10 NO MATERIAL ADVERSE CHANGE. Except as disclosed in the SEC Reports or in any press releases issued by the Company prior to the Closing Date, there has not been (i) an event, circumstance or change that has had or is reasonably likely to have a Material Adverse Effect upon the Company, (ii) any obligation incurred by the Company that is material to the Company, (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any loss or damage (whether or not insured) to the physical property of the Company which has had a Material Adverse Effect. 3.11 AMEX COMPLIANCE. The Company's Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is listed on the American Stock Exchange (the "AMEX"), and the Company has taken no action intended to, or which to its knowledge could have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Amex. The issuance of the Shares does not require shareholder approval, including, without limitation, pursuant to Section 713 of the Amex Company Guide. 3.12 REPORTING STATUS. The Company has timely made all filings required under the Exchange Act during the twelve (12) months preceding the date of this Agreement, and all of those documents complied in all material respects with the SEC's requirements as of their respective filing dates, and the information contained therein as of the respective dates thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The Company is currently eligible to register the resale of Common Stock by the Investors pursuant to a registration statement on Form S-3 under the Securities Act (the "REGISTRATION STATEMENT"). 3.13 NO MANIPULATION; DISCLOSURE OF INFORMATION. The Company has not taken and will not take any action designed to or that might reasonably be expected to cause or result in an unlawful manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. Securities Purchase Agreement Page 7 of 12 3.14 ACCOUNTANTS. Epstein Weber & Conover, PLC, who expressed their opinion with respect to the consolidated financial statements to be incorporated by reference from the Company's Annual Report on Form 10-K for the year ended March 31, 2005 into the Registration Statement and the prospectus which forms a part thereof (the "PROSPECTUS"), have advised the Company that they are, and to the knowledge of the Company they are, independent accountants as required by the Securities Act and the rules and regulations promulgated thereunder. 3.15 CONTRACTS. Except for matters which are not reasonably likely to have a Material Adverse Effect and those contracts that are substantially or fully performed or expired by their terms, the contracts listed as exhibits to or described in the SEC Reports that are material to the Company and all amendments thereto, are in full force and effect on the date hereof, and neither the Company nor, to the Company's knowledge, any other party to such contracts is in breach of or default under any of such contracts. 3.16 TAXES. Except for tax matters which are not reasonably likely to have a Material Adverse Effect, each of the Company and each of its Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon. 3.17 TRANSFER TAXES. On the Closing Date, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares hereunder will be, or will have been, fully paid or provided for by the Company and the Company will have complied with all laws imposing such taxes. 3.18 INVESTMENT COMPANY. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, within the meaning of the Investment Company Act of 1940, as amended, and will not be deemed an "investment company" as a result of the transactions contemplated by this Agreement. 3.19 INSURANCE. The Company maintains insurance of the types and in the amounts that the Company reasonably believes is adequate for its businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by similarly situated companies, all of which insurance is in full force and effect. 3.20 OFFERING PROHIBITIONS. Neither the Company nor any person acting on its behalf or at its direction has in the past or will in the future take any action to sell, offer for sale or solicit offers to buy any securities of the Company which would bring the offer or sale of the Shares as contemplated by this Agreement within the provisions of Section 5 of the Securities Act. 3.21 LISTING. The Company shall comply with all requirements with respect to the issuance of the Shares and the listing thereof on Amex. 3.22 RELATED PARTY TRANSACTIONS. Other than described in the SEC Reports, to the knowledge of the Company, no transaction has occurred between or among the Company or any of its affiliates, officers or directors or any affiliate or affiliates of any such officer or director that with the passage of time are reasonably likely be required to be disclosed pursuant to Section 13, 14 or 15(d) of the Exchange Act. Securities Purchase Agreement Page 8 of 12 3.23 BOOKS AND RECORDS. The books, records and accounts of the Company accurately and fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the operations of, the Company. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.24 ADDITIONAL CONTINGENT CONSIDERATION. The Company expects that with the funding of the Offering and the additional capital provided thereby, that the Company's auditor will not express doubt about the company's ability to continue as a going concern (i.e. provided a so-called "Clean Opinion"). However, should the auditor again express such doubt and not provide a Clean Opinion despite the additional capital as a part of the annual report for the fiscal year ending March 31, 2006 on Form 10-K, then the Company will issue to Investors additional cash consideration ("Additional Consideration") equal to five percent (5.000%) of the gross proceeds. By way of example, should the Company raise $2,000,000, and the Company's auditor not provide a Clean Opinion, then iLinc will owe to Investors $100,000, with such Additional Consideration, if due, paid to within fifteen (15) days of the filing of the Company's Form 10-K in which the opinion expressing doubt is included. Provided however, that should the auditor issue an opinion that is a Clean Opinion then the obligation to provide Contingent Consideration under this Section 3.24 shall forever expire without further obligation to Investors. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR. 4.1 INVESTOR KNOWLEDGE AND STATUS. The Investor represents and warrants to, and covenants with, the Company that: (i) the Investor is an "accredited investor" as defined in Regulation D under the Securities Act, is knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to, investments in securities presenting an investment decision similar to that involved in the purchase of the Shares, and has requested, received, reviewed and considered all information it deemed relevant in making an informed decision to purchase the Shares; (ii) the Investor understands that the Shares are "restricted securities" and have not been registered under the Securities Act and is acquiring the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement in the ordinary course of its business and for its own account for investment only, has no present intention of distributing any of such Shares and has no arrangement or understanding with any other persons regarding the distribution of such Shares (this representation and warranty not limiting the Investor's right to sell Shares pursuant to a Registration Statement filed under the Registration Rights Agreement or otherwise, or other than with respect to any claim arising out of a breach of this representation and warranty, the Investor's right to indemnification under Section 3 of the Registration Rights Agreement); (iii) the Investor will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares except in compliance with the Securities Act, applicable state securities laws and the respective rules and regulations promulgated thereunder; (iv) the Investor has answered all questions in paragraph 4 of the Securities Purchase Agreement and the Investor Questionnaire attached hereto as Exhibit B for use in preparation of the Registration Statement and the answers thereto are true and correct as of the date hereof and will be true and correct as of the Closing Date; (v) the Investor will notify the Company promptly of any change in any of such information until such time as the Investor has sold all of its Shares or until the Company is no longer required to keep the Registration Statement effective; and (vi) the Investor has, in connection with its decision to purchase the number of Shares set forth in paragraph 3 of the Securities Purchase Agreement, relied upon the representations and warranties of the Company contained herein Securities Purchase Agreement Page 9 of 12 and the information contained in the SEC Reports. The Investor understands that the issuance of the Shares to the Investor has not been registered under the Securities Act, or registered or qualified under any state securities law, in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the representations made by the Investor in this Agreement. No person (including without limitation the Placement Agent) is authorized by the Company to provide any representation that is inconsistent with or in addition to those contained herein or in the SEC Reports, and the Investor acknowledges that it has not received or relied on any such representations. 4.2 TRANSFER OF SHARES. The Investor agrees that it will not make any sale, transfer or other disposition of the Shares (a "DISPOSITION") other than Dispositions that are made pursuant to the Registration Statement in compliance with any applicable prospectus delivery requirements or that are exempt from registration under the Securities Act. Investor has not taken and will not take any action designed to or that might reasonably be expected to cause or result in manipulation of the price of the Common Stock to facilitate the subscription to, or the sale or resale of the Shares. The Company has not disclosed any material non-public information to the Investors. 4.3 POWER AND AUTHORITY. The Investor represents and warrants to the Company that (i) the Investor has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) this Agreement constitutes a valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except to the extent (i) rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, (ii) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and (iii) such enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.4 NO SHORT POSITION. The Investor has not prior to the Closing Date, and will not for the one (1) year period beginning with the Closing Date, established any hedge or other position in the Common Stock that is issued and outstanding, and that is designed to or could reasonably be expected to lead to or result in a sale, transfer or other disposition by the Investor or any other person or entity under the control or direction of Investor. For purposes hereof, a "hedge or other position" would include, without limitation, effecting any short sale or having in effect any short position (whether or not such sale or position is against the box and regardless of when such position was entered into) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to the Common Stock or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock. 4.5 NO INVESTMENT, TAX OR LEGAL ADVICE. The Investor understands that nothing in the SEC Reports, this Agreement, or any other materials presented to the Investor in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of Shares. 4.6 ACKNOWLEDGMENTS REGARDING PLACEMENT AGENT. The Investor acknowledges that the Placement Agent has acted solely as placement agent for the Company in connection with the Offering of the Shares by the Company, and that the Placement Agent has made no representation or warranty whatsoever with respect to the accuracy or completeness of information, data or other related disclosure material that has been provided to the Investor. The Investor further acknowledges that in making its decision to enter into this Agreement and purchase the Shares, it has relied on its own examination of the Company and the terms of, and consequences of holding, the Shares. The Investor further Securities Purchase Agreement Page 10 of 12 acknowledges that the provisions of this Section 4.7 are for the benefit of, and may be enforced by, the Placement Agent. Investor has not received any general solicitation or advertising regarding the Offering and Investor has not been furnished with any oral or written representation or information in connection with the Offering which is not contained in the SEC Reports or set forth in the Memorandum. 4.7 ADDITIONAL ACKNOWLEDGEMENT. Investor has thoroughly reviewed and the SEC Reports and the Memorandum (the "Disclosure Documents") prior to making this investment. Investor has been granted a reasonable time prior to the date hereof during which we have had the opportunity to obtain such additional information as Investor deems necessary to permit Investor to make an informed decision with respect to the purchase of the Common Stock. After examination of the SEC Reports and other information available, Investor is fully aware of the business prospects, financial condition, risks associated with investment and the operating history relating to the Company, and therefore in subscribing for the purchase of the Shares, Investor is not relying upon any information other than information contained in the Disclosure Documents. The Investor acknowledges that it has independently evaluated the merits of the transactions contemplated by this Agreement, that it has independently determined to enter into the transactions contemplated hereby, that it is not relying on any advice from or evaluation by any Other Investor, and that it is not acting in concert with any Other Investor in making its purchase of the Shares hereunder. The Investor and, to its knowledge, the Company acknowledge that the Investors have not taken any actions that would deem the Investors to be members of a "group" for purposes of Section 13(d) of the Exchange Act. 5. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants, agreements, representations and warranties made by the Company and the Investor herein shall survive the execution of this Agreement, the delivery to the Investor of the Shares being purchased and the payment therefor, and a party's reliance on such representations and warranties shall not be affected by any investigation made by such party or any information developed thereby. 6. REGISTRATION OF SHARES; PUBLIC STATEMENTS. 6.1 In connection with the purchase and sale of the Shares by the Investors contemplated hereby, the Company has entered into a Registration Rights Agreement with each Investor providing for the filing by the Company of a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time. 6.2 The Company agrees to disclose on a Current Report on Form 8-K the existence of the Offering and the material terms, thereof, including pricing, within four (4) days after the Closing. The Company will not issue any public statement, press release or any other public disclosure listing the Investor as one of the purchasers of the Shares without the Investor's prior review of the statement and prior consent thereto, except as may be required by applicable law or rules of any exchange on which the Company's securities are listed. 7. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to Securities Purchase Agreement Page 11 of 12 such carrier, (iv) if delivered by facsimile, upon electric confirmation of receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85016 Attention: James L. Dunn, Jr. Telephone: 602-952-1200 Fax: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (516) 433-1200 Fax: (214) 661-6688 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 8. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 9. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 10. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Securities Purchase Agreement Page 12 of 12 EX-10.27 4 ilinc_ex10-27.txt EXHIBIT 10.27 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made as of the date set forth below (the "Effective Date") between iLinc Communications, Inc., a Delaware corporation (the "COMPANY"), and the purchasers of its Common Stock (as defined below) pursuant to a Securities Purchase Agreement dated as of the date hereof (each in "Investor" and, collectively, the "Investors"). Capitalized terms used and not defined herein shall have the respective meanings ascribed to them in the Securities Purchase Agreement. RECITALS WHEREAS, the Company has sold 5,405,405 shares (the "SHARES") of its common stock, $0.001 par value per share, (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"); and WHEREAS, the execution and delivery of this Agreement by the Company is a condition to the completion of the Offering. NOW, THEREFORE, the parties hereto agree as follows: 1. REGISTRATION PROCEDURES AND EXPENSES. The Company shall: (a) subject to receipt of necessary information from the Investors, prepare and file with the Securities and Exchange Commission ("SEC"), within thirty (30) days after the Closing Date (the "REQUIRED FILING DATE"), a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time; (b) subject to receipt of necessary information from the Investors, to cause the Registration Statement to become effective as soon as practicable, but in no event later than ninety (90) days after the Required Filing Date (the "REQUIRED EFFECTIVE DATE"). If the Registration Statement (i) has not been filed by the Required Filing Date or (ii) has not been declared effective by the SEC on or before the Required Effective Date, then the Company shall, immediately following the Required Filing Date (if not then so filed) and the Required Effective Date (if not then so effective), and on each 30th day anniversary thereafter, make a payment to the Investor as compensation for such delay (the "LATE REGISTRATION PAYMENTS") an amount equal to one percent (1%) of the Purchase Price paid for the Shares purchased by the Investor, until the Registration Statement is filed or declared effective by the SEC. Notwithstanding the foregoing, in no event shall the total of all Late Registration Payments exceed in the aggregate ten percent (10%) of such Purchase Price. Late Registration Payments, if any, will be prorated on a daily basis and will be paid to Investor by wire transfer or check within five (5) Business Days after the date that each payment is due; (c) prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement current and effective for a period ending on the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Investor may sell Shares pursuant to paragraph (k) of Rule 144 under the Securities Act or any successor rule ("RULE 144") or (iii) such time as all Shares purchased by such Investor in this Offering have been sold pursuant to a registration statement or Rule 144, and to notify each Investor promptly upon the Registration Statement and each post-effective amendment thereto, being declared effective by the SEC; Registration Rights Agreement Page 1 of 10 (d) furnish to the Investor such number of copies (in paper or electronic version) of the Registration Statement and the Prospectus (including supplemental prospectuses), as the Investor may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Shares by the Investor; (e) file documents required of the Company for normal blue sky clearance in states specified in writing by the Investor; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (f) bear all expenses (other than underwriting discounts and commissions, if any) in connection with the procedures in paragraph (a) through (e) of this Section 1 and the registration of the Shares pursuant to the Registration Statement; (g) advise the Investors, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued; and (h) with a view to making available to the Investor the benefits of Rule 144 or other rule that may permit the Investor to sell Shares without registration, the Company agrees to use its commercially reasonable efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Investor's Shares may be resold pursuant to Rule 144(k) or (B) such date as all of the Investor's Shares shall have been sold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Investor upon request a written statement that the Company has complied with the reporting requirements of the Securities Act and the Exchange Act, a copy (in paper or electronic version) of the Company's most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other information as may be reasonably requested that permits the selling of any such Shares without registration. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 that the Investor shall furnish to the Company such information and representations regarding Investor, the Shares to be sold by Investor, and the intended method of disposition of such securities as shall be required to effect the registration of the Shares and/or sale under Rule 144. The Company understands that the Investor disclaims being an underwriter, but acknowledges that a determination by the SEC that the Investor is deemed an underwriter shall not relieve the Company of any obligations it has hereunder. 2. TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION. (a) The Investor agrees that it will not effect any disposition or other transfer of the Shares or its right to purchase the Shares that would constitute a sale within the meaning of the Securities Act other than transactions exempt from the registration requirements of the Securities Act, as contemplated in the Registration Statement and as described below, and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding the Investor or its plan of distribution. Registration Rights Agreement Page 2 of 10 (b) Except in the event that paragraph (c) below applies, the Company shall: (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Shares being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide the Investor with either copies of any documents filed pursuant to Section 2(b)(i) or access to such documents electronically; and (iii) upon request, inform each Investor who so requests that the Company has complied with its obligations in Section 2(b)(i) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Investor to that effect, will use its best efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Investor pursuant to Section 2(b)(i) hereof when the amendment has become effective). (c) Subject to paragraph (d) below, in the event: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any material changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall promptly deliver a certificate in writing or electronically to the Investor (the "SUSPENSION NOTICE") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Investor will refrain from selling any Shares pursuant to the Registration Statement (a "SUSPENSION") until the Investors are advised in writing by the Company that the current Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the event of any Suspension, the Company will use its reasonable best efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable after delivery of a Suspension Notice to the Investors. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Investor, the Investor shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 2(c). The Investor covenants that from the date hereof it will maintain in confidence the receipt and content of any Suspension Notice provided in accordance with this paragraph (c) in accordance with and subject to Section 4.6 of Annex I to the Securities Purchase Agreement. (d) If a Suspension is not then in effect, the Investor may sell Shares under the Registration Statement, provided that it complies with any applicable prospectus delivery requirements. Upon receipt of a request therefor, the Company will provide an adequate number of current Prospectuses to the Investor and to any other parties requiring such Prospectuses. Registration Rights Agreement Page 3 of 10 (e) In the event of a sale of Shares by the Investor, unless such requirement is waived by the Company in writing, the Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale substantially in the form attached hereto as Exhibit A, so that the Shares may be properly transferred. (f) The Company agrees that it shall, immediately prior to the Registration Statement being declared effective, deliver to its transfer agent an opinion letter of counsel, opining that at any time the Registration Statement is effective, the transfer agent shall issue, in connection with the sale of the Shares, certificates representing such Shares without restrictive legend, provided the Shares are to be sold pursuant to the Prospectus contained in the Registration Statement and the transfer agent receives a Certificate of Subsequent Sale in the form attached hereto as Exhibit "A." Upon receipt of such opinion, the Company shall cause the transfer agent to confirm, for the benefit of the Investor, that no further opinion of counsel is required at the time of transfer in order to issue such Shares without restrictive legend. The Company shall cause its transfer agent to issue a certificate without any restrictive legend to a purchaser of any Shares from the Investor at Investor's expense and upon request of Investor, if (a) the sale of such Shares is registered under the Registration Statement (including registration pursuant to Rule 415 under the Securities Act) and the Investor has delivered a Certificate of Subsequent Sale to the Transfer Agent; (b) the holder has provided the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Shares may be made without registration under the Securities Act; or (c) such Shares are sold in compliance with Rule 144 under the Securities Act. In addition, the Company shall, at the Investors expense and upon request of the Investor, remove the restrictive legend from any Shares held by the Investor following the expiration of the holding period required by Rule 144(k) under the Securities Act (or any successor rule). 3. INDEMNIFICATION. For the purpose of this Section 3: (a) the term "SELLING SHAREHOLDER" shall mean the Investor and each person, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act; (b) the term "REGISTRATION STATEMENT" shall mean the final Prospectus, supplement or amendment thereto (or deemed to be a part thereof) referred to in Section 1; and (c) the term "UNTRUE STATEMENT" shall mean any material untrue statement, or any material omission of a statement of a material fact required to be made therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading. (d) (i) The Company agrees to indemnify and hold harmless each Selling Shareholder from and against any losses, or damages to which such Selling Shareholder may incur (under the Securities Act or otherwise) insofar as such losses or damages arise out of (i) any untrue statement of a material fact contained in the Registration Statement, or (ii) any inaccuracy in the representations of the Company contained in this Agreement. The Company will reimburse such Selling Shareholder for any reasonable legal expense incurred or any out of pocket expenses reasonably incurred in defending any such claim or action; provided, however, that the Company shall not be liable in any such case Registration Rights Agreement Page 4 of 10 to the extent that such loss or damage arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Shareholder for use in preparation of the Registration Statement, or any inaccuracy in representations made by such Selling Shareholder in the Investor Questionnaire or the failure of such Selling Shareholder to comply with its covenants and agreements contained in Sections in this Agreement or contained in the Securities Purchase Agreement or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Selling Shareholder prior to the pertinent sale or sales by the Selling Shareholder. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Company from the Investor as a result of the Offering. (ii) The Investor agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses or damage to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such loss or damage (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any failure to comply with the covenants and agreements contained in this Agreement or of the Securities Purchase Agreement or (ii) any untrue statement of a material fact contained in the Registration Statement if, and only if, such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Investor specifically for use in preparation of the Registration Statement. The Investor will reimburse the Company (or such officer, director or controlling person), as the case may be, for any reasonable legal expense or other actual accountable out-of-pocket expenses reasonably incurred in defending any such claim, action or proceeding. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Investor from the sale of the Shares pursuant to the Registration Statement. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 3, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 3 (except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend such action) or from any liability otherwise than under this Section 3. Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof (unless it has failed to assume the defense thereof and appoint counsel reasonably satisfactory to the indemnified party), such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the reasonable opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such settlement; provided that such consent shall not be unreasonably Registration Rights Agreement Page 5 of 10 withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could reasonably have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (iv) If the indemnification provided for in this Section 3 is unavailable to or insufficient to hold harmless an indemnified party under paragraphs 3(d)(i) or 3(d)(ii) above in respect of any loss or damage (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss or damage (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Investor on the other in connection with the statements or omissions or other matters which resulted in such loss or damage (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or the Investor on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Investors were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the loss or damage (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any reasonable legal fees incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this subsection (d), the Investor shall not be required to contribute any amount in excess of the amount by which the gross amount received by the Investor from the sale of the Shares to which such loss relates exceeds the amount of any damages which the Investor has otherwise been required to pay by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Investors' obligations in this subsection to contribute are several in proportion to their sales of Shares to which such loss relates and not joint. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 3, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 3 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Securities Act and the Exchange Act. 4. Additonal Piggyback Registration Rights. (a) At any time within two (2) years following the Effective Date, unless the registration statement pursuant to Section 1 above is filed, if the Company proposes to register any Common Stock for its own or others' account under the Securities Act of 1933, (other than the registration required by Section 1 above) (an "Alternative Registration"), then the Company shall give each Investor prompt written notice of its intent to register such securities (the "Registration Notice") at least thirty (30) days prior to the filing of the Alternative Registration statement with the SEC. The Registration Notice shall specify the approximate date on which the Company proposes to file such Alternative Registration statement and shall contain a statement that each Investor is entitled to participate in such Alternative Registration, and shall set forth the number of shares of Common Stock that may be registered as a part Registration Rights Agreement Page 6 of 10 of the Alternative Registration. Each Investor desiring to participate in such Alternative Registration shall notify the Company no later than twenty (20) days following receipt of the Registration Notice of the aggregate number of shares of Common Stock that such Investor then desires to sell in the offering. This piggy back registration provision shall be merely supplemental to, and shall not in any way otherwise diminish, the obligation to file the registration statement described in Section 1 above. 5. TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent imposed by Section 4 of the Securities Purchase Agreement or this Agreement upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares when such Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares or at such time as an opinion of counsel satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 6. INFORMATION AVAILABLE. So long as the Registration Statement is effective covering the resale of Shares owned by the Investor, the Company will furnish (or, to the extent such information is available electronically through the Company's filings with the SEC, the Company will make available) to the Investor: (a) as soon as practicable after it is available, one copy of (i) its Annual Report to Shareholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants) and (ii) if not included in substance in the Annual Report to Shareholders, its Annual Report on Form 10-K (the foregoing, in each case, excluding exhibits); and, (b) upon the reasonable request of the Investor, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses either in printed or electronic form. 7. LIMITS ON ADDITIONAL ISSUANCES. Except for the issuance of stock options under the Company's stock option plan, the issuance of warrants to purchase the Company's common stock, or the issuance of common stock under the Company's employee stock purchase plan or upon exercise of outstanding options and warrants and the offering contemplated hereby, the Company will not, for a period of three (3) months following the Closing Date, offer for sale or sell any securities unless, in the opinion of the Company's counsel, such offer or sale does not jeopardize the availability of exemptions from the registration and qualification requirements under applicable securities laws with respect to the Offering. The foregoing shall not apply to securities issued in connection with any acquisition, including by way of merger, or purchase of stock or all or substantially all of the assets of any third party. The foregoing provisions shall not prevent the Company from filing a "shelf" registration statement pursuant to Rule 415 under the Securities Act, but the foregoing provisions shall apply to any sale of securities thereunder. 8. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to such carrier, (iv) if delivered by facsimile, upon electric confirmation of Registration Rights Agreement Page 7 of 10 receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attention: James L. Dunn, Jr. General Counsel Telephone: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (214) 953-6000 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 9. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 10. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 11. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Registration Rights Agreement Page 8 of 10 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 15, 2006 Herald Investment Management Limited on behalf of Herald Investment Trust, PLC ----------------------------------------- [INVESTOR NAME] By: /s/ Fraser Elms ------------------------------------- Name: Fraser Elms Title: Fund Manager Herald Investment Management Ltd. Address: 10 -11 Charterhouse Square -------------------------------- London EC1M 6AX ----------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ---------------------------------- Name: James M. Powers, Jr. Title: President Registration Rights Agreement Page 9 of 10 EXHIBIT A ILINC COMMUNICATIONS, INC. CERTIFICATE OF SUBSEQUENT SALE [Transfer Agent] ______________________________ ______________________________ RE: Sale of Shares of Common Stock of iLinc Communications, Inc. (the "Company") pursuant to the Company's Prospectus dated _______________, 2005 (the "Prospectus") Dear Sir/Madam: The undersigned hereby certifies, in connection with the sale of shares of Common Stock of the Company included in the table of Selling Shareholders in the Prospectus, that the undersigned has sold the Shares pursuant to the Prospectus and in a manner described under the caption "Plan of Distribution" in the Prospectus and that such sale complies with all applicable securities laws, including, without limitation, the Prospectus delivery requirements of the Securities Act of 1933, as amended. Selling Shareholder (the beneficial owner): ___________________________ Record Holder (e.g., if held in name of nominee): _____________________ Restricted Stock Certificate No.(s): __________________________________ Number of Shares Sold: ________________________________________________ Date of Sale: _________________________________________________________ In the event that you receive a stock certificate(s) representing more shares of Common Stock than have been sold by the undersigned, then you should return to the undersigned a newly issued certificate for such excess shares in the name of the Record Holder and BEARING A RESTRICTIVE LEGEND. Further, you should place a stop transfer on your records with regard to such certificate. Dated: ______________________ Very truly yours, By: _________________________________ Print Name: _________________________ Title: ______________________________ A-1 Registration Rights Agreement Page 10 of 10 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made as of the date set forth below (the "Effective Date") between iLinc Communications, Inc., a Delaware corporation (the "COMPANY"), and the purchasers of its Common Stock (as defined below) pursuant to a Securities Purchase Agreement dated as of the date hereof (each in "Investor" and, collectively, the "Investors"). Capitalized terms used and not defined herein shall have the respective meanings ascribed to them in the Securities Purchase Agreement. RECITALS WHEREAS, the Company has sold 5,405,405 shares (the "SHARES") of its common stock, $0.001 par value per share, (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"); and WHEREAS, the execution and delivery of this Agreement by the Company is a condition to the completion of the Offering. NOW, THEREFORE, the parties hereto agree as follows: 1. REGISTRATION PROCEDURES AND EXPENSES. The Company shall: (a) subject to receipt of necessary information from the Investors, prepare and file with the Securities and Exchange Commission ("SEC"), within thirty (30) days after the Closing Date (the "REQUIRED FILING DATE"), a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time; (b) subject to receipt of necessary information from the Investors, to cause the Registration Statement to become effective as soon as practicable, but in no event later than ninety (90) days after the Required Filing Date (the "REQUIRED EFFECTIVE DATE"). If the Registration Statement (i) has not been filed by the Required Filing Date or (ii) has not been declared effective by the SEC on or before the Required Effective Date, then the Company shall, immediately following the Required Filing Date (if not then so filed) and the Required Effective Date (if not then so effective), and on each 30th day anniversary thereafter, make a payment to the Investor as compensation for such delay (the "LATE REGISTRATION PAYMENTS") an amount equal to one percent (1%) of the Purchase Price paid for the Shares purchased by the Investor, until the Registration Statement is filed or declared effective by the SEC. Notwithstanding the foregoing, in no event shall the total of all Late Registration Payments exceed in the aggregate ten percent (10%) of such Purchase Price. Late Registration Payments, if any, will be prorated on a daily basis and will be paid to Investor by wire transfer or check within five (5) Business Days after the date that each payment is due; (c) prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement current and effective for a period ending on the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Investor may sell Shares pursuant to paragraph (k) of Rule 144 under the Securities Act or any successor rule ("RULE 144") or (iii) such time as all Shares purchased by such Investor in this Offering have been sold pursuant to a registration statement or Rule 144, and to notify each Investor promptly upon the Registration Statement and each post-effective amendment thereto, being declared effective by the SEC; Registration Rights Agreement Page 1 of 10 (d) furnish to the Investor such number of copies (in paper or electronic version) of the Registration Statement and the Prospectus (including supplemental prospectuses), as the Investor may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Shares by the Investor; (e) file documents required of the Company for normal blue sky clearance in states specified in writing by the Investor; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (f) bear all expenses (other than underwriting discounts and commissions, if any) in connection with the procedures in paragraph (a) through (e) of this Section 1 and the registration of the Shares pursuant to the Registration Statement; (g) advise the Investors, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued; and (h) with a view to making available to the Investor the benefits of Rule 144 or other rule that may permit the Investor to sell Shares without registration, the Company agrees to use its commercially reasonable efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Investor's Shares may be resold pursuant to Rule 144(k) or (B) such date as all of the Investor's Shares shall have been sold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Investor upon request a written statement that the Company has complied with the reporting requirements of the Securities Act and the Exchange Act, a copy (in paper or electronic version) of the Company's most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other information as may be reasonably requested that permits the selling of any such Shares without registration. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 that the Investor shall furnish to the Company such information and representations regarding Investor, the Shares to be sold by Investor, and the intended method of disposition of such securities as shall be required to effect the registration of the Shares and/or sale under Rule 144. The Company understands that the Investor disclaims being an underwriter, but acknowledges that a determination by the SEC that the Investor is deemed an underwriter shall not relieve the Company of any obligations it has hereunder. 2. TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION. (a) The Investor agrees that it will not effect any disposition or other transfer of the Shares or its right to purchase the Shares that would constitute a sale within the meaning of the Securities Act other than transactions exempt from the registration requirements of the Securities Act, as contemplated in the Registration Statement and as described below, and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding the Investor or its plan of distribution. Registration Rights Agreement Page 2 of 10 (b) Except in the event that paragraph (c) below applies, the Company shall: (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Shares being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide the Investor with either copies of any documents filed pursuant to Section 2(b)(i) or access to such documents electronically; and (iii) upon request, inform each Investor who so requests that the Company has complied with its obligations in Section 2(b)(i) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Investor to that effect, will use its best efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Investor pursuant to Section 2(b)(i) hereof when the amendment has become effective). (c) Subject to paragraph (d) below, in the event: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any material changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall promptly deliver a certificate in writing or electronically to the Investor (the "SUSPENSION NOTICE") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Investor will refrain from selling any Shares pursuant to the Registration Statement (a "SUSPENSION") until the Investors are advised in writing by the Company that the current Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the event of any Suspension, the Company will use its reasonable best efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable after delivery of a Suspension Notice to the Investors. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Investor, the Investor shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 2(c). The Investor covenants that from the date hereof it will maintain in confidence the receipt and content of any Suspension Notice provided in accordance with this paragraph (c) in accordance with and subject to Section 4.6 of Annex I to the Securities Purchase Agreement. (d) If a Suspension is not then in effect, the Investor may sell Shares under the Registration Statement, provided that it complies with any applicable prospectus delivery requirements. Upon receipt of a request therefor, the Company will provide an adequate number of current Prospectuses to the Investor and to any other parties requiring such Prospectuses. Registration Rights Agreement Page 3 of 10 (e) In the event of a sale of Shares by the Investor, unless such requirement is waived by the Company in writing, the Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale substantially in the form attached hereto as Exhibit A, so that the Shares may be properly transferred. (f) The Company agrees that it shall, immediately prior to the Registration Statement being declared effective, deliver to its transfer agent an opinion letter of counsel, opining that at any time the Registration Statement is effective, the transfer agent shall issue, in connection with the sale of the Shares, certificates representing such Shares without restrictive legend, provided the Shares are to be sold pursuant to the Prospectus contained in the Registration Statement and the transfer agent receives a Certificate of Subsequent Sale in the form attached hereto as Exhibit "A." Upon receipt of such opinion, the Company shall cause the transfer agent to confirm, for the benefit of the Investor, that no further opinion of counsel is required at the time of transfer in order to issue such Shares without restrictive legend. The Company shall cause its transfer agent to issue a certificate without any restrictive legend to a purchaser of any Shares from the Investor at Investor's expense and upon request of Investor, if (a) the sale of such Shares is registered under the Registration Statement (including registration pursuant to Rule 415 under the Securities Act) and the Investor has delivered a Certificate of Subsequent Sale to the Transfer Agent; (b) the holder has provided the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Shares may be made without registration under the Securities Act; or (c) such Shares are sold in compliance with Rule 144 under the Securities Act. In addition, the Company shall, at the Investors expense and upon request of the Investor, remove the restrictive legend from any Shares held by the Investor following the expiration of the holding period required by Rule 144(k) under the Securities Act (or any successor rule). 3. INDEMNIFICATION. For the purpose of this Section 3: (a) the term "SELLING SHAREHOLDER" shall mean the Investor and each person, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act; (b) the term "REGISTRATION STATEMENT" shall mean the final Prospectus, supplement or amendment thereto (or deemed to be a part thereof) referred to in Section 1; and (c) the term "UNTRUE STATEMENT" shall mean any material untrue statement, or any material omission of a statement of a material fact required to be made therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading. (d) (i) The Company agrees to indemnify and hold harmless each Selling Shareholder from and against any losses, or damages to which such Selling Shareholder may incur (under the Securities Act or otherwise) insofar as such losses or damages arise out of (i) any untrue statement of a material fact contained in the Registration Statement, or (ii) any inaccuracy in the representations of the Company contained in this Agreement. The Company will reimburse such Selling Shareholder for any reasonable legal expense incurred or any out of pocket expenses reasonably incurred in defending any such claim or action; provided, however, that the Company shall not be liable in any such case Registration Rights Agreement Page 4 of 10 to the extent that such loss or damage arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Shareholder for use in preparation of the Registration Statement, or any inaccuracy in representations made by such Selling Shareholder in the Investor Questionnaire or the failure of such Selling Shareholder to comply with its covenants and agreements contained in Sections in this Agreement or contained in the Securities Purchase Agreement or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Selling Shareholder prior to the pertinent sale or sales by the Selling Shareholder. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Company from the Investor as a result of the Offering. (ii) The Investor agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses or damage to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such loss or damage (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any failure to comply with the covenants and agreements contained in this Agreement or of the Securities Purchase Agreement or (ii) any untrue statement of a material fact contained in the Registration Statement if, and only if, such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Investor specifically for use in preparation of the Registration Statement. The Investor will reimburse the Company (or such officer, director or controlling person), as the case may be, for any reasonable legal expense or other actual accountable out-of-pocket expenses reasonably incurred in defending any such claim, action or proceeding. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Investor from the sale of the Shares pursuant to the Registration Statement. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 3, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 3 (except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend such action) or from any liability otherwise than under this Section 3. Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof (unless it has failed to assume the defense thereof and appoint counsel reasonably satisfactory to the indemnified party), such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the reasonable opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such settlement; provided that such consent shall not be unreasonably Registration Rights Agreement Page 5 of 10 withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could reasonably have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (iv) If the indemnification provided for in this Section 3 is unavailable to or insufficient to hold harmless an indemnified party under paragraphs 3(d)(i) or 3(d)(ii) above in respect of any loss or damage (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss or damage (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Investor on the other in connection with the statements or omissions or other matters which resulted in such loss or damage (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or the Investor on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Investors were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the loss or damage (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any reasonable legal fees incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this subsection (d), the Investor shall not be required to contribute any amount in excess of the amount by which the gross amount received by the Investor from the sale of the Shares to which such loss relates exceeds the amount of any damages which the Investor has otherwise been required to pay by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Investors' obligations in this subsection to contribute are several in proportion to their sales of Shares to which such loss relates and not joint. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 3, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 3 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Securities Act and the Exchange Act. 4. Additonal Piggyback Registration Rights. (a) At any time within two (2) years following the Effective Date, unless the registration statement pursuant to Section 1 above is filed, if the Company proposes to register any Common Stock for its own or others' account under the Securities Act of 1933, (other than the registration required by Section 1 above) (an "Alternative Registration"), then the Company shall give each Investor prompt written notice of its intent to register such securities (the "Registration Notice") at least thirty (30) days prior to the filing of the Alternative Registration statement with the SEC. The Registration Notice shall specify the approximate date on which the Company proposes to file such Alternative Registration statement and shall contain a statement that each Investor is entitled to participate in such Alternative Registration, and shall set forth the number of shares of Common Stock that may be registered as a part Registration Rights Agreement Page 6 of 10 of the Alternative Registration. Each Investor desiring to participate in such Alternative Registration shall notify the Company no later than twenty (20) days following receipt of the Registration Notice of the aggregate number of shares of Common Stock that such Investor then desires to sell in the offering. This piggy back registration provision shall be merely supplemental to, and shall not in any way otherwise diminish, the obligation to file the registration statement described in Section 1 above. 5. TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent imposed by Section 4 of the Securities Purchase Agreement or this Agreement upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares when such Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares or at such time as an opinion of counsel satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 6. INFORMATION AVAILABLE. So long as the Registration Statement is effective covering the resale of Shares owned by the Investor, the Company will furnish (or, to the extent such information is available electronically through the Company's filings with the SEC, the Company will make available) to the Investor: (a) as soon as practicable after it is available, one copy of (i) its Annual Report to Shareholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants) and (ii) if not included in substance in the Annual Report to Shareholders, its Annual Report on Form 10-K (the foregoing, in each case, excluding exhibits); and, (b) upon the reasonable request of the Investor, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses either in printed or electronic form. 7. LIMITS ON ADDITIONAL ISSUANCES. Except for the issuance of stock options under the Company's stock option plan, the issuance of warrants to purchase the Company's common stock, or the issuance of common stock under the Company's employee stock purchase plan or upon exercise of outstanding options and warrants and the offering contemplated hereby, the Company will not, for a period of three (3) months following the Closing Date, offer for sale or sell any securities unless, in the opinion of the Company's counsel, such offer or sale does not jeopardize the availability of exemptions from the registration and qualification requirements under applicable securities laws with respect to the Offering. The foregoing shall not apply to securities issued in connection with any acquisition, including by way of merger, or purchase of stock or all or substantially all of the assets of any third party. The foregoing provisions shall not prevent the Company from filing a "shelf" registration statement pursuant to Rule 415 under the Securities Act, but the foregoing provisions shall apply to any sale of securities thereunder. 8. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to such carrier, (iv) if delivered by facsimile, upon electric confirmation of Registration Rights Agreement Page 7 of 10 receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attention: James L. Dunn, Jr. General Counsel Telephone: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (214) 953-6000 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 9. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 10. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 11. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Registration Rights Agreement Page 8 of 10 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 9, 2006 Sophrosyne Technology Fund, Ltd. ----------------------------------------------- [INVESTOR NAME] By: /s/ Benjamin James Taylor ------------------------------------------- Name: Benjamin James Taylor Title: Director Address: Ogier Fiduciary Services (Cayman) Ltd. -------------------------------------- Queensgate House, South Church St. ----------------------------------------------- P.O. Box 1234 GT, Grand Cayman ----------------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ---------------------------------- Name: James M. Powers, Jr. Title: President Registration Rights Agreement Page 9 of 10 EXHIBIT A ILINC COMMUNICATIONS, INC. CERTIFICATE OF SUBSEQUENT SALE [Transfer Agent] ______________________________ ______________________________ RE: Sale of Shares of Common Stock of iLinc Communications, Inc. (the "Company") pursuant to the Company's Prospectus dated _______________, 2005 (the "Prospectus") Dear Sir/Madam: The undersigned hereby certifies, in connection with the sale of shares of Common Stock of the Company included in the table of Selling Shareholders in the Prospectus, that the undersigned has sold the Shares pursuant to the Prospectus and in a manner described under the caption "Plan of Distribution" in the Prospectus and that such sale complies with all applicable securities laws, including, without limitation, the Prospectus delivery requirements of the Securities Act of 1933, as amended. Selling Shareholder (the beneficial owner): ___________________________ Record Holder (e.g., if held in name of nominee): _____________________ Restricted Stock Certificate No.(s): __________________________________ Number of Shares Sold: ________________________________________________ Date of Sale: _________________________________________________________ In the event that you receive a stock certificate(s) representing more shares of Common Stock than have been sold by the undersigned, then you should return to the undersigned a newly issued certificate for such excess shares in the name of the Record Holder and BEARING A RESTRICTIVE LEGEND. Further, you should place a stop transfer on your records with regard to such certificate. Dated: ______________________ Very truly yours, By: _________________________________ Print Name: _________________________ Title: ______________________________ A-1 Registration Rights Agreement Page 10 of 10 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made as of the date set forth below (the "Effective Date") between iLinc Communications, Inc., a Delaware corporation (the "COMPANY"), and the purchasers of its Common Stock (as defined below) pursuant to a Securities Purchase Agreement dated as of the date hereof (each in "Investor" and, collectively, the "Investors"). Capitalized terms used and not defined herein shall have the respective meanings ascribed to them in the Securities Purchase Agreement. RECITALS WHEREAS, the Company has sold 5,405,405 shares (the "SHARES") of its common stock, $0.001 par value per share, (the "COMMON STOCK"), to certain investors in a private placement (the "OFFERING"); and WHEREAS, the execution and delivery of this Agreement by the Company is a condition to the completion of the Offering. NOW, THEREFORE, the parties hereto agree as follows: 1. REGISTRATION PROCEDURES AND EXPENSES. The Company shall: (a) subject to receipt of necessary information from the Investors, prepare and file with the Securities and Exchange Commission ("SEC"), within thirty (30) days after the Closing Date (the "REQUIRED FILING DATE"), a Registration Statement on Form S-3 to enable the resale of the Shares by the Investors from time to time; (b) subject to receipt of necessary information from the Investors, to cause the Registration Statement to become effective as soon as practicable, but in no event later than ninety (90) days after the Required Filing Date (the "REQUIRED EFFECTIVE DATE"). If the Registration Statement (i) has not been filed by the Required Filing Date or (ii) has not been declared effective by the SEC on or before the Required Effective Date, then the Company shall, immediately following the Required Filing Date (if not then so filed) and the Required Effective Date (if not then so effective), and on each 30th day anniversary thereafter, make a payment to the Investor as compensation for such delay (the "LATE REGISTRATION PAYMENTS") an amount equal to one percent (1%) of the Purchase Price paid for the Shares purchased by the Investor, until the Registration Statement is filed or declared effective by the SEC. Notwithstanding the foregoing, in no event shall the total of all Late Registration Payments exceed in the aggregate ten percent (10%) of such Purchase Price. Late Registration Payments, if any, will be prorated on a daily basis and will be paid to Investor by wire transfer or check within five (5) Business Days after the date that each payment is due; (c) prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement current and effective for a period ending on the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Investor may sell Shares pursuant to paragraph (k) of Rule 144 under the Securities Act or any successor rule ("RULE 144") or (iii) such time as all Shares purchased by such Investor in this Offering have been sold pursuant to a registration statement or Rule 144, and to notify each Investor promptly upon the Registration Statement and each post-effective amendment thereto, being declared effective by the SEC; Registration Rights Agreement Page 1 of 10 (d) furnish to the Investor such number of copies (in paper or electronic version) of the Registration Statement and the Prospectus (including supplemental prospectuses), as the Investor may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Shares by the Investor; (e) file documents required of the Company for normal blue sky clearance in states specified in writing by the Investor; provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (f) bear all expenses (other than underwriting discounts and commissions, if any) in connection with the procedures in paragraph (a) through (e) of this Section 1 and the registration of the Shares pursuant to the Registration Statement; (g) advise the Investors, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued; and (h) with a view to making available to the Investor the benefits of Rule 144 or other rule that may permit the Investor to sell Shares without registration, the Company agrees to use its commercially reasonable efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) such date as all of the Investor's Shares may be resold pursuant to Rule 144(k) or (B) such date as all of the Investor's Shares shall have been sold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Investor upon request a written statement that the Company has complied with the reporting requirements of the Securities Act and the Exchange Act, a copy (in paper or electronic version) of the Company's most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other information as may be reasonably requested that permits the selling of any such Shares without registration. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 that the Investor shall furnish to the Company such information and representations regarding Investor, the Shares to be sold by Investor, and the intended method of disposition of such securities as shall be required to effect the registration of the Shares and/or sale under Rule 144. The Company understands that the Investor disclaims being an underwriter, but acknowledges that a determination by the SEC that the Investor is deemed an underwriter shall not relieve the Company of any obligations it has hereunder. 2. TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION. (a) The Investor agrees that it will not effect any disposition or other transfer of the Shares or its right to purchase the Shares that would constitute a sale within the meaning of the Securities Act other than transactions exempt from the registration requirements of the Securities Act, as contemplated in the Registration Statement and as described below, and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding the Investor or its plan of distribution. Registration Rights Agreement Page 2 of 10 (b) Except in the event that paragraph (c) below applies, the Company shall: (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Shares being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide the Investor with either copies of any documents filed pursuant to Section 2(b)(i) or access to such documents electronically; and (iii) upon request, inform each Investor who so requests that the Company has complied with its obligations in Section 2(b)(i) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Investor to that effect, will use its best efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Investor pursuant to Section 2(b)(i) hereof when the amendment has become effective). (c) Subject to paragraph (d) below, in the event: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any material changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall promptly deliver a certificate in writing or electronically to the Investor (the "SUSPENSION NOTICE") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Investor will refrain from selling any Shares pursuant to the Registration Statement (a "SUSPENSION") until the Investors are advised in writing by the Company that the current Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the event of any Suspension, the Company will use its reasonable best efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable after delivery of a Suspension Notice to the Investors. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Investor, the Investor shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 2(c). The Investor covenants that from the date hereof it will maintain in confidence the receipt and content of any Suspension Notice provided in accordance with this paragraph (c) in accordance with and subject to Section 4.6 of Annex I to the Securities Purchase Agreement. (d) If a Suspension is not then in effect, the Investor may sell Shares under the Registration Statement, provided that it complies with any applicable prospectus delivery requirements. Upon receipt of a request therefor, the Company will provide an adequate number of current Prospectuses to the Investor and to any other parties requiring such Prospectuses. Registration Rights Agreement Page 3 of 10 (e) In the event of a sale of Shares by the Investor, unless such requirement is waived by the Company in writing, the Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale substantially in the form attached hereto as Exhibit A, so that the Shares may be properly transferred. (f) The Company agrees that it shall, immediately prior to the Registration Statement being declared effective, deliver to its transfer agent an opinion letter of counsel, opining that at any time the Registration Statement is effective, the transfer agent shall issue, in connection with the sale of the Shares, certificates representing such Shares without restrictive legend, provided the Shares are to be sold pursuant to the Prospectus contained in the Registration Statement and the transfer agent receives a Certificate of Subsequent Sale in the form attached hereto as Exhibit "A." Upon receipt of such opinion, the Company shall cause the transfer agent to confirm, for the benefit of the Investor, that no further opinion of counsel is required at the time of transfer in order to issue such Shares without restrictive legend. The Company shall cause its transfer agent to issue a certificate without any restrictive legend to a purchaser of any Shares from the Investor at Investor's expense and upon request of Investor, if (a) the sale of such Shares is registered under the Registration Statement (including registration pursuant to Rule 415 under the Securities Act) and the Investor has delivered a Certificate of Subsequent Sale to the Transfer Agent; (b) the holder has provided the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Shares may be made without registration under the Securities Act; or (c) such Shares are sold in compliance with Rule 144 under the Securities Act. In addition, the Company shall, at the Investors expense and upon request of the Investor, remove the restrictive legend from any Shares held by the Investor following the expiration of the holding period required by Rule 144(k) under the Securities Act (or any successor rule). 3. INDEMNIFICATION. For the purpose of this Section 3: (a) the term "SELLING SHAREHOLDER" shall mean the Investor and each person, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act; (b) the term "REGISTRATION STATEMENT" shall mean the final Prospectus, supplement or amendment thereto (or deemed to be a part thereof) referred to in Section 1; and (c) the term "UNTRUE STATEMENT" shall mean any material untrue statement, or any material omission of a statement of a material fact required to be made therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading. (d) (i) The Company agrees to indemnify and hold harmless each Selling Shareholder from and against any losses, or damages to which such Selling Shareholder may incur (under the Securities Act or otherwise) insofar as such losses or damages arise out of (i) any untrue statement of a material fact contained in the Registration Statement, or (ii) any inaccuracy in the representations of the Company contained in this Agreement. The Company will reimburse such Selling Shareholder for any reasonable legal expense incurred or any out of pocket expenses reasonably incurred in defending any such claim or action; provided, however, that the Company shall not be liable in any such case Registration Rights Agreement Page 4 of 10 to the extent that such loss or damage arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Shareholder for use in preparation of the Registration Statement, or any inaccuracy in representations made by such Selling Shareholder in the Investor Questionnaire or the failure of such Selling Shareholder to comply with its covenants and agreements contained in Sections in this Agreement or contained in the Securities Purchase Agreement or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Selling Shareholder prior to the pertinent sale or sales by the Selling Shareholder. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Company from the Investor as a result of the Offering. (ii) The Investor agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses or damage to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such loss or damage (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any failure to comply with the covenants and agreements contained in this Agreement or of the Securities Purchase Agreement or (ii) any untrue statement of a material fact contained in the Registration Statement if, and only if, such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Investor specifically for use in preparation of the Registration Statement. The Investor will reimburse the Company (or such officer, director or controlling person), as the case may be, for any reasonable legal expense or other actual accountable out-of-pocket expenses reasonably incurred in defending any such claim, action or proceeding. The obligation to indemnify shall be limited to the net amount of the proceeds received by the Investor from the sale of the Shares pursuant to the Registration Statement. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 3, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 3 (except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend such action) or from any liability otherwise than under this Section 3. Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof (unless it has failed to assume the defense thereof and appoint counsel reasonably satisfactory to the indemnified party), such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the reasonable opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such settlement; provided that such consent shall not be unreasonably Registration Rights Agreement Page 5 of 10 withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could reasonably have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (iv) If the indemnification provided for in this Section 3 is unavailable to or insufficient to hold harmless an indemnified party under paragraphs 3(d)(i) or 3(d)(ii) above in respect of any loss or damage (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss or damage (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Investor on the other in connection with the statements or omissions or other matters which resulted in such loss or damage (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or the Investor on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Investors were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the loss or damage (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any reasonable legal fees incurred by such indemnified party in connection with defending any such action or claim. Notwithstanding the provisions of this subsection (d), the Investor shall not be required to contribute any amount in excess of the amount by which the gross amount received by the Investor from the sale of the Shares to which such loss relates exceeds the amount of any damages which the Investor has otherwise been required to pay by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Investors' obligations in this subsection to contribute are several in proportion to their sales of Shares to which such loss relates and not joint. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 3, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 3 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Securities Act and the Exchange Act. 4. Additonal Piggyback Registration Rights. (a) At any time within two (2) years following the Effective Date, unless the registration statement pursuant to Section 1 above is filed, if the Company proposes to register any Common Stock for its own or others' account under the Securities Act of 1933, (other than the registration required by Section 1 above) (an "Alternative Registration"), then the Company shall give each Investor prompt written notice of its intent to register such securities (the "Registration Notice") at least thirty (30) days prior to the filing of the Alternative Registration statement with the SEC. The Registration Notice shall specify the approximate date on which the Company proposes to file such Alternative Registration statement and shall contain a statement that each Investor is entitled to participate in such Alternative Registration, and shall set forth the number of shares of Common Stock that may be registered as a part Registration Rights Agreement Page 6 of 10 of the Alternative Registration. Each Investor desiring to participate in such Alternative Registration shall notify the Company no later than twenty (20) days following receipt of the Registration Notice of the aggregate number of shares of Common Stock that such Investor then desires to sell in the offering. This piggy back registration provision shall be merely supplemental to, and shall not in any way otherwise diminish, the obligation to file the registration statement described in Section 1 above. 5. TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent imposed by Section 4 of the Securities Purchase Agreement or this Agreement upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares when such Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares or at such time as an opinion of counsel satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 6. INFORMATION AVAILABLE. So long as the Registration Statement is effective covering the resale of Shares owned by the Investor, the Company will furnish (or, to the extent such information is available electronically through the Company's filings with the SEC, the Company will make available) to the Investor: (a) as soon as practicable after it is available, one copy of (i) its Annual Report to Shareholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants) and (ii) if not included in substance in the Annual Report to Shareholders, its Annual Report on Form 10-K (the foregoing, in each case, excluding exhibits); and, (b) upon the reasonable request of the Investor, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses either in printed or electronic form. 7. LIMITS ON ADDITIONAL ISSUANCES. Except for the issuance of stock options under the Company's stock option plan, the issuance of warrants to purchase the Company's common stock, or the issuance of common stock under the Company's employee stock purchase plan or upon exercise of outstanding options and warrants and the offering contemplated hereby, the Company will not, for a period of three (3) months following the Closing Date, offer for sale or sell any securities unless, in the opinion of the Company's counsel, such offer or sale does not jeopardize the availability of exemptions from the registration and qualification requirements under applicable securities laws with respect to the Offering. The foregoing shall not apply to securities issued in connection with any acquisition, including by way of merger, or purchase of stock or all or substantially all of the assets of any third party. The foregoing provisions shall not prevent the Company from filing a "shelf" registration statement pursuant to Rule 415 under the Securities Act, but the foregoing provisions shall apply to any sale of securities thereunder. 8. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if from outside the United States, by International Federal Express (or comparable service) or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, upon the Business Day received, (ii) if delivered by nationally recognized overnight carrier, one (1) Business Day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two (2) Business Days after timely delivery to such carrier, (iv) if delivered by facsimile, upon electric confirmation of Registration Rights Agreement Page 7 of 10 receipt and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph: (a) if to the Company, to: iLinc Communications, Inc. 2999 North 44th Street, Suite 650 Phoenix, AZ 85018 Attention: James L. Dunn, Jr. General Counsel Telephone: 602-952-1200 with a copy to: Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, TX 75202 Attention: James Ryan III Telephone: (214) 953-6000 (b) if to the Investor, at its address on the signature page to the Stock Purchase Agreement. 9. AMENDMENTS; WAIVER. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought. 10. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 11. ENTIRE AGREEMENT; SEVERABILITY. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without giving effect to the principles of conflicts of law. 13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Registration Rights Agreement Page 8 of 10 Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. DATED AS OF: June 9, 2006 Benjamin James Taylor and Diane Wong Shoda ------------------------------------------ [INVESTOR NAME] By: /s/ Benjamin James Taylor -------------------------------------- Name: Benjamin James Taylor By: /s/ Diane Wong Shoda -------------------------------------- Name: Diane Wong Shoda Address: 54 E. Allendale Avenue -------------------------------- Allendale, NJ 07401 ----------------------------------------- AGREED AND ACCEPTED: iLinc Communications, Inc. By: /s/ James M. Powers, Jr. ---------------------------------- Name: James M. Powers, Jr. Title: President Registration Rights Agreement Page 9 of 10 EXHIBIT A ILINC COMMUNICATIONS, INC. CERTIFICATE OF SUBSEQUENT SALE [Transfer Agent] ______________________________ ______________________________ RE: Sale of Shares of Common Stock of iLinc Communications, Inc. (the "Company") pursuant to the Company's Prospectus dated _______________, 2005 (the "Prospectus") Dear Sir/Madam: The undersigned hereby certifies, in connection with the sale of shares of Common Stock of the Company included in the table of Selling Shareholders in the Prospectus, that the undersigned has sold the Shares pursuant to the Prospectus and in a manner described under the caption "Plan of Distribution" in the Prospectus and that such sale complies with all applicable securities laws, including, without limitation, the Prospectus delivery requirements of the Securities Act of 1933, as amended. Selling Shareholder (the beneficial owner): ___________________________ Record Holder (e.g., if held in name of nominee): _____________________ Restricted Stock Certificate No.(s): __________________________________ Number of Shares Sold: ________________________________________________ Date of Sale: _________________________________________________________ In the event that you receive a stock certificate(s) representing more shares of Common Stock than have been sold by the undersigned, then you should return to the undersigned a newly issued certificate for such excess shares in the name of the Record Holder and BEARING A RESTRICTIVE LEGEND. Further, you should place a stop transfer on your records with regard to such certificate. Dated: ______________________ Very truly yours, By: _________________________________ Print Name: _________________________ Title: ______________________________ A-1 Registration Rights Agreement Page 10 of 10 EX-12 5 ilinc_10kex-12.txt EXHIBIT 12 ILINC COMMUNICATIONS, INC. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the Company's earnings to fixed charges for the periods indicated: YEAR ENDED MARCH 31, ------------------------------------------- 2006 2005 2004 ------------- --------------- ----------- Ratio of Earnings to Fixed Charges (a) (a) (a) (a)
(a) Due to the loss recorded in 2006, 2005, and 2004, the ratio coverage was less than 1:1. The Company would have needed to generate additional earnings of $1.3 million, $5.2 million, and $2.3 million to achieve a ratio coverage of 1:1 in 2006, 2005, and 2004. For the purposes of computing the consolidated ratio of earnings to fixed charges, earnings consist of income before income taxes and extraordinary items. Fixed charges consist of interest on all indebtedness, amortization of debt discount and expense, and that portion of rental expense that the Company believes to be representative of interest. EX-21.1 6 ilinc_10kex21-1.txt EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Liberty Acquisition Corporation, a Tennessee corporation and wholly owned subsidiary of iLinc Communications, Inc. 2. Special Omega Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of iLinc Communications, Inc. 3. Pentegra Investments, Inc., a Delaware corporation and wholly owned subsidiary of iLinc Communications, Inc. 4. Edge Acquisition Subsidiary, Inc., a Delaware Corporation and wholly owned subsidiary of iLinc Communications, Inc. 5. TW Acquisition Subsidiary, Inc., a Delaware Corporation and wholly owned subsidiary of iLinc Communications, Inc. EX-23.1 7 ilinc_10kex23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the iLinc Communications, Inc. Registration Statement on Form S-8 (No. 333-71332) , the Registration Statement on Form S-3 (No. 333-113380) and the Registration Statement on Form S-3 (No. 123248) of our report dated June 13, 2006, on the consolidated balance sheet of iLinc Communications, Inc. as of March 31, 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, which report appears in iLinc Communications, Inc.'s Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated June 13, 2006, relating to the financial statement schedule, which appears in this Form 10-K. /s/ Epstein, Weber & Conover PLC - ----------------------------------- Scottsdale, Arizona June 13, 2006 EX-23.2 8 ilinc_10kex23-2.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the iLinc Communications, Inc. Registration Statement on Form S-8 (No. 333-71332), the Registration Statement on Form S-3 (No. 333-113380) and the Registration Statement on Form S-3 (No. 123248) of our report dated May 21, 2004 (which contains an explanatory paragraph indicating substantial doubt about iLinc Communications, Inc.'s ability to continue as a going concern), relating to the consolidated financial statements appearing in the Company's Annual Report on Form 10-K for the year ended March 31, 2004. We also consent to the incorporation by reference of our report dated May 21, 2004 relating to the financial statement schedules which appear in this Form 10-K. /s/ BDO Seidman, LLP - -------------------- Costa Mesa, California June 29, 2006 EX-31.1 9 ilinc_10kex31-1.txt EXHIBIT 31.1 CERTIFICATION I, James M. Powers, Jr. certify that: 1. I have reviewed this annual report on Form 10-K of iLinc Communications, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, possess, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ James M. Powers, Jr. ---------------------------------------- James M. Powers, Jr., Chairman of the Board, President and Chief Executive Officer June 29, 2006 EX-31.2 10 ilinc_10kex31-2.txt EXHIBIT 31.2 CERTIFICATION I, James L. Dunn, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of iLinc Communications, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, possess, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ James L. Dunn, Jr. ---------------------------------- James L. Dunn, Jr. Senior Vice President and Chief Financial Officer June 29, 2006 EX-32.1 11 ilinc_10kex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of iLinc Communications, Inc. (the "Company") on Form 10-K for the period ending March 31, 2006 as filed with the Securities Exchange Commission on the date hereof (the "Report"), I, James M. Powers, Jr., Chief Executive Officer of the Company, hereby certify, to my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James M. Powers, Jr. ---------------------------------- James M. Powers, Jr., Chairman of the Board, President and Chief Executive Officer June 29, 2006 EX-32.2 12 ilinc_10kex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of iLinc Communications, Inc. (the "Company") on Form 10-K for the period ending March 31, 2006 as filed with the Securities Exchange Commission on the date hereof (the "Report"), I, James L. Dunn, Jr., Senior Vice President and Chief Financial Officer of the Company, hereby certify, to my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James L. Dunn, Jr. ------------------------------------- James L. Dunn, Jr. Senior Vice President and Chief Financial Officer June 29, 2006 -----END PRIVACY-ENHANCED MESSAGE-----