-----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, MY2/xgsayrdMtXEbvI6OnqECAlizFXV0eV68Oa2rzaB6+9INU33Fe8fl/WoY4Lin Uix9GFhpTMKmP9Vj0qhrlw== 0000912057-01-540260.txt : 20020411 0000912057-01-540260.hdr.sgml : 20020411 ACCESSION NUMBER: 0000912057-01-540260 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: I LINK INC CENTRAL INDEX KEY: 0000849145 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 592291344 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17973 FILM NUMBER: 1794505 BUSINESS ADDRESS: STREET 1: 13751 S WADSWORTH PK DR SUITE 200 STREET 2: STE 200 CITY: DRAPER STATE: UT ZIP: 84020 BUSINESS PHONE: 8015765000 MAIL ADDRESS: STREET 1: 13751 S WADSWORTH PK DR STREET 2: STE 200 CITY: DRAPER STATE: UT ZIP: 84020 FORMER COMPANY: FORMER CONFORMED NAME: MEDCROSS INC DATE OF NAME CHANGE: 19920703 10-Q 1 a2063563z10-q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES sEXCHANGE ACT OF 1934 For the transition period from ___________ to Commission file number: 0-17973 I-LINK INCORPORATED (Exact name of registrant as specified in its charter) FLORIDA 59-2291344 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 13751 S. WADSWORTH PARK DRIVE, SUITE 200, DRAPER, UTAH 84020 (Address of principal executive offices) (801) 576-5000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter time period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / ----------- As of November 6, 2001, the registrant had outstanding 116,549,667 shares of $0.007 par value common stock. The disclosures set forth Part II Item 1 in the registrant's Form 10-Q for the period ended June 30, 2001 filed on August 20, 2001are incorporated in Part II Item 1 herein. ================================================================================ PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 ASSETS (Unaudited) -------------- -------------- Current assets: Cash and cash equivalents $ 1,712,934 $ 2,155,628 Accounts receivable, less allowance for doubtful accounts of $1,667,000 and $100,665 as of September 30, 2001 and December 31, 2000, respectively 16,202,362 3,357,856 Prepaid expenses 3,579,417 - Other current assets 1,988,759 385,891 -------------- -------------- Total current assets 23,483,472 5,899,375 Furniture, fixtures, equipment and software, net 23,567,913 10,983,273 Intangible assets, net 2,294,040 3,939,226 Other assets 1,693,250 835,618 -------------- -------------- $ 51,038,675 $ 21,657,492 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 7,292,663 $ 5,370,490 Accrued liabilities 12,869,492 3,327,900 Unearned revenue 3,533,596 14,885,592 Current portion of long-term debt 1,646,988 785,971 Notes payable to a related party 22,090,259 7,768,000 Accrued interest on notes payable to a related party 657,850 2,376,498 Current portion of obligations under capital leases 4,895,897 1,445,690 -------------- -------------- Total current liabilities 52,986,745 35,960,141 Notes payable 1,577,235 796,662 Notes payable and accrued interest - related party 11,618,972 - Unearned revenue - 1,666,667 Obligations under capital leases 7,458,964 338,263 -------------- -------------- 73,641,916 38,761,733 -------------- -------------- Commitments and contingencies (Note 8) Redeemable preferred stock - Class M - 11,734,820 -------------- -------------- Stockholders' deficit: Preferred stock, $10 par value, authorized 10,000,000 shares, issued and outstanding 769 and 24,435 at September 30, 2001 and December 31, 2000, respectively, liquidation preference of $761,310 at September 30, 2001 7,690 244,350 Common stock, $.007 par value, authorized 300,000,000 shares, issued and outstanding 116,549,547 and 28,136,506 at September 30, 2001 and December 31, 2000, respectively 815,849 196,957 Additional paid-in capital 128,851,786 106,622,114 Accumulated deficit (152,278,566) (135,902,482) -------------- -------------- Total stockholders' deficit (22,603,241) (28,839,061) -------------- -------------- $ 51,038,675 $ 21,657,492 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 1 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- -------------- ------------- --------------- Revenues: Telecommunication services $ 25,274,900 $ 3,666,119 $ 49,104,324 $ 13,542,438 Marketing services - - - 463,740 Technology licensing and development 1,419,998 1,432,301 4,276,895 7,678,707 Other 433,174 444,582 1,618,216 2,154,862 -------------- -------------- -------------- -------------- Total revenues 27,128,072 5,543,002 54,999,435 23,839,747 -------------- -------------- -------------- -------------- Operating costs and expenses: Telecommunication network expense 22,988,640 5,736,946 43,014,152 17,387,954 Marketing services - - - 456,354 Selling, general and administrative 9,894,235 4,242,074 19,335,976 13,778,795 Provision for (benefit from) doubtful accounts 1,276,740 (300,667) 2,654,496 79,236 Depreciation and amortization 3,204,871 1,565,065 7,186,662 4,614,770 Research and development 434,651 1,085,236 2,025,023 2,759,594 Impairment of goodwill 8,040,054 - 8,040,054 - -------------- -------------- -------------- -------------- Total operating costs and expenses 45,839,191 12,328,654 82,256,363 39,076,703 -------------- -------------- -------------- -------------- Operating loss (18,711,119) (6,785,652) (27,256,928) (15,236,956) -------------- -------------- -------------- -------------- Other income (expense): Interest expense (1,816,722) (339,429) (2,831,354) (1,133,752) Interest and other income 25,212 249,940 76,872 400,737 Settlement expense - - - (639,565) -------------- -------------- -------------- -------------- Total other income (expense) (1,791,510) (89,489) (2,754,482) (1,372,580) -------------- -------------- -------------- -------------- Net loss $(20,502,629) $(6,875,141) $(30,011,410) $(16,609,536) ============== ============== ============== ============== CALCULATION OF NET LOSS PER COMMON SHARE: Net Loss $(20,502,629) $(6,875,141) $(30,011,410) $(16,609,536) Cumulative preferred stock dividends (5,595) (402,529) (27,610) (1,221,231) Dividends accrued and paid on Class M redeemable preferred stock - - (269,027) - Net effect on retained earnings of redemption and reissuance of Class M and N preferred stock, including beneficial conversion features - - 15,512,473 - -------------- -------------- -------------- -------------- Net loss applicable to common stock $(20,508,224) $(7,277,670) $(14,795,574) $(17,830,767) ============== ============== ============== ============== Basic and diluted weighted average shares outstanding 113,672,070 27,850,335 93,333,115 26,639,187 ============== ============== ============== ============== Net loss per common share - basic and diluted $ (0.18) $ (0.26) $ (0.16) $ (0.67) ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 2 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)
Preferred Stock Common Stock ------------------- ---------------------- Additional Accumulated Shares Amount Shares Amount Paid-in Capital Deficit -------- --------- ----------- -------- ---------------- ------------- BALANCE AT DECEMBER 31, 2000 24,435 $ 244,350 28,136,506 $ 196,957 $ 106,622,114 $(135,902,482) Conversion of convertible debt and accrued interest into Class M mezzanine preferred stock and common warrants - - - - 6,377,673 - Common stock issued and accumulated deficit acquired as a result of WebToTel acquisition and conversion of notes payable - - 17,454,333 122,182 11,822,812 (1,246,834) Stock issued - employee stock purchase plan - - 34,518 241 15,338 - Repurchase of Class M mezzanine preferred stock - - - - - - Repurchase of Class N preferred stock (14,404) (144,040) - - (14,164,060) - Net contribution from repurchase/settlement with stockholders of Class M and N preferred stock - - - - (5,000,000) 30,292,319 Contingent beneficial conversion feature on Class N preferred stock - - - - 9,779,846 (9,779,846) Issuance of common shares to related party to repurchase warrants outstanding - - 5,000,000 35,000 (35,000) - Reissuance and conversion of Class M redeemable preferred stock into common stock - - 50,442,857 353,100 3,696,900 - Reissuance and conversion of Class N preferred stock into common stock - - 11,523,159 80,662 869,338 - Beneficial conversion feature on the reissuance of Class M and N preferred stock - - - - 5,000,000 (5,000,000) Other conversions of Class N preferred stock into common stock (13) (130) 9,143 64 66 - Warrants issued in connection with certain notes payable to related party - - - - 2,079,456 - Beneficial conversion feature on certain convertible note payable to related party - - - - 1,092,143 - Conversion of Class C preferred stock into common stock (9,249) (92,490) 3,415,015 23,905 68,585 - Dividend on Class C preferred stock paid in the form of common stock - - 534,016 3,738 626,575 (630,313) Net loss - - - - - (30,011,410) -------- --------- ----------- --------- -------------- -------------- BALANCE AT SEPTEMBER 30, 2001 769 $ 7,690 116,549,547 $ 815,849 $ 128,851,786 $(152,278,566) ======== ========= =========== ========= ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, --------------------------------- 2001 2000 ------------- ------------- Cash flows from operating activities: Net loss $ (30,011,410) $ (16,609,536) Adjustments to reconcile net loss to net cash used in (provided by) operating activities: Depreciation and amortization 7,186,662 4,614,770 Impairment of goodwill 8,040,054 - Provision for doubtful accounts 2,654,496 79,236 Common stock issued as payment of accrued liabilities - 740,587 Amortization of discount on notes payable to a related party 888,468 - Amortization of deferred compensation on stock options issued for services - 503,257 Increase (decrease) from changes in operating assets and liabilities (net of effects of acquisition of businesses): Accounts receivable (3,376,429) 818,117 Other assets (4,733,639) (294,856) Unearned revenue (11,427,632) 17,916,667 Accounts payable, accrued liabilities and accrued interest 8,858,967 (271,573) Discontinued operations - noncash charges and working capital changes - 66,162 ------------- ------------- Net cash provided by (used in) operating activities (21,920,463) 7,562,831 ------------- ------------- Cash flows from investing activities: Purchases of furniture, fixtures, equipment and software (1,527,514) (4,687,910) Acquisition of WorldxChange assets (13,000,000) - Cash received from purchase of WebToTel 233,787 - Investing activities of discontinued operations - 29,537 ------------- ------------- Net cash used in investing activities (14,293,727) (4,658,373) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of notes payable to related party 36,189,534 2,600,000 Proceeds from advance under strategic marketing agreement - 1,751,183 Payment of related party debt - (2,600,000) Payment of advance under strategic marketing agreement - (1,751,183) Payment of long-term debt (29,040) - Payment of capital lease obligations (404,578) (104,979) Proceeds from exercise of common stock warrants and options and issuances under stock purchase plan 15,580 4,274,879 Financing activities of discontinued operations - (24,204) ------------- ------------- Net cash provided by financing activities 35,771,496 4,145,696 ------------- ------------- Increase (decrease) in cash and cash equivalents (442,694) 7,050,154 Cash and cash equivalents at beginning of period 2,155,628 2,996,004 ------------- ------------- Cash and cash equivalents at end of period $ 1,712,934 $ 10,046,158 ============= ============= Cash and cash equivalents at end of period: Continuing operations $ 1,712,934 $ 9,929,375 Discontinued operations - 116,783 ------------- ------------- Total cash and cash equivalents at end of period $ 1,712,934 $ 10,046,158 ============= =============
4 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, --------------------------------- 2001 2000 ------------- ------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reclassification of Class F redeemable preferred stock from mezzanine - $ 2,338,784 Discount on note payable to related party due to warrants issued with the note $ 2,079,456 - Stock options issued for services - 54,902 Equipment acquired under capital lease obligations 9,523,590 - Conversion of notes payable to a related party and associated accrued interest to Class M redeemable preferred stock 10,305,072 - Reclassification of Class M redeemable preferred stock from mezzanine 22,039,892 - Conversion of notes payable to a related party and associated accrued interest to common stock 10,326,938 -
5 NOTE 1 - DESCRIPTION OF BUSINESS, PRINCIPLES OF CONSOLIDATION AND LIQUIDITY The consolidated financial statements include the accounts of I-Link Incorporated and its subsidiaries ("I-Link" or the "Company"). The Company's principal operations are two-fold. First, for the past five years the Company has developed and marketed enhanced communications products and services utilizing its own private intranet and both owned and leased network switching and transmission facilities. The communications solutions are delivered through the Company's proprietary technologies. Enhanced communications products and services are marketed through master agent and wholesale distributor arrangements with I-Link Communications Inc., a wholly owned subsidiary of the Company that is an FCC licensed long-distance carrier. The Company develops and licenses communications applications products and software that support multimedia communications (voice, fax and audio) over the public switched network, local area networks and the Internet. The second principal operation began on June 4, 2001, when I-Link Incorporated, through its wholly-owned subsidiary WorldxChange Corp. ("WorldxChange"), purchased certain assets and assumed certain liabilities of WorldxChange Communications, Inc. from a bankruptcy proceeding. WorldxChange is a facilities-based telecommunications carrier that provides international and domestic long-distance service to retail customers. Telecommunication services provided by WorldxChange consist primarily of a dial-around product that allows a customer to make a call from any phone by dialing a 10-10-XXX prefix. The phone call is then billed directly to the customer. Billings to these customers are primarily done through the customers' local exchange carrier ("LEC"). Marketing of the dial around product is primarily done through independent marketing agents that receive a commission. WorldxChange's retail base is comprised of residential and commercial customers located throughout the United States. On March 1, 2001, I-Link became a majority owned subsidiary of Counsel Communications LLC, which is a wholly-owned subsidiary of Counsel Corporation (US), (collectively, "Counsel"). On April 17, 2001, I-Link, WebToTel, Inc. ("WebToTel"), a subsidiary of Counsel, and its subsidiary Nexbell Communications Inc. ("Nexbell") in a stock-for-stock transaction. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial data are unaudited; however, in the opinion of the management of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of (a) the results of operations for the three-month and nine-month periods ended September 30, 2001 and 2000, (b) the financial position at September 30, 2001, and (c) cash flows for the nine-month periods ended September 30, 2001 and 2000. The December 31, 2001 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2000 and quarterly reports on Form 10-Q for the three and six-months ended March 31 and June 30, 2001. The results of operations for the three and nine-month periods ended September 30, 2001 are not necessarily indicative of those to be expected for the entire year. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET LOSS PER SHARE Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. The weighted average number of shares outstanding includes 17,454,333 shares issued by I-Link in April 2001 to acquire WebToTel as if the acquisition and related stock issuance had occurred on March 1, 2001. Options, warrants, convertible preferred stock and convertible debt are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. As the Company had a net loss applicable to common stock for the three and nine-month periods ending September 30, 2001 and 2000, basic and diluted loss per share are the same. The net loss per common share basic and diluted for the nine-months ending September 30, 2001 includes a net increase to retained earnings of $30,292,319 attributable to the redemption on March 1, 2001 of the Class M redeemable preferred stock and all Class N preferred stock owned by Winter Harbor, including redemption of the beneficial conversion feature related to such 6 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED preferred stock. In addition, there was a charge to retained earnings of $9,779,846 representing a contingent beneficial conversion feature on the Class N preferred stock resulting from the reset of the conversion price. The net loss per common share basic and diluted also reflects a $5,000,000 charge to retained earnings for the beneficial conversion feature related to the reissuance on March 1, 2001 of the Class M and Class N preferred stock to Counsel Communications, LLC. AMORTIZATION OF INTANGIBLES WebToTel acquired Nexbell on February 22, 2001 and accounted for that acquisition using the purchase method of accounting. As part of that acquisition, WebToTel recorded $9,136,427 of goodwill. This goodwill was being amortized over a five-year period. The Company continuously reviews the products it offers and their contribution to our Company and our overall strategy. As of September 30, 2001, our analysis determined that it was not economically justified to continue to maintain a portion of the Company's network related to leased lines for local access origination and Nexbell's METS product. Subsequent to September 30 2001, the company approved a plan to discontinue offering the METS product. With this determination, the Company performed an impairment analysis of the goodwill recorded in connection with the acquisition of WebToTel and its subsidiary Nexbell ("WebToTel"). The analysis was performed in response to projected losses on the METS product acquired in the WebToTel acquisition. As a result of this review, an $8,040,054 impairment charge, representing the remaining balance of the goodwill, was recorded as of September 30, 2001. The Company anticipates incurring additional operating losses in the fourth quarter of 2001 of approximately $1.3 million related to the wind down the METS product and a portion of the Company's network related to leased lines used for local access origination. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of SFAS 141 will not have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company is currently assessing, but has not yet determined the impact of SFAS 142 on its financial position and results of operations. In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations", effective for years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is currently evaluating the effects of this Statement. In August 2001, the FASB issued the Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the disposal of long-lived assets. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the potential impact, if any, the adoption of SFAS 144 will have on its financial position and results of operation. 7 NOTE 3 - SHORT TERM BORROWINGS On June 6, 2001, I-Link and Counsel entered into a Loan and Security Agreement ("Loan Agreement"). Any monies advanced to I-Link between June 6, 2001 and April 15, 2002, (in the amount not to exceed $10,000,000) will be governed by the Loan Agreement. In connection with the Loan Agreement, I-Link will execute a note payable to Counsel, due June 6, 2002. The loan is secured by all of the assets of I-Link. Outstanding balances (including any accrued and unpaid interest) under the loan bear interest at 10% per annum which interest is payable quarterly in arrears following the last business day of each quarter. However, Counsel may (and has) at its sole election allow interest to accrue and become payable at the end of the term. As of September 30, 2001, advances under this loan agreement totaled $9,159,536. To fund the acquisition of the assets purchased and liabilities assumed by WorldxChange, Counsel provided a loan to WorldxChange in the aggregate amount of $15,000,000. The loan is collateralized against all assets of WorldxChange. The loan is also guaranteed by I-Link and collateralized by the assets of I-Link. Outstanding balances (including any accrued and unpaid interest) under the loan bear interest of 10% per annum and are payable quarterly in arrears and in cash on the last business day of each quarter. The payment of cash interest by WorldxChange may be waived by Counsel. The loan will mature on June 4, 2002 but may be extended upon mutual agreement of both Counsel and I-Link. The loan may be prepaid at any time prior to the maturity, without penalty. In connection with the $15,000,000 loan, I-Link issued to Counsel a warrant to purchase 15,000,000 shares of common stock of I-Link at an exercise price of $0.60 per share. The warrants are exercisable in three tranches as follows; 5,000,000 on the date of the agreement, 5,000,000 on September 4, 2001 and December 4, 2001, respectively, in the event the loan is still outstanding on those dates. The warrants expire on June 4, 2003. The Company has recorded $2,079,455 as a discount against the $15,000,000 loan from Counsel representing the relative fair value attributed to the 10,000,000 shares exercisable as of September 30, 2001. The value of the warrants is calculated using the Black Scholes Model and is being amortized over the term of the loan. In the event the third tranche of warrants become exercisable, the Company will record additional interest expense related to the fair value of the warrants when exercisable. NOTE 4 - LONG-TERM DEBT The Company borrowed $12,000,000 under a loan agreement with Counsel Communications during 2001. Interest on the note (9% per annum) is automatically added to principal at the end of each calendar quarter. The note is convertible into I-Link's common stock at a conversion rate of $.56 per share. At any time the Company made a draw on the loan agreement and the market price of the Company's common stock was higher than the conversion rate, a debt discount was recorded equal to this beneficial conversion feature. As of September 30, 2001, debt discount of $1,092,143 has been recorded on the borrowings of $12,000,000. This discount is being accreted to interest expense over the term (three years) of the loan agreement. Included in the liabilities assumed with the WorldxChange acquisition, WorldxChange and I-Link Incorporated agreed to a non-interest-bearing obligation of $1,350,000 payable in installments of $37,500 per month for 36 months to a carrier. The Company has recorded this debt at its fair market value with an imputed interest rate of 10%, resulting in a liability in the amount of $1,162,171. The obligation is subject to reduced payments based upon future usage with the carrier. NOTE 5 - FURNITURE, FIXTURES, EQUIPMENT AND SOFTWARE In connection with the purchase of certain assets from WorldxChange Communications Inc, the Company recorded $5,247,709 in equipment and cables, including Indefeasible Rights of Use ("IRU") in telecommunication cable systems. On June 27, 2001, WorldxChange entered into a capital lease agreement to lease certain telecommunications equipment with a value of $9,524,000. Lease payments for the first six months of the lease term will be $159,000 per month. The remaining forty-two payments are $245,000 per month. 8 NOTE 6 - INCOME TAXES The Company recognized no income tax benefit from the losses generated in 2001 and 2000 because of the uncertainty of the realization of the related deferred tax asset. NOTE 7 - STOCK-BASED COMPENSATION PLANS During the nine months ended September 30, 2001, approximately 3,500,000 options to purchase the Company's common stock previously issued to employees expired or were forfeited. During the same period, there were approximately 1,800,000 options to purchase common stock issued to employees. There were no exercises of options during the nine-month period ended September 30, 2001. NOTE 8 - COMMITMENTS AND CONTINGENCIES I-Link's subsidiaries have various agreements with national carriers to lease local access spans and to purchase carrier services. The agreements include minimum usage commitments with termination penalties up to 100% of the remaining commitment. Minimum usage commitments are as follows: 2001 (fourth quarter of 2001) $ 1,600,000 2002 5,400,000 2003 3,600,000 2002 3,100,000 2003 1,300,000
As of September 30, 2001, I-Link's subsidiary Nexbell had defaulted on two equipment leases. As of September 30, Nexbell was in default on $690,000 in arrearages. Nexbell is currently in discussions with the leasing companies and has recorded its best estimate of the liability under these leases as of September 30, 2001. However, the potential range of the liability could be approximately $1.6 million greater than the recorded liability. As of September 30, 2001, I-Link was in default on an equipment lease. This lease was secured by a letter of credit issued by an affiliate of Winter Harbor LLC, a former majority shareholder of I-Link. On October 11, 2001, the leasing company drew against the letter of credit in the amount of $1,998,681. As of September 30, 2001, I-Link continues to carry the liability related to this lease in its financial statements. On October 26, 2001, I-Link received a demand for payment from Winter Harbor LLC for the amount of the draw on the letter of credit and interest since October 11, 2001. The Company is evaluating Winter Harbor's demand in light of the various agreements entered into between the Company, Counsel Communications LLC and Winter Harbor. While the Company believes that it will not be required to pay cash to Winter Harbor of the amount claimed, there can be no assurance as to the ultimate outcome of this matter. WorldxChange has entered into operating lease agreements to lease space at various switch sites and at its headquarters. These lease agreements include commitments as follows: 2001 $ 1,000,000 (fourth quarter of 2001) 2002 3,000,000 2003 1,200,000 2004 500,000 2005 500,000 Thereafter through 2010 11,000,000 ------------ Total $ 17,200,000
9 NOTE 9 - PREFERRED STOCK On September 6, 2001, all outstanding shares of the Company's Class C preferred stock automatically converted into shares of common stock according to the terms of the designation of the Class C preferred stock. Accordingly, 9,249 shares of Class C preferred stock were converted into 3,415,015 shares of common stock. In addition to the conversion of the preferred stock, the Company was obligated to pay dividends declared but unpaid and other dividends not paid on the preferred stock through the conversion date. Accordingly, dividends in the amount of $630,313 were paid through the issuance of 534,016 shares of common stock. NOTE 10 - LEGAL PROCEEDINGS On January 18, 2001, I-Link filed action against Red Cube, International AG and Red Cube, Inc. ("Red Cube") in federal court in Utah seeking damages against Red Cube, for an alleged default on an agreement to provide approximately $60,000,000 in equity funding to I-Link, and instituting a scheme to drive I-Link out of business and obtain control of I-Link's proprietary technology, telecommunications network, key employees and customers. I-Link obtained a temporary restraining order against Red Cube preventing Red Cube from interfering with I-Link's employees, vendors and customers. Red Cube commenced an arbitration proceeding in New York (see next paragraph) and then filed a motion to dismiss the federal court action and compel arbitration based upon a mandatory arbitration provision in the May 2000 Cooperation and Framework Agreement by and between Red Cube and I-Link. The court found that I-Link's claims were "related to" the Cooperation and Framework Agreement and granted Red Cube's motion to dismiss for lack of subject matter jurisdiction. The dismissal resulted in this issue being submitted for arbitration pursuant to the Cooperation and Framework Agreement. On January 24, 2001, Red Cube, after the federal court action described above had been commenced against it by I-Link, delivered a written demand for arbitration and commenced an arbitration proceeding in New York alleging that I-Link breached the Cooperation and Framework Agreement by (i) threatening a shut-down of I-Link's IP telecommunications network, (ii) the resignation of Dror Nahumi as an employee of I-Link (which Red Cube claims will cause I-Link to breach its undertaking to provide certain consulting services in the event I-Link is unable to perform under the Agreement and Red Cube is required to assume primary operation and maintenance of its own IP telecommunications network based upon I-Link's technology), and (iii) I-Link's alleged failure to update the escrowed copy of its source code to the current version of the source code employed to maintain the IP telecommunications network. When the federal court action was dismissed in favor of the arbitration proceeding, I-Link filed a response in the arbitration proceeding denying all of Red Cube's claims. I-Link also filed a counterclaim against Red Cube virtually identical to the claims it initially brought against Red Cube in the federal court action seeking compensatory and/or punitive damages for Red Cube's default under a subsequent agreement to provide approximately $60,000,000 in equity funding to I-Link, and engaging in a scheme to drive I-Link out of business and obtain control of I-Link's proprietary technology, telecommunications network, key employees and customers. In May 2001, Red Cube amended its claim to include additional allegations that I-Link undertook certain unspecified "significant transactions" in violation of its agreements with I-Link's then majority shareholder, Winter Harbor, LLC (with which Red Cube was also at the time engaged in arbitration) which resulted in damage to Red Cube. I-Link has denied these additional allegations. The arbitration proceeding is in the discovery stage. In its Quarterly Report dated September 30, 2001, Ventis, a Swiss private equity investment firm and an investor in Red Cube, stated that Red Cube and Winter Harbor LLC had settled their arbitration subject to a confidentiality agreement. In June 2001, I-Link gave notice to Red Cube that it intended to cease providing international carrier services to Red Cube (representing the vast majority of all services performed for Red Cube) as a result of Red Cube's failure to provide I-Link adequate assurance of ongoing payment for such services. Red Cube sought emergency relief in the arbitration attempting to prohibit I-Link from terminating these services. A hearing was held before the arbitration panel in July 2001 and Red Cube's request for relief was denied. I-Link ceased providing international carrier services to Red Cube immediately thereafter. On September 28, 2001, The Nasdaq Stock Market Inc. issued an order delisting I-Link's common stock from The Nasdaq SmallCap Market, effective October 1, 2001. I-Link's common stock is now traded on the OTC-Electronic Bulletin Board. We are involved in litigation relating to claims arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse affect to us. 10 NOTE 11 - SEGMENT OF BUSINESS REPORTING The Company's four reportable segments are as follows: - - Telecommunications services - includes long-distance toll services, origination and termination services (I-Link and Nexbell) and enhanced calling features such as the One-Number service (formerly know as V-Link). The telecommunications services products are marketed primarily to residential and small business customers. - - Dial-around telecommunication services - includes operations of WorldxChange that offers a dial around telecommunications product through independent marketing agents. This business was entered into effective June 4, 2001 with the Company's purchase of certain assets and liabilities of WorldxChange Communications, Inc. - - Marketing services - includes training and promotional materials to independent sales representatives (IRs) in the network marketing sales channel. Additionally, revenues are generated from registration fees paid by IRs to attend regional and national sales conferences. This segment ceased operations in February 2000. - - Technology licensing and development - provides research and development to enhance the Company's product and technology offerings. Products developed by this segment include One Number, Indavo, and other proprietary technology. The Company licenses certain developed technology to third party users such as Red Cube. There are no intersegment revenues. The Company's business is conducted principally in the U.S.; foreign operations are not material. The table below presents information about revenues from external customers and net loss for the three-month and six-month periods ended September 30, 2001 and 2000. There has been no material change in segment assets from the amounts reported in the Company's annual report on Form 10-K for the year ended December 31, 2000 except that segment assets for dial-around telecommunication services has increased by approximately $34,000,000 due to the acquisition of WorldxChange.
FOR THE THREE-MONTH FOR THE NINE-MONTH PERIOD ENDED PERIOD ENDED ------------------------------------ ------------------------------------- SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 -------------- --------------- ---------------- --------------- REVENUES FROM EXTERNAL CUSTOMERS: Telecommunications services $ 4,221,000 $ 4,111,000 $ 23,303,000 $ 15,297,000 Dial-around telecommunication services 21,487,000 - 27,419,000 - Marketing services - - - 464,000 Technology licensing and development 1,420,000 1,432,000 4,277,000 8,079,000 -------------- --------------- ---------------- --------------- Total revenues from external customers for reportable segments $ 27,128,000 $ 5,543,000 $ 54,999,000 $ 23,840,000 ============== =============== ================ =============== SEGMENT INCOME (LOSS): Telecommunications services $ (13,274,000) $(2,761,000) $ (15,416,000) $ (6,548,000) Dial-around telecommunication services (3,001,000) - (4,243,000) - Marketing services - (50,000) - (204,000) Technology licensing and development 573,000 (96,000) 951,000 3,875,000 -------------- --------------- ---------------- --------------- Total segment income (loss) for reportable Segments (15,702,000) (2,907,000) (18,708,000) (2,877,000)
11
FOR THE THREE-MONTH FOR THE NINE-MONTH PERIOD ENDED PERIOD ENDED -------------------------------------- ------------------------------------- SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 -------------- -------------- -------------- -------------- Unallocated non-cash amounts in consolidated net loss: Settlement expense - - - (640,000) Amortization of discount on notes payable (784,000) - (888,000) - Amortization of deferred compensation on stock options issued for services - (122,000) - (503,000) Amortization of intangible assets (549,000) (626,000) (1,645,000) (2,064,000) Other corporate expenses (3,468,000) (3,220,000) (8,770,000) (10,526,000) -------------- -------------- -------------- -------------- $ (20,503,000) $(6,875,000) $ (30,011,000) $(16,610,000) ============== ============== ============== ==============
12 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information contained in the financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis set forth in our Form 10-K for the year ended December 31, 2000 and Form 10-Q for the quarters ended March 31 and June 30, 2001. FORWARD LOOKING INFORMATION THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27-A OF THE SECURITIES ACT OF 1933, AS AMENDED, SECTION 21-E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND INFORMATION RELATING TO I-LINK INCORPORATED AND SUBSIDIARIES (I-LINK) THAT ARE BASED ON MANAGEMENT'S EXERCISE OF BUSINESS JUDGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND "INTEND" AND WORDS OF SIMILAR IMPORT, ARE INTENDED TO IDENTIFY ANY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REFLECT OUR CURRENT VIEW OF FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES AS NOTED BELOW. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward-looking statements. Several of these factors include, without limitation: - - our ability to finance and manage expected rapid growth; - - the impact of competitive services and pricing; - - our ongoing relationship with our long distance carriers and vendors; - - our ability to meet our usage commitments with carriers; - - our dependence upon key personnel; - - subscriber attrition; - - the adoption of new, or changes in, accounting principles; |X| legal proceedings; - - federal and state governmental regulation of the long distance telecommunications and internet industries; - - our ability to maintain, operate and upgrade our information systems network; - - our success in deploying our Communication Engine network in internet telephony; - - the existence of demand for and acceptance of our products and services (including but not limited to dial-around service and One-Number service (formerly V-Link(TM))); - - our ability to efficiently integrate our recent acquisitions; - - the migrating of subscribers from a retail billing basis to a wholesale billing basis; - - the ultimate financial liability related to certain leases in default as of September 30, 2001; - - other risks referenced from time to time in our filings with the SEC. WE UNDERTAKE NO OBLIGATION AND DO NOT INTEND TO UPDATE, REVISE OR OTHERWISE PUBLICLY RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF ANY UNANTICIPATED EVENTS. Our principal operations are two-fold: First, for the past five years we have been an integrated voice and data communications company focused on simplifying the delivery of "Unified Communication." Unified Communication is the integration of traditional telecommunications with new data IP (Internet Protocol) communications systems with the effect of simplifying communications, increasing communication capabilities and lowering overall communication costs. Unified Communication platforms integrate telecommunication, mobile communication, paging, voice-over-IP (VoIP) and 13 Internet technologies. We have developed and marketed enhanced communications products and services utilizing our own private intranet and both owned and leased network switching and transmission facilities. The communications solutions are delivered through our proprietary technologies. Our enhanced communications products and services are marketed through master agent and wholesale distributor arrangements with I-Link Communications, our wholly owned subsidiary, that is an FCC licensed long-distance carrier. We also undertake research and development of new telecommunications services, products and technologies, and the licensing of certain of these products and technologies to other telecommunications companies. Second, beginning June 4, 2001, we purchased, through our wholly-owned subsidiary WorldxChange Corp. ("WorldxChange"), certain assets and assumed certain liabilities of WorldxChange Communications, Inc. from a bankruptcy proceeding. WorldxChange is a facilities-based telecommunications carrier that provides international and domestic long-distance service to retail customers. Telecommunication services provided by WorldxChange consist primarily of a dial-around product that allows a customer to make a call from any phone by dialing a 10-10-XXX prefix. The phone call is then billed directly to the customer. Billings to these customers are primarily done through the customers' local exchange carrier ("LEC"). Marketing of the dial around product is primarily done through independent marketing agents that receive a commission. WorldxChange's retail base is comprised of residential and commercial customers. On March 1, 2001, we became a majority owned subsidiary of Counsel Communications LLC which was a wholly-owned subsidiary of Counsel Corporation (US), (collectively, "Counsel"). On April 17, 2001, we acquired WebToTel, Inc. ("WebToTel"), a subsidiary of Counsel, and its subsidiaries including Nexbell Communications Inc. ("Nexbell") in a stock-for-stock transaction. Nexbell continued to offer a Multi-Exchange Transport Service ("METS") product originally offered by NexBell that provided customers with VoIP-based local access origination and termination services. However, Nexbell determined it is not economically justified to continue selling its product and accordingly stopped taking new orders for the product and initiated steps toward an orderly discontinuance for existing customers (expected December 1, 2001). LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of September 30, 2001 were $1,712,934 and the working capital deficit was $29,503,273 (including $22,748,109 payable to our parent company). Cash used by operating activities during the nine-month period ended September 30, 2001 was $21,920,463 as compared to cash provided by operations of $7,562,831 during the same period ended September 30, 2000. The primary reason for the change from 2000 was cash provided by operating activities in 2000 included $20,000,000 received as of September 30, 2000 from a customer, Red Cube, International AG and Red Cube, Inc. ("Red Cube"), which did not recur in 2001. Net cash used by investing activities in the nine-month period ended September 30, 2001 was $14,293,727 as compared to net cash used of $4,658,373 in the same period ended September 30, 2000. Cash used by investing activities in 2001 was attributed to $13,000,000 used to purchase the net assets of WorldxChange and $1,527,514 used to purchase equipment. These uses of cash were offset by cash of $233,787 received as part of the WebToTel acquisition. Cash used by investing activities in 2000 was primarily attributable to the purchase of network equipment of $4,687,910, which was offset by $29,537 received from the sale of assets from discontinued operations. Financing activities provided net cash of $35,771,496 in the first nine-months of 2001, as compared to cash provided of $4,145,696 in the same period of 2000. Cash provided in the first nine-months of 2001 included loans from Counsel of $36,189,534 and $15,580 from issuances of common stock which were offset by repayment of notes payable and capital lease obligations of $433,618. Cash provided in 2000 included proceeds of $2,600,000 from a note payable to a related party, $4,274,879 in net proceeds from exercises of common stock warrants and options and a $1,751,183 advance received under the strategic marketing and channel agreement with a customer. The $2,600,000 note and $1,751,183 advance were both repaid during the second quarter of 2000. Repayments of capital lease obligations of $104,979 and repayments of $24,204 on certain notes in discontinued operations offset these proceeds. 14 We incurred a net loss from continuing operations of $30,011,410 (including an $8 million non-cash impairment of goodwill) for the first nine-months of 2001, and as of September 30, 2001 had an accumulated deficit of $ 152,278,566. While we anticipate that revenues during the fourth quarter of 2001 will be greater than recorded in the third quarter of 2001, we anticipate that revenue generated from continuing operations will not be sufficient during the remainder of 2001 and into 2002 to fund our operations or continued expansion of our private telecommunications network facilities and anticipated growth in subscriber base. As of September 30, 2001, we were in default on a lease with a potential current liability of approximately $2 million and Nexbell was in default on certain leases with a potential current liability of approximately $3 million. While we are working on settlement of these potential liabilities on a favorable basis to us, the ultimate liability could have a negative effect on our liquidity and financial resources. We continue to be dependent upon funding from Counsel to fund our operational cash needs (see discussion below). CURRENT POSITION/FUTURE REQUIREMENTS While revenues from operations have increased significantly, operational expenses have also increased, thus continuing our need for sources of operational funds other than from operations. Our operational cash needs continue to be funded through our agreement with Counsel wherein Counsel committed to fund, through long-term inter-company advances or equity contribution, all capital investment, working capital or other operational cash requirements through April 15, 2002. On June 6, 2001, we entered into a Loan and Security Agreement with Counsel, pursuant to which Counsel agreed to advance up to $10 million. We no longer have any availability under that facility, and we have entered into discussions with Counsel with respect to the terms under which Counsel will advance additional funds. There can be no assurance that Counsel will continue to provide funding after April 15, 2002. We anticipate that additional funds will be necessary after such time to fund our operations and finance the planned expansion of our business communications services, product development and manufacturing, and to discharge our financial obligations. The availability of such funds will depend on prevailing market conditions, interest rates, our financial position and results of our operations. There can be no assurance that such funds will be available or if available that they will be on terms and conditions favorable to I-Link. RESULTS OF OPERATIONS In order to more fully understand the comparison of the three and nine months ended September 30, 2001 as compared to the same three and nine months in 2000, you must understand two significant business transactions that are reflected in our 2001 financial results, for which there are not comparable transactions in 2000. Specifically: 1. We acquired WebToTel Incorporated and its subsidiaries (including Nexbell) in a stock for stock transaction on April 17, 2001. However, as WebToTel and I-Link were under common control of Counsel as of March 1, 2001 (the date Counsel obtained its ownership in I-Link), we have accounted for the acquisition on an accounting method consistent with the pooling-of-interests method of accounting as of March 1, 2001. Accordingly, we have included the financial results of WebToTel and its subsidiaries subsequent to March 1, 2001. 2. On June 4, 2001 WorldxChange completed the purchase of certain assets and liabilities of WorldxChange Communication, Inc. WorldxChange continues to offer the dial-around telecommunications product, which WorldxChange Communications, Inc. had previously offered. We did not offer a comparable product prior to June 4, 2001. THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 REVENUES Telecommunications service revenue increased $21,608,781 to $25,274,900 in the three months ended September 30, 2001 as compared to $3,666,119 in the three months ended September 30, 2000. The increase is primarily the result of the acquisition of two companies. Revenue in the third quarter increased $21,487,000 related to the dial-around business of WorldxChange and $1,191,000 related to the METS product offered by Nexbell. Excluding the above revenues, recurring 15 revenues decreased $1,069,000 which was due to a decrease in revenues billed to wholesale customers in the third quarter 2001 as compared to the third quarter of 2000. We anticipate that reported revenues for the fourth quarter will be higher than the third quarter primarily because WorldxChange will begin its first major advertising campaign that the Company anticipates will result in higher revenues than those for the third quarter. The Company has determined to discontinue maintaining a potion of the Company's network related to leased lines used for local access origination and to cease offering its METS product, effectively ceasing revenues from METS as of approximately December 1, 2001. We anticipate revenues from other recurring sources will remain constant in the fourth quarter. Technology licensing and development revenue decreased $12,303 to $1,419,998 in the third quarter of 2001 as compared to $1,432,301 in the same quarter of 2000. During the three months ended September 30, 2001, licensing revenues were primarily from a $10,000,000 licensing agreement in May 2000 between Red Cube and I-Link that is being recorded over a two-year period. Accordingly, $1,250,000 was recorded in the third quarters of 2001 and 2000. As of September 30, 2001, the unearned balance of $2,917,000 has been recorded as unearned revenue. Revenue from this source will vary from quarter to quarter based on timing of future technology licensing and development projects. Other revenues in the third quarter of 2001 decreased $11,408 to $433,174 as compared to $444,582 in the same period of 2000. These revenues relate primarily to customer care, billing and accounts receivable services performed primarily for our single largest customer. Revenues from these services are expected to remain constant in the fourth quarter of 2001. However, revenues from these types of services vary from period to period based upon services requested. OPERATING COSTS AND EXPENSES Telecommunication network expense increased $17,251,694 in the third quarter of 2001 to $22,988,640 as compared to $5,736,946 for the same quarter of 2000. The primary increase was related to inclusion of network expense ($15,727,405) related to the dial-around business that we began to offer June 4, 2001 when we acquired the operations of and certain assets and liabilities of WorldxChange Communications, Inc. These expenses include the costs related to the continuing development and deployment of our communication network and expenses related to the generation of telecommunication service revenue. The remaining increase in telecommunication network expense was primarily due to the inclusion of the expense associated with the METS product in 2001. We anticipate that telecommunication network expense for the fourth quarter will be significantly different from the third quarter due to two events. First, in the fourth quarter WorldxChange will begin its first major advertising campaign which the Company anticipates will result in significantly higher revenues and related telecommunication network expense than those for the third quarter. Second, the Company has determined to discontinue offering its METS product effectively ceasing revenues as of December 1, 2001. Certain related telecommunication network expenses from METS will begin to decrease during December 2001 and continue to decline into the first quarter of 2002. Selling, general and administrative expense increased $5,652,161 to $9,894,235 in the third quarter of 2001 as compared to $4,242,074 in the third quarter of 2000. The primary components of the net increase consisted of an approximate $5,862,000 related to the WorldxChange dial-around business that began June 4, 2001. Additional increases related to Nexbell were offset by a reduction in other corporate expenses relating to the workforce reductions implemented in the first six months of 2001. We anticipate that selling, general and administrative expenses will increase dramatically as a result of the advertising campaign by WorldxChange in the fourth quarter of 2001. The provision for doubtful accounts increased $1,577,407 to $1,276,740 in the third quarter of 2001 as compared to a negative expense of ($300,667) in the same quarter of 2000. The overall increase was due to (1) provision for doubtful accounts associated with two sources of revenues, WorldxChange ($1,171,000) and Nexbell ($93,000), both of which came into existence in 2001; and (2) during the third quarter of 2000 we settled a lawsuit wherein we sued a former wholesale customer for non-payment of its bills. Prior to the third quarter of 2000 we had written off the receivable from this customer. Upon settling the lawsuit we received $300,000 for past billings, which amount reduced our bad debt expense in the third quarter of 2000. We anticipate that the relationship between telecommunication service revenues and the bad debt provision for the fourth quarter will be comparable to the third quarter. 16 Depreciation and amortization increased $1,639,806 to $3,204,871 in the third quarter of 2001 as compared to $1,565,065 in the third quarter of 2000. The increase is primarily due to depreciation and amortization relating to assets and goodwill acquired in the WebToTel and WorldxChange acquisitions. Depreciation of WorldxChange assets resulted in approximately $1,149,000 of the increase. The remainder of the increase in depreciation and amortization was due to $457,000 amortization of goodwill recorded in the WebToTel acquisition. While we anticipate depreciation will be comparable in the fourth quarter, there will be no amortization of goodwill on the WebToTel acquisition in future periods as a result of the impairment of goodwill recorded in the third quarter (see discussion on impairment of goodwill expense below). Research and development decreased $650,585 to $434,651 in the third quarter of 2001 as compared to $1,085,236 in the same period of 2000. The decrease was primarily a result of our decision to consolidate our research operations at our headquarters in Draper, Utah and an overall decrease in research and development activities during 2001. We anticipate that research and development expense will continue at a comparable amount during the fourth quarter of 2001. During the third quarter of 2001, we performed a review of the products we offer and their contribution to our Company and our overall strategy. As of September 30, 2001, our analysis determined that it was not economically justified to continue to maintain a portion of the Company's network related to leased lines used for local access origination and Nexbell's METS product. Accordingly, we performed an impairment analysis of the goodwill recorded in connection with the acquisition of WebToTel and subsidiaries ("WebToTel"). The analysis was performed in response to projected losses on the METS product acquired in the WebToTel acquisition. Additionally, subsequent to September 30, 2001, we approved a plan to discontinue offering the METS product. As a result of this review, an $8,040,054 impairment charge was recorded during the quarter. We do not anticipate any impairment expense in the fourth quarter of 2001. OTHER INCOME (EXPENSE) Interest expense increased $1,477,293 to $1,816,722 in the third quarter of 2001 as compared to $339,429 in the same quarter of 2000. The increase was due primarily to increased interest on related-party debt and non-cash interest expense. Interest in the third quarter of 2001 on related party debt was $525,000 higher compared to the same period of 2000 due to higher average balances outstanding during the three months ended September 30, 2001. We also recorded non-cash interest expense of $785,000 in the third quarter of 2001 related to the amortization of a beneficial conversion feature on convertible debt with Counsel and non-cash interest related to the value of warrants issued to Counsel in connection with a loan. Interest expense in the fourth quarter is anticipated to increase as the Company continues to accrue interest on borrowings from Counsel and continues to record non-cash interest related to the amortization of beneficial conversion feature on convertible debt and amortization of the value of warrants issued to Counsel in connection with a loan. There were no similar non-cash interest expenses recorded in the third quarter of 2000. Interest and other income decreased $224,728 to $25,212 in the third quarter of 2001 as compared to $249,940 in the same quarter of 2000. The decrease was primarily due to a decrease in the average balance of cash on hand in the third quarter of 2001 as compared to the same quarter of 2000. NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 REVENUES Telecommunications service revenue increased $35,561,886 to $49,104,324 in the first nine months of 2001 as compared to $13,542,438 in the first nine months of 2000. The increase is primarily the result of the recognition of previously reported unearned revenue related to a prepayment from Red Cube and two acquisitions during 2001. According to the terms of the agreement, Red Cube was to use services related to the prepayment prior to June 30, 2001. Unused services as of June 30, 2001 were approximately $9,543,000. As the Company has no further obligation under the prepayment arrangement, the $9,543,000 was recognized as revenue as of June 30, 2001. We do not expect any significant revenues from Red Cube in the future. Revenues also increased due to the acquisition of two companies. Revenue in the first nine months of 2001 increased $27,420,000 (representing revenues from June to September of 2001) related to the dial-around business of WorldxChange and $2,352,000 (representing revenues from March to September of 2001) related to Nexbell's METS product. These increases in telecommunications services revenues were offset by decreases in revenue which were a direct result of a shift in focus from retail to wholesale sales in addition to decreases in revenues billed to wholesale customers in 2001 as compared to revenues billed to wholesale customers in 2000. 17 Marketing services revenue, which included revenue from independent representatives for promotional and presentation materials, WebCentre, and ongoing administrative support decreased $463,740 to $0 in the first nine-months of 2001 as compared to $463,740 in the same period of 2000. The decrease was a result of transition of this network-marketing channel to Big Planet in February 2000, which caused marketing service revenues to cease. Technology licensing and development revenue decreased $3,401,812 to $4,276,895 in the first nine months of 2001 as compared to $7,678,707 in the first nine months of 2000. During the first nine months of 2001, the revenues were primarily from a $10,000,000 licensing agreement in May 2000, between Red Cube and I-Link that is being recorded over a two-year period. Accordingly, $3,750,000 was recorded in the first nine months of 2001 as compared to $2,083,333 in the first nine months of 2000. As of September 30, 2001, the unearned balance of $2,917,000 has been recorded as unearned revenue. During the first nine months of 2000, revenues of $4,000,000 were recorded related to two licensing agreements that did not recur in 2001. The additional overall decrease in technology licensing revenue was due to several other licensing agreements in 2000 which did not recur in 2001. Technology licensing revenue will vary from quarter to quarter based on timing of technology licensing and development projects. Other revenues in the first nine months of 2001 decreased $536,646 to $1,618,216 as compared to $2,154,862 in the first nine months of 2000. During the first nine months of 2000, other revenues also included royalties of $400,000 from the sale of Indavo units to a company which will not use the Indavo units over the I-Link Network. There were no comparable sales of Indavo in 2001. Decreases in other revenues relating to customer care, billing and accounts receivable services performed for our single largest customer accounted for the balance of the decrease in other revenues. Revenues from these types of services vary from period to period based upon services requested. OPERATING COSTS AND EXPENSES Telecommunication network expense increased $25,626,198 in the nine months ended September 30, 2001 to $43,014,152 as compared to $17,387,954 for the same period in 2000. These expenses include the costs related to the continuing development and deployment of our communication network and expenses related to the generation of telecommunication service revenue. The primary increase was related to inclusion of network expense ($21,043,000) related to the dial-around business that we began to offer June 4, 2001 when we acquired certain assets and liabilities of WorldxChange Communications, Inc. The remaining increase in telecommunication network expense was due to the inclusion of the expense associated with the METS product in 2001 in addition to increased expenses in 2001 related to the network buildout which began in late 2000. Marketing service costs decreased $456,354 to $0 in the first nine months of 2001 as compared to $456,354 for the same period in 2000. The decrease in expense is directly related to the transition of the network-marketing channel to Big Planet Inc. in February 2000, which resulted in the cessation of marketing service revenues and accordingly the related expenses. Selling, general and administrative expense increased $5,557,181 to $19,335,976 in the first nine months of 2001 as compared to $13,778,795 in the first nine months in 2000. The primary components of the net increase were due to additional selling, general and administrative cost of approximately $7,000,000 related to WorldxChange dial-around business that began June 4, 2001. Further increases relating to WebToTel were offset by a reduction in other corporate expenses relating to the workforce reductions in the first six months of 2001 including reduction in facilities, materials etc. and other cost cutting measures instituted by management. The provision for doubtful accounts increased $2,575,260 to $2,654,496 in the nine months of 2001 as compared to $79,236 in the same period in 2000. The increase was directly due to necessary provisions for doubtful accounts associated with two sources of revenues. During the second and third quarters of 2001 we recorded an allowance for accounts receivable from a major customer in the amount of $975,000 due to the termination of their agreement and pending arbitration. Additional reserves of $1,453,000 were recorded related to the WorldxChange dial-around business, which began June 4, 2001. Further increases relate to the WebToTel (primarily the Nexbell METS product) acquisition included in our financial statements after March 1, 2001. 18 Depreciation and amortization increased $2,571,892 to $7,186,662 in the first nine months of 2001 as compared to $4,614,770 in the first nine months of 2000. The increase is primarily due to depreciation of $1,477,000 relating to WorldxChange assets and 1,066,000 from amortization of goodwill acquired in the WebToTel acquisition. Research and development decreased $734,571 to $2,025,023 in the first nine months of 2001 as compared to $2,759,594 in the same period in 2000. The decrease was primarily a result of our decision to consolidate our research operations at our headquarters in Draper, Utah and a decrease in research and development activities during 2001. During the third quarter of 2001, we performed a review of the products we offer and their contribution to our Company and our overall strategy. As of September 30, 2001, our analysis determined that it was not economically justified to continue to maintain a portion of the Company's network related to leased lines used for local access origination and Nexbell's METS product. Accordingly, we performed an impairment analysis of the goodwill recorded in connection with the acquisition of WebToTel and subsidiaries ("WebToTel"). The analysis was performed in response to projected losses on the METS product acquired in the WebToTel acquisition. Additionally, subsequent to September 30, 2001, we approved a plan to discontinue offering the METS product. As a result of this review, an $8,040,054 impairment charge was recorded during the quarter. We do not anticipate any impairment expense in the fourth quarter of 2001. OTHER INCOME (EXPENSE) Interest expense increased $1,697,602 to $2,831,354 in the first nine months of 2001 as compared to $1,133,752 in the same period of 2000. We recorded non-cash interest expense of $888,000 in the first nine months of 2001 related to the amortization of a beneficial conversion feature on convertible debt with Counsel and amortization of the discount related to the value of warrants issued to Counsel n connection with a loan. Interest on other debt increased $522,000 as a result of increased average balances of debt outstanding. Interest and other income decreased $323,865 to $76,872 in the first nine months of 2001 as compared to $400,737 in the same period of 2000. The decrease was primarily due to a decrease in the average balance of cash on hand in the first nine months of 2001. A settlement expense of $639,565 was recorded in the first nine months of 2000. This expense is the result of an obligation to issue 129,519 shares of common stock in exchange for certain trading restrictions imposed on JNC Opportunity Fund Ltd. ("JNC") in relation to the common stock to be issued to JNC pursuant to a settlement and release agreement entered into in February 2000. There was no comparable expense in the first nine months of 2001. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of SFAS 141 will not have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company is currently assessing, but has not yet determined the impact of SFAS 142 on its financial position and results of operations. In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations", effective for years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is currently evaluating the effects of this Statement. 19 In August 2001, the FASB issued the Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the disposal of long-lived assets. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the potential impact, if any, the adoption of SFAS 144 will have on its financial position and results of operation. ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Our cash equivalents are invested with high quality issuers and limit the amount of credit exposure to any one issuer. Due to the short-term nature of the cash equivalents, we believe that we are not subject to any material interest rate risk. We did not have any foreign currency hedges or other derivative financial instruments as of September 30, 2001. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk. 20 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On January 18, 2001, I-Link filed action against Red Cube, International AG and Red Cube, Inc. ("Red Cube") in federal court in Utah seeking damages against Red Cube, for an alleged default on an agreement to provide approximately $60,000,000 in equity funding to I-Link, and instituting a scheme to drive I-Link out of business and obtain control of I-Link's proprietary technology, telecommunications network, key employees and customers. I-Link obtained a temporary restraining order against Red Cube preventing Red Cube from interfering with I-Link's employees, vendors and customers. Red Cube commenced an arbitration proceeding in New York (see next paragraph) and then filed a motion to dismiss the federal court action and compel arbitration based upon a mandatory arbitration provision in the May 2000 Cooperation and Framework Agreement by and between Red Cube and I-Link. The court found that I-Link's claims were "related to" the Cooperation and Framework Agreement and granted Red Cube's motion to dismiss for lack of subject matter jurisdiction. The dismissal resulted in this issue being submitted for arbitration pursuant to the Cooperation and Framework Agreement. On January 24, 2001, Red Cube, after the federal court action described above had been commenced against it by I-Link, delivered a written demand for arbitration and commenced an arbitration proceeding in New York alleging that I-Link breached the Cooperation and Framework Agreement by (i) threatening a shut-down of I-Link's IP telecommunications network, (ii) the resignation of Dror Nahumi as an employee of I-Link (which Red Cube claims will cause I-Link to breach its undertaking to provide certain consulting services in the event I-Link is unable to perform under the Agreement and Red Cube is required to assume primary operation and maintenance of its own IP telecommunications network based upon I-Link's technology), and (iii) I-Link's alleged failure to update the escrowed copy of its source code to the current version of the source code employed to maintain the IP telecommunications network. When the federal court action was dismissed in favor of the arbitration proceeding, I-Link filed a response in the arbitration proceeding denying all of Red Cube's claims. I-Link also filed a counterclaim against Red Cube virtually identical to the claims it initially brought against Red Cube in the federal court action seeking compensatory and/or punitive damages for Red Cube's default under a subsequent agreement to provide approximately $60,000,000 in equity funding to I-Link, and engaging in a scheme to drive I-Link out of business and obtain control of I-Link's proprietary technology, telecommunications network, key employees and customers. In May 2001 Red Cube amended its claim to include additional allegations that I-Link undertook certain unspecified "significant transactions" in violation of its agreements with I-Link's then majority shareholder, Winter Harbor, LLC (with which Red Cube was also at the time engaged in arbitration) which resulted in damage to Red Cube. I-Link has denied these additional allegations. The arbitration proceeding is in the discovery stage. In its Quarterly Report dated September 30, 2001, Ventis, a Swiss private equity investment firm and an investor in Red Cube, stated that Red Cube and Winter Harbor had settled their arbitration subject to a confidentiality agreement. In June 2001, I-Link gave notice to Red Cube that it intended to cease providing international carrier services to Red Cube (representing the vast majority of all services performed for Red Cube) as a result of Red Cube's failure to provide I-Link adequate assurance of ongoing payment for such services. Red Cube sought emergency relief in the arbitration attempting to prohibit I-Link from terminating these services. A hearing was held before the arbitration panel in July 2001 and Red Cube's request for relief was denied. I-Link ceased providing international carrier services to Red Cube immediately thereafter. The information in Part II, Item 1 of I-link's quarterly report on Form 10-Q for the period ending June 30, 2001 relating to the Company's proceedings before The Nasdaq Stock Market, Nasdaq Listing Qualifications Department ("Nasdaq") is incorporated herein by reference. On September 28, 2001, Nasdaq issued an order delisting I-Link's common stock from The Nasdaq SmallCap Market, effective October 1, 2001. I-Link's common stock is now traded on the OTC-Electronic Bulletin Board. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES As of September 30, 2001 I-Link's subsidiary Nexbell had defaulted on two equipment leases. As of September 30, Nexbell was in default on $690,000 in arrearages and approximately $3,000,000 in total. As of September 30, 2001, I-Link was in default on an equipment lease. This lease was secured by a letter of credit issued by an affiliate of Winter Harbor LLC, a former majority shareholder of I-Link. On October 11, 2001, the leasing company drew against the letter of credit in the amount of $1,998,681. As of September 30, 2001, I-link continues to carry the liability related to this lease in its financial statements. On October 26, 2001, I-Link received a demand for 21 payment from Winter Harbor LLC for the amounts of the draw on the letter of credit and interest since October 11, 2001. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held on September 20, 2001 where the stockholders considered five proposals as follows: 1. Messrs. Norman Chirite and Albert Reichmann were elected as Class III Directors of I-Link. Mr. Allan C. Silber was elected as a Class II Director. Mr. Chririte, Mr. Reichmann and Mr. Silber each received the following vote totals: 68,481,245 votes for and 629,672 votes withheld. Messrs. Henry Y. L. Toh, Hal B. Heaton, Gary J. Wasserson and Samuel L. Shimer continued as Directors. 2. A proposal to approve a discretionary reverse split of I-Link's common stock was defeated. For the vote on this proposal, the common stock voted in two groups. One group (the "Affiliates") consisted of those who were officers, directors or greater than 5% holders of the common stock. The other group ("Non-Affiliates") consisted of all other holders of common stock. The affirmative vote of a majority of the outstanding shares of BOTH GROUPS was required to approve the proposal. The voting was as follows: Affiliates: of 79,400,546 shares outstanding in the group, 61,966,057 voted for, none voted against, and none abstained. Non-Affiliates: of 33,825,290 shares outstanding in the group, 6,285,007 voted for, 821,033 voted against, and 38,160 abstained. The Non-Affiliates group did not pass the proposal, therefore it was defeated. 3. A proposal to approve an increase in the Company's authorized shares of common stock from 150 million to 300 million was approved. The vote was 67,949,361 for, 1,126,946 against and 34,610 abstained. 4. The 2001 Stock Option and Appreciation Rights Plan was approved. The vote was 67,925,946 for, 1,151,260 against and 33,711 abstained. 5. Issuances by I-Link of shares of its common stock in connection with the March 1, 2001 Senior Convertible Loan and Security Agreement between Counsel Communications LLC and I-Link and with the April 17, 2001 Agreement and Plan of Merger between WebToTel, Inc. and I-Link were ratified. The vote was 68,339,581 for, 737,931 against and 32,905 abstained. ITEM 6(a) - EXHIBITS EXHIBIT NO. EXHIBIT 4.11 2001 Stock Option and Appreciation Rights Plan, filed herewith ITEM 6(b) - REPORTS ON FORM 8-K A Current Report on Form 8-K/A#1 was filed on August 20, 2001 as an amendment to a Form 8-K filed on June 19, 2001, in order to include financial statements and pro forma financial information relative to I-Link's purchase of WorldxChange. A Current Report on Form 8-K/A#2 was filed on July 27, 2001 as an amendment to a Form 8-K/A#1 filed on June 29, 2001, to amend certain information in the unaudited pro forma combined condensed statement of operation for the year ended December 31, 2000 as originally reported in the 8-K/A#1. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. I-LINK INCORPORATED ---------------------- (Registrant) Date: November 13, 2001 By: /s/ GARY S. WASSERSON ------------------------------- Gary S. Wasserson Chief Executive Officer By: /s/ JAMES A. GIAUQUE III ------------------------------- James A. Giauque III Chief Accounting Officer 23 EX-4.11 3 a2063563zex-4_11.txt EXHIBIT 4.11 I-LINK INCORPORATED 2001 STOCK OPTION AND APPRECIATION RIGHTS PLAN ARTICLE I ESTABLISHMENT AND PURPOSE Section 1.1 I-Link Incorporated, a Florida corporation (the "Company"), hereby establishes an equity incentive plan to be named the 2001 Stock Option and Appreciation Rights Plan (the "2001 Plan" or "Plan"). Section 1.2 The purpose of the 2001 Plan is to induce persons who are officers, directors, employees and consultants of the Company or any of its subsidiaries who are in a position to contribute materially to the Company's prosperity to remain with the Company, to offer such persons incentives and rewards in recognition of their contributions to the Company's progress, and to encourage such persons to continue to promote the best interests of the Company. The 2001 Plan provides for options which qualify as incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to be issued to such persons who are employees or officers, as well as options which do not so qualify ("Non-Qualified Options") to be issued to officers, directors, employees and consultants. Section 1.3 This Plan shall be governed by, and construed in accordance with, the laws of the State of Florida. Section 1.4 All stock options and SARs, granted by the Company on or after the date that this 2001 Plan has been approved or adopted by the Company's stockholders, shall be governed by the terms and conditions of this 2001 Plan unless the terms of such option or SAR specifically indicate that it is not to be governed by this 2001 Plan. ARTICLE II ADMINISTRATION Section 2.1 All determinations under the 2001 Plan concerning the selection of persons eligible to receive awards under the 2001 Plan and with respect to the timing, pricing and amount of a grant or award under this 2001 Plan shall be made by the administrator (the "Administrator") of the 2001 Plan. The Administrator shall be either (a) the Company's Board of Directors (the "Board"), or (b) in the discretion of the Board, a committee (the "Committee") that is composed solely of two or more members of the Board. In the event the Committee is the Administrator, the Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. In such case, a majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be deemed the acts of the Committee. With respect to persons subject to Section 16 of the Securities Exchange Act of 1934 ("Exchange Act"), transactions under this 2001 Plan are intended to comply with all applicable conditions of Rule 16b-3 ("Rule 16b-3") or its successor under the Exchange Act, as such may be amended from time to time. To the extent any provision of the 2001 Plan or action by the Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator. C-1 Section 2.2 The provisions of this 2001 Plan relating to Incentive Options are intended to comply in every respect with Section 422 of the Code and the regulations promulgated thereunder ("Section 422"). In the event any future statute or regulation shall modify Section 422, this 2001 Plan shall be deemed to incorporate by reference such modification. Any stock option agreement relating to any Incentive Option granted pursuant to this 2001 Plan outstanding and unexercised at the time that any modifying statute or regulation becomes effective shall also be deemed to incorporate by reference such modification, and no notice of such modification need be given to the optionee. Any stock option agreement relating to an Incentive Option shall provide that the optionee hold his stock received upon exercise of such Incentive Option for a minimum of two years from the date of grant of the Incentive Option and one year from the date of the exercise of such Incentive Option absent the written approval, consent or waiver of the Committee. Section 2.3 All determinations made by the Administrator with respect to award grants to: (i) the chief executive officer of the Company or an individual acting in that capacity; (ii) one of the four highest compensated officers (other than the chief executive officer) of the Company; or (iii) an individual reasonably deemed likely, in the judgment of the Board of Directors or the Committee, to become an employee described in clause (i) or (ii) of this paragraph within the exercise period of any contemplated option, shall be made only by those directors who qualify as an "outside director" within the meaning of Treasury Regulation Sect. 1.162-27(e)(3), as that Regulation may be amended from time to time (the "Regulation"), under the Code, and all other directors must abstain from making any such award determinations. This limitation is subject to adjustment at the Board's discretion pursuant to Article IX herein. This limitation shall be calculated by including the number of shares of Common Stock underlying the exercise of any Option granted pursuant to this Plan (if any). Section 2.4 If any provision of this 2001 Plan is determined to disqualify the shares purchasable pursuant to the Incentive Options granted under this 2001 Plan from the special tax treatment provided by Section 422, such provision shall be deemed to incorporate by reference the modification required to qualify the shares for said tax treatment. Section 2.5 The Company shall grant Incentive Options and Non-Qualified Options (collectively, "Options") and SARs under the 2001 Plan in accordance with determinations made by the Board or the Committee pursuant to the provisions of the 2001 Plan. All Options shall be evidenced by a Stock Option Agreement and all SARs shall be evidenced by a Stock Appreciation Rights Agreement (which may or may not be incorporated into a Stock Option Agreement at the sole discretion of the Administrator). All Options granted pursuant to the 2001 Plan shall be clearly identified as Incentive Options or Non-Qualified Options. The Board or the Committee may from time to time adopt (and thereafter amend or rescind) such rules and regulations for carrying out the 2001 Plan and take such action in the administration of the 2001 Plan, not inconsistent with the provisions hereof, as it shall deem proper. The Board or, subject to the supervision of the Board, the Committee, shall have plenary discretion, subject to the express provisions of this 2001 Plan, to determine which officers, directors, employees and consultants shall be granted Options, the number of shares subject to each Option, the time or times when an Option may be exercised (whether in whole or in installments), the terms and provisions of the respective Option agreements (which need not be identical), including such terms and provisions which may be amended from time to time as shall be required, in the judgment of the Board or the Committee, to conform to any change in any law or regulation applicable hereto, and whether SARs hereto shall be granted pursuant to Article VIII; and to make all other determinations deemed necessary or advisable for the administration of the 2001 Plan. The interpretation and construction of any provisions of the 2001 Plan by the Board or the Committee (unless otherwise determined by the Board) shall be final, conclusive and binding upon all persons. Section 2.6 No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the 2001 Plan or any Option or SAR granted under it. A member of the Board or the Committee shall be indemnified by the Company, pursuant to the C-2 Company's By-Laws, for any expenses, judgments or other costs incurred as a result of a lawsuit filed against such member claiming any rights or remedies due to such member's participation in the administration of the 2001 Plan. ARTICLE III TOTAL NUMBER OF SHARES AVAILABLE TO BE OPTIONED OR GRANTED Section 3.1 There shall be reserved for issuance or transfer upon exercise of Options, to be granted from time to time under this 2001 Plan, an aggregate of 14,000,000 shares of Common Stock, $.001 par value per share, of the Company (subject to adjustment as provided in Article X hereof). The shares issued by the Company under the 2001 Plan may be either Treasury shares or authorized but unissued shares, as the Board from time to time may determine. Section 3.2 In the event that any outstanding Options under the 2001 Plan for any reason should expire or are terminated without having been exercised in full; or shares of Common Stock subject to Options are surrendered in whole or in part pursuant to SARs granted under Article VIII hereof (except to the extent that shares of Common Stock are paid to the holder of the Option upon such surrender) should be returned to Treasury, the unpurchased shares subject to such Option and any such surrendered shares or shares returned to Treasury may again be available for transfer under the 2001 Plan. Section 3.3 No Options or SARs shall be granted pursuant to this 2001 Plan to any optionee after the tenth anniversary of the earlier of the date that this 2001 Plan is adopted by the Board or the date that this 2001 Plan is approved by the Company's stockholders. ARTICLE IV ELIGIBILITY Section 4.1 Non-Qualified Options and SARs may be granted pursuant to this 2001 Plan only to officers, directors, employees and consultants of the Company or any of its subsidiaries, as selected by the Board or the Committee, and Incentive Options may be granted pursuant to this 2001 Plan only to officers, directors who are also employees, and employees of the Company or any of its subsidiaries, as selected by the Committee. Persons granted Options and/or SARs pursuant to this 2001 Plan are hereinafter referred to as "Optionees." For purposes of determining who is an employee with respect to eligibility for Incentive Options, Section 422 shall govern. The Board or the Committee may determine in its sole discretion that any person who would otherwise be eligible to be granted Options and SARs, shall, nonetheless, be ineligible to receive any award under this 2001 Plan. Section 4.2 The Board or the Committee will, in its discretion, determine the persons to be granted Options or SARs, the time or times at which Options or SARs shall be granted; with respect to Options, the number of shares subject to each Option; the terms of a vesting or forfeiture schedule, if any, the type of Option issued, the period during which any such options may be exercised; the manner in which Options may be exercised and all other terms and conditions of the Options; provided, however, no Option or SAR will be made which has terms or conditions inconsistent with this 2001 Plan. Relevant factors in making such determinations may include the value of the services rendered by the respective Optionee, his present and potential contributions to the Company, and such other factors which are deemed relevant in accomplishing the purpose of the 2001 Plan. C-3 ARTICLE V TERMS AND CONDITIONS OF OPTIONS Section 5.1 Each Option granted under the 2001 Plan shall be evidenced by a STOCK OPTION AGREEMENT in a form not inconsistent with the 2001 Plan, provided that the following terms and conditions shall apply: (a) The price at which each share of Common Stock covered by an Option may be purchased ("OPTION EXERCISE PRICE") shall be set forth in the Stock Option Agreement and shall be determined by the Board or the Committee, provided that the OPTION EXERCISE PRICE for any Incentive Option shall not be less than the "FAIR MARKET VALUE" OF THE COMMON STOCK AT THE TIME OF GRANT AS DEFINED IN SECTION 6.1(B). Notwithstanding the foregoing, if an Incentive Option to purchase shares is granted pursuant to this 2001 Plan to an Optionee who, on the date of the grant, directly or indirectly owns more than 10% of the voting power of all classes of stock of the Company or its parent or subsidiary, not including the stock obtainable under the Option, the minimum Option Exercise Price of such Option shall be not less than 110% of the "FAIR MARKET VALUE" of the stock on the date of grant. (b) The "FAIR MARKET VALUE" shall be determined by the Board or the Committee, which determination shall be binding upon the Company and its officers, directors, employees and consultants. The determination of the Fair Market Value shall be based upon the following methodology: (i) if the Common Stock is not listed and traded upon a recognized securities exchange and there is no report of stock prices with respect to the Common Stock published by a recognized stock quotation service, on the basis of the recent purchases and sales of the Common Stock in arms-length transactions; or (ii) if the Common Stock is not then listed and traded upon a recognized securities exchange or quoted on The Nasdaq Stock Market, Inc. ("Nasdaq"), and there are reports of stock prices by a recognized quotation service, on the basis of quotations for such stock, based upon the average of the closing bid prices of the Common Stock for the five most recent trading days preceding the date of grant ("Five-Day Average"); or (ii) if the Common Stock shall then be listed and traded upon a recognized securities exchange or quoted on Nasdaq, upon the basis of the Five-Day Average preceding the date of grant on such recognized securities exchange; or, if the Common Stock was not traded on such date, upon the basis of the Five-Day Average nearest preceding that date. In the absence of any of the above-referenced evidence of Fair Market Value, the Board or the Committee shall consider such other factors relating to the Fair Market Value of the Common Stock, as it shall deem appropriate. (c) For the purpose of determining whether an Optionee owns more than 10% of the voting power of all classes of stock of the Company, an Optionee is considered to own those shares which are owned directly or indirectly through brothers and sisters (including half-blooded siblings), spouse, ancestors and lineal descendants; and proportionately as a stockholder of a corporation, a partner of a partnership, and/or a beneficiary of a trust or an estate that owns shares of the Company. (d) Notwithstanding any other provision of this 2001 Plan, in accordance with the provisions of Section 422(d) of the Code, to the extent that the aggregate Fair Market Value (determined at in accordance with Section 5.1(b)) of the stock of the Company with respect to which Incentive Options (without reference to this provision) are exercisable for the first time by any individual in any calendar year under any and all stock option plans of the Company, its subsidiary corporations and its parent (if any) exceeds $100,000, such Options shall be treated as Non-Qualified Options. (e) An Optionee may, in the Board or the Committee's discretion, be granted more than one Incentive Option or Non-Qualified Option during the duration of this 2001 Plan, and may be C-4 issued a combination of Non-Qualified Options and Incentive Options; provided that non-employees are not eligible to receive Incentive Options. (f) The duration of any Option and any right or SAR related to the Option shall be within the sole discretion of the Board or the Committee; provided, however, that any Incentive Option granted to a 10% or less stockholder or any Non-Qualified Option shall, by its terms, be exercised within ten years after the date the Option is granted and any Incentive Option granted to a greater than 10% stockholder shall, by its terms, be exercised within five years after the date the Option is granted. (g) Any Option and any right or SAR related thereto shall not be transferable by the Optionee other than by will, or by the laws of descent and distribution. An Option may be exercised during the Optionee's lifetime only by the Optionee. (h) At least six months shall elapse from the date on which an Option is granted to a director, officer or beneficial owner of more than 10% of the outstanding Common Stock under this 2001 Plan by the Board (or the Committee) to the date on which any share of Common Stock underlying such Option is sold or any SAR associated with such Option is exercised, unless the Board or the Committee otherwise consents in writing. (i) In the event that stockholder approval of the 2001 Plan is not obtained within one year of the adoption of the 2001 Plan by the Board or within such other time period required under Section 422 and the regulations thereunder, all Options issued and issuable hereunder shall automatically be deemed to be Non-Qualified Options. (j) The Committee may impose such other conditions with respect to the exercise of options, including without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. ARTICLE VI EMPLOYMENT OR SERVICE OF OPTIONEE Section 6.1 If the employment or service of an Optionee is terminated for cause, any vested or unvested Options, or rights to Options (collectively referred to herein as "Option Rights"), SARs, if any, of such Optionee under any then outstanding Non-Qualified or Incentive Option shall terminate immediately. Unless the Board or the Committee determines to define "cause" differently and such definition is set forth in the Stock Option Agreement, "cause" shall mean incompetence in the performance of duties, disloyalty, dishonesty, theft, embezzlement, unauthorized disclosure of customer lists, product lines, processes or trade secrets of the Company, individually or as an employee, partner, associate, officer or director of any organization. The determination of the existence and the proof of "cause" shall be made by the Board or the Committee and, subject to the review of any determination made by the Committee by the Board, such determination shall be binding on the Optionee and the Company. Section 6.2 If the employment or service of the Optionee is terminated by either the Optionee or the Company for any reason other than for cause, death, or for disability, as defined in Section 22(e)(3) of the Code, the Option Rights, and SARs, if any, of such Optionee under any then outstanding Non-Qualified Option shall, subject to the provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any time prior to the expiration of the Option or within three months after the date of such termination, whichever period of time is shorter, but only to the extent of the vested right to exercise the Option at the date of such termination. With respect to Incentive Options, such Options shall, subject to the provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any time prior to the expiration of the Option, or within three months after the date of such C-5 termination, whichever period of time is shorter, but only to the extent of the vested right to exercise the Option at the date of such termination. Section 6.3 In the case of an Optionee who becomes disabled, as defined by Section 22(e)(3) of the Code, the Option rights of such Optionee under any then outstanding Incentive Option shall, subject to the provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any time prior to the expiration of the Option or, in the case of an Incentive Option, within three months after the date of termination of employment or service due to disability, whichever period of time is shorter, but only to the extent of the vested right to exercise the Option, and SARs if any, at the date of such termination. With respect to any then outstanding Non-Incentive Options, the Option rights of such Optionee shall, subject to the provisions of Section 6.1(h) hereof, be exercisable by such Optionee at any time prior to the expiration of the Option, or within three months after the date of termination of employment or service due to disability, whichever period of time is shorter, but only to the extent of the vested right to exercise the Option, and SARs, if any, at the date of such termination. Section 6.4 In the event of the death of an Optionee, the Option rights of such Optionee under any then outstanding Incentive Option shall be exercisable by the person or persons to whom these rights pass by will or by the laws of descent and distribution, at any time prior to the expiration of the Option or within three years after the date of death, whichever period is shorter; but only to the extent of the vested right to exercise the Option and SARs, if any, at such time. With respect to any then Non-Incentive Options, the Option rights exercisable by the person or persons to whom these rights pass by will or by the laws of descent and distribution shall, subject to the provisions of Section 5.1(h) hereof, be exercisable by person or persons, at any time prior to the expiration of the Option, or within three months after the date of death, but only to the extent of the vested right to exercise the Option, and SARs, if any, at such time. If a person or estate acquires the right to exercise a Non-Qualified or Incentive Option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of such Option, and may require such consents and releases of taxing authorities, as the Committee may deem advisable. Section 6.5 In addition to the requirements set forth in the 2001 Plan, the Committee or the Board may set such other targets, restrictions or other terms relating to the employment or service of the Optionee, including but not limited to a requirement that an employee must be continuously employed by the Company for such period of time as the Board or Committee, in its discretion, deems advisable before the right to exercise any portion of an Option granted to such employee will accrue, which targets, restrictions, or terms must be fulfilled or complied with, as the case may be, prior to the exercise of any portion of an Option and/or SARs, if any, granted to any Optionee. Section 6.6 Options and/or SARs, if any, granted under the 2001 Plan shall not be affected by any change of duties or position, so long as the Optionee continues in the service of the Company. Section 6.7 Nothing contained in the 2001 Plan, or in any Option and/or SARs, if any, granted pursuant to the 2001 Plan, shall confer upon any Optionee any right with respect to continuance of employment or service by the Company nor interfere in any way with the right of the Company to terminate the Optionee's employment or service or change the Optionee's compensation at any time. ARTICLE VII EXERCISE OF OPTIONS Section 7.1 Except as provided in this Article VIII, an Option shall be exercised by tender to the Company of the total Option Exercise Price of the shares with respect to which the Option is exercised and written notice of the exercise. The right to purchase shares shall be cumulative so that, once the right to purchase any shares has vested, such shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. A partial exercise of an Option shall not C-6 affect the right of the Optionee to exercise the Option from time to time, in accordance with the 2001 Plan, as to the remaining number of shares subject to the Option. The Option Exercise Price of the shares shall be in United States dollars, payable in cash or by certified bank check. Notwithstanding the foregoing, in lieu of cash, an Optionee may, with the approval of the Board or the Committee, exercise his Option by tendering to the Company shares of the Common Stock of the Company owned by him and having an aggregate Fair Market Value at least equal to the total Option Exercise Price or part or all of one or more Options to purchase Common Stock of the Company for which the aggregate Fair Market Value of the Common Stock underlying exercise of the Option shall be at least equal to the Option Exercise Price. The Fair Market Value of any shares of Common Stock so surrendered shall be determined by the Board or the Committee by application of the methodology set forth in Section 5.1(b) hereof; except that the term "date of surrender" shall be substituted for the term "date of grant" in applying such Section 5.1(b). Section 7.2 Except as provided in Article VI, an Option may not be exercised unless the holder thereof is an officer, director, employee or consultant of the Company at the time of exercise. Section 7.3 No Optionee, or Optionee's executor, administrator, legatee, distributee or other permitted transferee, shall be deemed to be a holder of any shares subject to an Option for any purpose whatsoever unless and until a stock certificate or certificates for such are issued to such person(s) under the terms of the 2001 Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article IX hereof. Section 7.4 If (i) the listing, registration or qualification of the Options issued hereunder, or of any securities that may be purchased upon exercise of such Options (the "Subject Securities") upon any securities exchange or quotation system, or under federal or state law is necessary as a condition of or in connection with the issuance or exercise of the Options, or (ii) the consent or approval of any governmental regulatory body is necessary as a condition of, or in connection with, the issuance or exercise of the Options, the Company shall not be obligated to deliver the certificates representing the Subject Securities or to accept or to recognize an Option exercise unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained. The Company will take reasonable action to so list, register, or qualify the Options and the Subject Securities, or effect or obtain such consent or approval, so as to allow for their issuance. Section 7.5 An Optionee may be required to represent to the Company as a condition of his exercise of Options issued under this 2001 Plan: (i) that the Subject Securities acquired upon Option exercise are being acquired by him for investment and not with a view to distribution or resale, unless counsel for the Company is then of the view that such a representation is not necessary and is not required under the Securities Act of 1933, as amended, (the "Securities Act") or any other applicable statute, law, regulation or rule; and (ii) that the Optionee shall make no exercise or disposition of an Option or of the Subject Securities in contravention of the Securities Act, the Exchange Act or the rules and regulations thereunder. Optionees may also be required to provide (as a condition precedent to exercise of an Option) such documentation as may be reasonably requested by the Company to assure compliance with applicable law and the terms and conditions of the 2001 Plan and the subject Option. ARTICLE VIII STOCK APPRECIATION RIGHTS Section 8.1 The Board or the Committee may, in its discretion, grant in connection with any Option, at any time prior to the exercise thereof, SARs to surrender all or part of the Option to the extent that such Option is exercisable and receive in exchange an amount payable in cash, shares of the C-7 Company's Common Stock or a combination thereof, as determined by the Board or the Committee, equal to the difference between the then Fair Market Value of the shares (valued at the then Fair Market Value, in accordance with the methodology set forth in Section 5.1(b), except that the term "date of surrender" shall be substituted for the term "date of grant,") issuable upon the exercise of the Option or portions thereof surrendered and the Option Exercise Price payable upon the exercise of the Option or portions thereof surrendered (the "Spread"). Such SARs may be granted only under the following conditions: (a) the SARs will expire no later than the expiration of the underlying Option; (b) the SARs may be for no more than one hundred percent ("100%)"of the Spread; (c) the SARs are transferable only when the underlying Option is transferable, and under the same conditions; (d) the SARs may be exercised only when the underlying Option is eligible to be exercised; (e) the SARs may be exercised only when the Spread is positive, i.e., when the Fair Market Value of the Common Stock subject to the Option exceeds the Option Exercise Price; and (f) any SARs granted to an Optionee shall be subject to all terms, conditions and provisions governing the Options, as expressed in the 2001 Plan and in the Option agreement issued to such Optionee pursuant to the 2001 Plan. Section 8.2 Each grant of an SAR under the Plan shall be evidenced by a Stock Appreciation Rights Agreement between the Optionee and the Company, which may either be a separate agreement between the Company and the Optionee, or may be incorporated into an Option Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. Each SAR Agreement shall specify the number of shares of Common Stock to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article IX. Section 8.3 Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may be awarded in combination with Options, and the SAR Agreement may provide that the SARs will not be exercisable unless the related Options are forfeited. An SAR may be included in an Incentive Option only at the time of grant but may be included in an Non-Qualified Option at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event of certain conditions that are determined in the sole discretion of the Board or the Committee. Section 8.4 Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price ARTICLE IX CHANGE IN NUMBER OF OUTSTANDING SHARES OF STOCK, ADJUSTMENTS, REORGANIZATIONS, ETC. Section 9.1 In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased, or changed into or exchanged for a different number of shares or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, combination of shares, or a dividend payable in capital stock, appropriate adjustment may be made by the Board or the Committee in the number and kind of shares for the purchase of which Options may be granted under the 2001 Plan, including the maximum number that may be granted to any one person. In addition, the Administrator may make appropriate adjustments in the number and kind of shares as to C-8 which outstanding Options, and, to the extent granted, SARs in connection therewith, or portions thereof then unexercised, shall be exercisable, to the end that the Optionee's proportionate interest shall be maintained as before the occurrence to the unexercised portion of the Option, and to the extent granted, SARs in connection therewith, and with a corresponding adjustment in the Option Exercise Price per share. Any such adjustment made by the Administrator shall be conclusive. Section 9.2 The grant of an Option and/or any SARs granted in connection therewith, pursuant to the 2001 Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. Section 9.3 Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company as a result of which the outstanding securities of the class then subject Options and/or any SARs granted in connection therewith, are changed into or exchanged for cash or property or securities not of the Company's issue, or upon a sale of substantially all the property of the Company to an association, person, party, corporation, partnership, or control group as that term is construed for purposes of the Exchange Act, the 2001 Plan shall terminate, and all Options, and any SARs granted in connection therewith, theretofore granted hereunder shall terminate unless provision be made in writing in connection with such transaction for the continuance of the 2001 Plan and/or for the assumption of Options and/or any SARs granted in connection therewith, theretofore granted, or the substitution for such Options of options covering the stock of a successor employer corporation, or a parent or a subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, in which event the 2001 Plan and Options, and/or any SARs granted in connection therewith, theretofore granted shall continue in the manner and under the terms so provided. If the 2001 Plan and unexercised Options, and /or any SARs granted in connection therewith, shall terminate pursuant to the foregoing sentence, all persons owning any unexercised portions of Options then outstanding shall have the right, at such time prior to the consummation of the transaction causing such termination as the Company shall designate, to exercise the unexercised portions of their Options, including the portions thereof which would, but for this Section 10.3 not yet be exercisable; except that the exercise of any SARs after such termination shall be allowed solely at the discretion of the Board. ARTICLE X WITHHOLDING TAXES Section 10.1 General. To the extent required by applicable federal, state, local or foreign law, an Optionee or his successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Stock or make any cash payment under the Plan until such obligations are satisfied. Section 10.2 Share Withholding. The Committee may permit an Optionee to satisfy all or part of his withholding or income tax obligations by having the Company withhold all or a portion of any shares of Common Stock that otherwise would be issued to him or by surrendering all or a portion of any shares of Common Stock that he or she previously acquired. Such shares of Common Stock shall be valued at their Fair Market Value in accordance with the methodology set forth in Section 5.1 (b) hereof, except that the term "date of surrender" shall be substituted for the term "date of grant" in applying such methodology. C-9 ARTICLE XI DURATION, AMENDMENT AND TERMINATION Section 11.1 The Board may at any time terminate the 2001 Plan or make such amendments thereto as it shall deem advisable and in the best interests of the Company, without action on the part of the stockholders of the Company unless such approval is required pursuant to applicable law; provided, however, that no such termination or amendment shall, without the consent of the individual to whom any Option shall theretofore have been granted, affect or impair the rights of such individual under such Option. Pursuant to Section 422(b)(2) of the Code, no Incentive Option may be granted pursuant to this 2001 Plan more than ten years from the date the 2001 Plan is adopted or the date the 2001 Plan is approved by the stockholders of the Company, whichever is earlier. ARTICLE XII RESTRICTIONS Section 12.1 Any shares issued pursuant to the 2001 Plan shall be subject to such restrictions on transfer and limitations as shall, in the opinion of the Board or the Committee, be necessary or advisable to assure compliance with the laws, rules and regulations of the United States government or any state or jurisdiction thereof or any other applicable law. In addition, the Board or the Committee may in any Stock Option Agreement and/or SAR impose such other restrictions upon the exercise of an Option or upon the sale or other disposition of the shares of Common Stock deliverable upon exercise thereof as the Board or the Committee may, in its sole discretion, determine, including but not limited to provisions which allow the Company to reacquire such shares at their original purchase price if the Optionee's employment terminates within a stated period after the acquisition of such shares. By accepting an award pursuant to the 2001 Plan each Optionee shall thereby agree to any such restrictions. Section 12.2 Any certificate issued to evidence shares issued pursuant to an Option shall bear such legends and statements as the Board or counsel to the Company shall deem advisable to assure compliance with the laws, rules and regulations of the United States government or any state or jurisdiction thereof. No shares will be delivered under the 2001 Plan until the Company has obtained such consents or approvals from such regulatory bodies of the United States government or any state or jurisdiction thereof as the Board or counsel to the Company deems necessary or advisable. ARTICLE XIII FINANCIAL ASSISTANCE Section 13.1 The Company is vested with authority under this 2001 Plan, at the discretion of the Board, to assist any employee to whom an Option is granted hereunder (including any director or officer of the Company or any of its subsidiaries who is also an employee) in the payment of the purchase price payable on exercise of that Option, by lending the amount of such purchase price to such employee on such terms and at such rates of interest and upon such security (or unsecured) as shall have been authorized by or under authority of the Board. Any such assistance shall comply with the requirements of Regulation G promulgated by the Board of the Federal Reserve System, as amended from time to time, and any other applicable law, rule or regulation. C-10 ARTICLE XIV APPLICATION OF FUNDS Section 14.1 The proceeds received by the Company from the sale of stock pursuant to the exercise of Options under the 2001 Plan are to be added to the general funds of the Company and used for its corporate purposes as determined by the Board. ARTICLE XV EFFECTIVENESS OF PLAN Section 15.1 This 2001 Plan shall become effective upon adoption by the Board, and Options may be issued hereunder from and after that date subject to the provisions of Section 3.3. This 2001 Plan must be approved by the Company's stockholders in accordance with the applicable provisions (relating to the issuance of stock or Options) of the Company's governing documents and state law or, if no such approval is prescribed therein, by the affirmative vote of the holders of a majority of the votes cast at a duly held stockholders meeting at which a quorum representing a majority of all the Company's outstanding voting stock is present and voting (in person or by proxy) or, without regard to any required time period for approval, by any other method permitted by Section 422 and the regulations thereunder. If such stockholder approval is not obtained within one year of the adoption of the 2001 Plan by the Board or within such other time period required under Section 422 and the regulations thereunder, this 2001 Plan shall remain in force, provided however, that all Options issued and issuable hereunder shall automatically be deemed to be Non-Qualified Options. ***** C-11 IN WITNESS WHEREOF, pursuant to the adoption of this 2001 Plan by the Board of Directors of the Company, this 2001 Plan is hereby executed effective as of this 4th day of June, 2001. I-LINK INCORPORATED ------------------------------------- Gary J. Wasserson PRESIDENT AND CHIEF EXECUTIVE OFFICER ATTEST: - ------------------------------------- David E. Hardy, Esq. SECRETARY C-12 -----END PRIVACY-ENHANCED MESSAGE-----