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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

                For the quarterly period ended JuneSeptember 30, 2001

                                       OR

[ ]/ / TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEsEXCHANGE 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/X/  No ---     -----

                               --------------/ /

                                   -----------

As of August 10,November 6, 2001, the registrant had outstanding 112,600,636116,549,667 shares of
$0.007 par value common stock.

The disclosures set forth Part II Item 1 in Forms 8-Kthe registrant's Form 10-Q for the
period ended June 30, 2001 filed on March 16, 2001, May 2, 2001
and June 19, 2001 areAugust 20, 2001are incorporated in Part II
Item 21 herein.

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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

                      I-LINK INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

ASSETS JuneSeptember 30, 2001 December 31, 2001 2000 ASSETS (Unaudited) 2000 --------------- ----------------------------- -------------- Current assets: Cash and cash equivalents $ 1,744,5561,712,934 $ 2,155,628 Accounts receivable, less allowance for doubtful accounts of $1,667,000 and $100,665 as of JuneSeptember 30, 2001 and December 31, 2000, respectively 17,702,13616,202,362 3,357,856 Prepaid expenses 3,579,417 - Other current assets 2,382,9031,988,759 385,891 --------------- ----------------------------- -------------- Total current assets 21,829,59523,483,472 5,899,375 Furniture, fixtures, equipment and software, net 24,432,09823,567,913 10,983,273 Other assets: Intangible assets, net 11,340,6282,294,040 3,939,226 Other assets 1,620,6221,693,250 835,618 --------------- ----------------------------- -------------- $ 59,222,94351,038,675 $ 21,657,492 =============== ============================= ============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 7,623,5227,292,663 $ 5,370,490 Accrued liabilities 8,234,74012,869,492 3,327,900 Unearned revenue 4,708,0583,533,596 14,885,592 Current portion of long-term debt 2,139,0191,646,988 785,971 Notes payable to a related party 25,360,96422,090,259 7,768,000 Accrued interest on notes payable to a related party 349,137657,850 2,376,498 Current portion of obligations under capital leases 4,778,8604,895,897 1,445,690 --------------- ----------------------------- -------------- Total current liabilities 53,194,30052,986,745 35,960,141 Notes payable 1,587,8951,577,235 796,662 Notes payable and accrued interest - related party 11,618,972 - Unearned revenue - 1,666,667 Obligations under capital leases 7,234,0047,458,964 338,263 --------------- --------------- 62,016,199-------------- -------------- 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 10,018769 and 24,435 at JuneSeptember 30, 2001 and December 31, 2000, respectively, liquidation preference of $1,848,478$761,310 at JuneSeptember 30, 2001 100,1807,690 244,350 Common stock, $.007 par value, authorized 150,000,000300,000,000 shares, issued and outstanding 112,569,743116,549,547 and 28,136,506 at JuneSeptember 30, 2001 and December 31, 2000, respectively 787,991815,849 196,957 Additional paid-in capital 127,494,197128,851,786 106,622,114 Notes receivable from stockholders (30,000) - Accumulated deficit (131,145,624)(152,278,566) (135,902,482) --------------- ----------------------------- -------------- Total stockholders' deficit (2,793,256)(22,603,241) (28,839,061) --------------- ----------------------------- -------------- $ 59,222,94351,038,675 $ 21,657,492 =============== ============================= ==============
The accompanying notes are an integral part of these consolidated financial statementsstatements. 1 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, SixNine Months Ended JuneSeptember 30, ---------------------------------- ----------------------------------September 30, ------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- ----------------------------- ------------- --------------- RevenuesRevenues: Telecommunication services $ 19,408,44125,274,900 $ 4,589,1123,666,119 $ 23,829,42449,104,324 $ 9,876,31913,542,438 Marketing services - - - 464,354463,740 Technology licensing and development 1,419,998 1,739,906 2,856,897 6,246,4061,432,301 4,276,895 7,678,707 Other 518,459 1,008,563 1,185,042 1,709,667 --------------- --------------- --------------- ---------------433,174 444,582 1,618,216 2,154,862 -------------- -------------- -------------- -------------- Total revenues 21,346,898 7,337,581 27,871,363 18,296,746 --------------- --------------- --------------- ---------------27,128,072 5,543,002 54,999,435 23,839,747 -------------- -------------- -------------- -------------- Operating costs and expenses: Telecommunication network expense 13,715,806 5,537,946 20,025,512 11,651,00822,988,640 5,736,946 43,014,152 17,387,954 Marketing services - - - 349,034456,354 Selling, general and administrative 5,703,360 5,724,953 9,441,741 9,644,0419,894,235 4,242,074 19,335,976 13,778,795 Provision for (benefit from) doubtful accounts 1,269,397 54,187 1,377,756 379,9031,276,740 (300,667) 2,654,496 79,236 Depreciation and amortization 2,330,806 1,560,816 3,981,791 3,049,7053,204,871 1,565,065 7,186,662 4,614,770 Research and development 523,614 841,446 1,590,372 1,674,358 --------------- --------------- --------------- ---------------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 23,542,983 13,719,348 36,417,172 26,748,049 --------------- --------------- --------------- ---------------45,839,191 12,328,654 82,256,363 39,076,703 -------------- -------------- -------------- -------------- Operating loss (2,196,085) (6,381,767) (8,545,809) (8,451,303) --------------- --------------- --------------- ---------------(18,711,119) (6,785,652) (27,256,928) (15,236,956) -------------- -------------- -------------- -------------- Other income (expense): Interest expense (666,792) (350,481) (1,014,633) (794,323)(1,816,722) (339,429) (2,831,354) (1,133,752) Interest and other income 23,590 112,969 51,661 150,79625,212 249,940 76,872 400,737 Settlement expense - 720,385- - (639,565) --------------- --------------- --------------- ----------------------------- -------------- -------------- -------------- Total other income (expense) (643,202) 482,873 (962,972) (1,283,092) --------------- --------------- --------------- ---------------(1,791,510) (89,489) (2,754,482) (1,372,580) -------------- -------------- -------------- -------------- Net loss $ (2,839,287) $ (5,898,894) $ (9,508,781) $ (9,734,395) =============== =============== =============== ===============$(20,502,629) $(6,875,141) $(30,011,410) $(16,609,536) ============== ============== ============== ============== CALCULATION OF NET INCOME (LOSS)LOSS PER COMMON SHARE: Net Loss $ (2,839,287) $ (5,898,894) $ (9,508,781) $ (9,734,395)$(20,502,629) $(6,875,141) $(30,011,410) $(16,609,536) Cumulative preferred stock dividends (11,068) (393,095) (22,015) (800,488)(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 - Dividends paid on Class F preferred stock - - - (18,214) --------------- --------------- --------------- ----------------------------- -------------- -------------- -------------- Net income (loss)loss applicable to common stock $ (2,850,355) $ (6,291,989) $ 5,712,650 $ (10,553,097) =============== =============== =============== ===============$(20,508,224) $(7,277,670) $(14,795,574) $(17,830,767) ============== ============== ============== ============== Basic and diluted weighted average shares outstanding 112,569,657 24,901,536 82,995,083 26,026,948 =============== =============== =============== ===============113,672,070 27,850,335 93,333,115 26,639,187 ============== ============== ============== ============== Net income (loss)loss per common share - basic and diluted $ (.03)(0.18) $ (0.25)(0.26) $ .07(0.16) $ (0.41) =============== =============== =============== ===============(0.67) ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statementsstatements. 2 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS' DEFECITDEFICIT (UNAUDITED)
Preferred Stock Common Stock -------------------------- --------------------------------------------- ---------------------- Additional Paid-inAccumulated Shares Amount Shares Amount Paid-in Capital ------------ ------------ ------------ ------------ --------------Deficit -------- --------- ----------- -------- ---------------- ------------- BALANCE AT DECEMBER 31, 2000 24,435 $ 244,350 28,136,506 $196,957$ 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 - - 3,745 26 2,07534,518 241 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 - - - - 1,430,2902,079,456 - 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 JUNESEPTEMBER 30, 2001 10,018769 $ 100,180 112,569,7437,690 116,549,547 $ 787,991815,849 $ 127,494,197 ============ ============ ============ ============128,851,786 $(152,278,566) ======== ========= =========== ========= ============== Stockholder Notes Accumulated Receivable Deficit -------------- --------------- BALANCE AT DECEMBER 31, 2000 - $ (135,902,482) Conversion of convertible debt and accrued interest into Class M mezzanine preferred stock and common warrants - - Common stock issued and accumulated deficit acquired as a result of WebToTel acquisition and conversion of notes payable $(30,000) (1,246,834) Stock issued - employee stock purchase plan - - Repurchase of Class M mezzanine preferred stock - - Repurchase of Class N preferred stock - - Net contribution from repurchase/settlement with stockholders of Class M and N preferred stock - 30,292,319 Contingent beneficial conversion feature on Class N preferred stock - (9,779,846) Issuance of common shares to related party to repurchase warrants outstanding - - Reissuance and conversion of Class M redeemable preferred stock into common stock - - Reissuance and conversion of Class N preferred stock into common stock - - Beneficial conversion feature on the reissuance of Class M and N preferred stock - (5,000,000) Other conversions of Class N preferred stock into common stock - - Warrants issued in connection with certain notes payable to related party - - Beneficial conversion feature on certain convertible note payable to related party - - Net loss - (9,508,781) -------------- --------------- BALANCE AT JUNE 30, 2001 $(30,000) $ (131,145,624) ============== ===============
The accompanying notes are an integral part of these consolidated financial statementsstatements. 3 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (UNAUDITED)
For the SixNine Months Ended JuneSeptember 30, -------------------------------------------------------------------------- 2001 2000 ------------------- ------------------------------- ------------- Cash flows from operating activities: Net loss $ (9,508,781)(30,011,410) $ (9,734,395)(16,609,536) Adjustments to reconcile net loss to net cash used in (provided by) operating activities: Depreciation and amortization 3,981,791 3,049,7057,186,662 4,614,770 Impairment of goodwill 8,040,054 - Provision for doubtful accounts 1,377,756 379,9032,654,496 79,236 Common stock issued as payment of accrued liabilities - 740,588740,587 Amortization of discount on notes payable to a related party 103,919888,468 - Amortization of deferred compensation on stock options issued for services - 381,417503,257 Increase (decrease) from changes in operating assets and liabilities (net of effects of acquisition of businesses): Accounts receivable (3,629,463) (10,821,262)(3,376,429) 818,117 Other assets (1,475,736) (76,073)(4,733,639) (294,856) Unearned revenue (10,177,534) 19,166,667(11,427,632) 17,916,667 Accounts payable, accrued liabilities and accrued interest 4,304,467 657,5138,858,967 (271,573) Discontinued operations - noncash charges and working capital changes - (26,141) ------------------- ------------------66,162 ------------- ------------- Net cash provided by (used in) operating activities (15,023,581) 3,717,922 ------------------- ------------------(21,920,463) 7,562,831 ------------- ------------- Cash flows from investing activities: Purchases of furniture, fixtures, equipment and software (716,953) (2,970,434)(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 - 19,674 ------------------- ------------------29,537 ------------- ------------- Net cash used in investing activities (13,483,166) (2,950,760) ------------------- ------------------(14,293,727) (4,658,373) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of notes payable to related party 28,325,70036,189,534 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 (9,136)(29,040) - Payment of capital lease obligations (222,989) (66,544)(404,578) (104,979) Proceeds from exercise of common stock warrants and options and issuances under stock purchase plan 2,100 3,532,71915,580 4,274,879 Financing activities of discontinued operations - (24,719) ------------------- ------------------(24,204) ------------- ------------- Net cash provided by financing activities 28,095,675 3,441,456 ------------------- ------------------35,771,496 4,145,696 ------------- ------------- Increase (decrease) in cash and cash equivalents (411,072) 4,208,618(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 $1,744,556 $ 7,204,622 =================== ==================1,712,934 $ 10,046,158 ============= ============= Cash and cash equivalents at end of period: Continuing operations $ 1,744,5561,712,934 $ 7,190,5209,929,375 Discontinued operations - 14,102 ------------------- ------------------116,783 ------------- ------------- Total cash and cash equivalents at end of period $ 1,744,5561,712,934 $ 7,204,622 =================== ==================10,046,158 ============= =============
The accompanying notes are an integral part of these consolidated financial statements 4 I-LINK INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (UNAUDITED)
For the SixNine Months Ended JuneSeptember 30, -------------------------------------------------------------------------- 2001 2000 ------------------- ------------------------------- ------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reclassification of Class F redeemable preferred stock from mezzanine - $2,338,784 Warrants issued in connection with a$ 2,338,784 Discount on note payable to related party $1,430,290due to warrants issued with the note $ 2,079,456 - Stock options issued for services - $54,90254,902 Equipment acquired under capital lease obligations $9,000,0009,523,590 - Conversion of notes payable to a related party and associated accrued interest to Class M redeemable preferred stock $10,305,07210,305,072 - Reclassification of Class M redeemable preferred stock from mezzanine $22,039,89222,039,892 - Conversion of notes payable to a related party and associated accrued interest to common stock $10,326,93810,326,938 -
The accompanying notes are an integral part of these consolidated financial statements 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 operation isoperations are two-fold. First, for the development, salepast five years the Company has developed and delivery ofmarketed enhanced communications products and services utilizing its own private intranet and both owned and leased network switching and transmission facilities. The Company provides unique communications solutions are delivered through its use ofthe Company's proprietary technologies. TelecommunicationsEnhanced communications products and services are marketed primarily through master agent and wholesale distributor arrangements with I-Link Communications Inc., a wholly owned subsidiary of the Company that is aan 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. On March 1, 2001, I-Link became a majority owned subsidiary of Counsel Communications LLC which was a wholly-owned subsidiary of Counsel Corporation, (collectively, "Counsel"). On April 17, 2001, I-Link merged with WebToTel, Inc. ("WebToTel"), a subsidiary of Counsel, and it's subsidiary Nexbell Communications Inc. ("Nexbell") as more fully described in Note 9. As the entities were under common control as of March 1, 2001, the financial statements for the three and six months ended June 30, 2001 include the financial results of WebToTel and Nexbell as if I-Link's merger with these two entities had occurredThe second principal operation began on March 1, 2001. As the entities were under common control of Counsel at the time of the merger, the acquisition of WebToTel has been accounted for similar to a pooling-of-interests using Counsel's book values of the WebToTel assets and liabilities. The impact of the consolidation of the WebToTel results of operations and retained deficit for the period from March 31, 2001 are as shown below:
I-Link results of operations for the first WebToTel I-Link results I-Link results quarter of 2001 as results of of operations of operations reported in 3/31/01 operations for for the second for the six months Form 10-Q March 2001 quarter of 2001 ended June 30, 2001 ------------------------------------------------------------------------------ Revenues $ 6,231,338 $ 293,127 $ 21,346,898 $ 27,871,363 Net Loss $ 5,916,658 $ 752,836 $ 2,839,287 $ 9,508,781
I-Link balance at WebToTel I-Link results Balance as March 31, 2001 WebToTel accumulated of operations reported in as reported in net loss for deficit acquired for the second the June 30, 3/31/01 Form 10-Q March 2001 as of 3-1-01 quarter of 2001 2001 Form 10-Q ------------------------------------------------------------------------------------ Accumulated deficit $126,306,667 $752,836 $1,246,834 $2,839,287 $131,145,624
On June 4, 2001, when I-Link Incorporated, through it'sits wholly-owned subsidiary WorldxChange Corp. ("WorldxChange"), purchased certain assets and assumed certain liabilities of WorldxChange Communications, Inc. from a bankruptcy proceeding as more fully described in Note 9.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 willis then be 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. 6 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 six-monthnine-month periods ended JuneSeptember 30, 2001 and 2000, (b) the financial position at JuneSeptember 30, 2001, and (c) cash flows for the six-monthsnine-month periods ended JuneSeptember 30, 2001 and 2000. The year-endDecember 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 reportreports on Form 10-Q for the three-monthsthree and six-months ended March 31 and June 30, 2001. The results of operations for the three and six-monthnine-month periods ended JuneSeptember 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 mergeracquisition and related stock issuance had occurred on March 1, 2001 (see Notes 1 and 9).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-monththree and nine-month periods ending JuneSeptember 30, 2001 and 2000 and the six-month period ending June 30, 2000, basic and diluted loss per share are the same. As of June 30, 2001, all potential common stock was anti-dilutive and therefore excluded from weighted average shares outstanding. The net incomeloss per common share basic and diluted for the six-monthsnine-months ending JuneSeptember 30, 2001 includes a net gainincrease to retained earnings forof $30,292,319 attributedattributable 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 incomeloss 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, 2001of2001 of the Class M and Class N preferred stock to Counsel Communications, LLC. During the six-month period ended June 30, 2000, holders of the Series F Redeemable preferred stock converted 248 shares. Accordingly, they were paid stock dividends of 87,477 shares of common stock on the converted shares during the first six-months of 2000. All Series F preferred stock had been converted to common stock as of June 2000. 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 iswas 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, ("SFAS 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. 7 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after MarchDecember 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 agreed to enterentered 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 and 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 JuneSeptember 30, 2001, advances under this loan agreement totaled $1,475,700.$9,159,536. To fund the acquisition of the assets purchased and liabilities assumed by WorldxChange, (as more fully described in Note 9), Counsel provided a loan to I-LinkWorldxChange in the aggregate amount of $15,000,000. The loan is collateralized against all assets of I-Link Incorporated and WorldxChange andWorldxChange. The loan is also guaranteed by I-Link Incorporated.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 or I-Link 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 shareswarrants 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 $1,430,290$2,079,455 as a discount against the $15,000,000 loan from Counsel representing the relative fair value attributed to the 5,000,00010,000,000 shares exercisable immediately.as of September 30, 2001. The value of the warrant waswarrants is calculated using the Black Scholes Model and is being amortized over the term of the loan. In the event the Company issues the second and third tranche of warrants as described above,become exercisable, the Company will record additional interest expense related to the fair value of the warrants when issued.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, the CompanyWorldxChange and I-Link Incorporated agreed to a non-interest-bearing noteobligation 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 noteobligation is subject to reduced payments based upon future usage with the carrier. NOTE 5 - 5 FURNITURE, FIXTURES, EQUIPMENT AND SOFTWARE In connection with the purchase of certain assets from WorldxChange Communications Inc, (see Note 9), the Company recorded $5,247,709 in equipment and cables, including Indefeasible Rights of Use ("IRU") in telecommunication cable systems. 8 On June 27, 2001, WorldxChange entered into a capital lease agreement to lease certain telecommunications equipment with a value of $9,000,000.$9,524,000. Lease payment termspayments for the first six months of the lease term will be $150,000$159,000 per month. The remaining forty-two payments will be $231,361are $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 sixnine months ended JuneSeptember 30, 2001, approximately 3,080,0003,500,000 options to purchase the Company's common stock previously issued to employees expired or were forfeited. During the same six months,period, there were approximately 1,791,0001,800,000 options to purchase common stock issued to employees. There were no exercises of options during the six-monthnine-month period ended JuneSeptember 30, 2001. NOTE 8 - PURCHASE COMMITMENTS The Company has an agreementAND CONTINGENCIES I-Link's subsidiaries have various agreements with a national carriercarriers to lease local access spans.spans and to purchase carrier services. The agreement includesagreements include minimum usage commitments of $2,160,000 per year for the two years beginning July 2000. If I-Link werewith termination penalties up to terminate the agreement early, it would be required to pay 25 percent of any remaining minimum monthly usage requirements. NOTE 9 - ACQUISITION OF SUBSIDIARIES ACQUISITION OF WEBTOTEL On April 17, 2001, I-Link completed its merger with WebToTel and it's subsidiary Nexbell, for 17,454,333 shares of I-Link common stock. WebToTel was an entity established to acquire telecommunication companies. Nexbell is a wholesale network telecommunications provider which operates a private, managed IP telephony network that delivers packet voice services to over 400 key metropolitan areas in the United States. Nexbell's first product offering, Multi-Exchange Transport Service (METS), provides customers with VoIP based local access origination and termination services through 32 (subsequently consolidated to 13) domestic points of presence. The merger of I-Link and WebToTel has been accounted for using the book values of WebToTel, effective March 1, 2001, the earliest dated that all three entities were under common control of Counsel. PURCHASE OF CERTAIN WORLDXCHANGE COMMUNICATIONS, INC. ASSETS AND LIABILITIES On June 4, 2001, I-Link Incorporated, through it's wholly-owned subsidiary WorldxChange, purchased certain assets and assumed certain liabilities of WorldxChange Communications, Inc. ("Debtor") from a bankruptcy proceeding. The purchased assets included all100% of the assets employed in the Debtor's operations in the United States and consisted of the Debtor's equipment, inventory, retail long distance business, accounts receivable, licenses, permits, authorizations, software programs and related technology. On June 4, 2001, the Debtor transferred the purchased assets to WorldxChange in exchange for $13,000,000. To fund the acquisition of the assets and provide working capital, Counsel agreed to provide a collateralized loan to I-Link in the aggregate amount of $15,000,000 (of which $13,000,000 was used for the purchase) as more fully described in Note 4. 9 The preliminary estimate of the fair values of assets acquired and liabilities assumed as of June 4, 2001remaining commitment. Minimum usage commitments are as follows: Accounts receivable and other current assets $12,096,000 Furniture, fixtures, and equipment 5,247,000 Accounts payable and accrued liabilities (2,187,000) Notes payable (1,162,000) Obligations under capital leases (994,000) -------------- Net cash paid $13,000,000 ==============2001 (fourth quarter of 2001) $ 1,600,000 2002 5,400,000 2003 3,600,000 2002 3,100,000 2003 1,300,000
Unaudited pro forma resultsAs of operationsSeptember 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 six months ended June 30, 2001 and 2000 as if the acquisitions had been completed asamount of the beginningdraw on the letter of credit and interest since October 11, 2001. The Company is evaluating Winter Harbor's demand in light of the period are shown below. The pro forma results includevarious agreements entered into between the historical result of operations of I-LinkCompany, Counsel Communications LLC and WebToTel forWinter Harbor. While the six-months ended June 30, 2001. The pro forma results include the historical result of operations of WorldxChange for the six-months ended March 31, 2001. The pro forma results include estimates and assumptions which managementCompany believes are reasonable. However, pro forma results dothat it will not include any anticipated cost savings or other effectsbe required to pay cash to Winter Harbor of the planned integrationamount 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 operations, and are not necessarily indicativeCompany's Class C preferred stock automatically converted into shares of common stock according to the terms of the results which would have occurred ifdesignation of the business combinations had occurredClass 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 dates indicated, or which may resultpreferred stock through the conversion date. Accordingly, dividends in the future.
For the Six-Months Ended ----------------------------- June 30, 2001 June 30, 2000 -------------- ------------ Revenues $ 65,385,000 $ 48,471,000 Net Loss $(48,584,000) $(46,366,000) Loss Per Share $ (.38) $(1.09)
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 Incorporated ("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 AAA 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 it's 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 10 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 is also currently 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 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 February 8, 2001, The Nasdaq Stock Market, Nasdaq Listing Qualifications Department (the "Staff"), notified the Company that its securities would be de-listed from the Nasdaq SmallCap Market (the "SmallCap Market") for the Company's inability to meet a SmallCap Market continued inclusion requirement for $35,000,000 in market capitalization. Subsequently, the Staff, in its March 8, 2001 correspondence, notified I-Link that the Company no longer complied with the minimum bid price requirement of $1.00 per share as set forth in National Association of Securities Dealers, Inc. ("NASD") Rule 4310(c)(4). Subsequently, on June 11, 2001, the Staff raised additional concern regarding the Company's issuances of stock and debt to Counsel Corporation in connection with the Loan and NexBell transactions (as defined below) (it was alleged that said stock issuances by I-Link should have been approved by I-Link's stockholders). On May 17, 2001, an oral hearing was held before a panel of the Nasdaq Listing Qualifications Panel (the "Panel"), relating to the various concerns raised by the Staff. On July 17, 2001, the Panel issued a decision to continue the listing of I-Link's securities on the SmallCap Market in accordance with the exception from certain continued listing criteria. Under the terms and conditions of the exception, I-Link is required, on or before August 3, 2001, to file a proxy statement with the Securities and Exchange Commission (the "SEC") and Nasdaq evidencing I-Link's intent (1) to seek shareholder approval for a reverse stock sufficient to evidence a closing bid price of at least $1.00 per share, and (2) to seek shareholder ratification for the issuance of shares of its common stock to Counsel Corporation in connection with (i) March 1, 2001 Senior Convertible Loan and Security Agreement with Counsel Communications LLC, a wholly-owned subsidiary of Counsel Corporation (the "Loan transaction") and (ii) April 17, 2001 Agreement and Plan of Merger by and among I-Link and I-Link Acquisition Corp., a Delaware corporation and I-Link's wholly owned subsidiary, on the one hand, and WebToTel, Inc., a Delaware corporation, Counsel Corporation, and certain other shareholders, on the other hand (the "NexBell transaction"). On July 30, 2001, the Company filed a revised preliminary proxy statement with the SEC and Nasdaq. I-Link's compliance with the first requirement necessary for continued listing on the SmallCap was acknowledged in the Staff correspondence dated August 9, 2001. As a result of its compliance with the foregoing requirement, the Panel determined to continue the continued listing exception through September 5, 2001. On August 16, 2001, the Nasdaq Staff satisfied I-Link's request for an extension to effect the proposed reverse stock split and extended the compliance deadline from September 5, 2001 to September 13, 2001. Pursuant to the terms of the August 16, 2001 reiteration of the Panel's determination, on or before September 13, 2001, I-Link is required to submit to Nasdaq documentation evidencing receipt of shareholder ratification for stock issuances to Counsel Corporation in connection with the Loan and NexBell transactions. In addition, the Company, on or before September 13, 2001, must demonstrate closing bid price of at least $1.00 per share and, immediately thereafter, a closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. Further, the Company, on or before September 13, 2001, must demonstrate a market capitalization of at least $35,000,000 and, immediately after, a market capitalization of at least $35,000,000 for a minimum of 10 consecutive trading days. As of the date of this filing, I-Link is not in compliance with the SmallCap Market capitalization continued listing criterion. There is no assurance that I-Link will comply with this requirement even if the proposed reverse stock split is effected as described in this proxy statement. Under the terms of the Panel's July 17, 2001 decision (as well as its August 16, 2001 reiteration), I-Link's non- 11 compliance with the market capitalization criterion, on or before September 13, 2001, will result in the de-listing of its securities from the SmallCap Market. I-Link must comply with all of the foregoing continued listing requirements in order to for its securities to remain listed on the SmallCap Market. In the event the Company fails to meet any one of the requirements as set forth in the July 17, 2001 Panel decision (as well as the August 16, 2001 reiteration of the same), the Company's common stock will be de-listed from the SmallCap Market. Should I-Link's securities cease to be listed on the SmallCap Market, its securities may continue to be listed on the OTC-Bulletin Board. NOTE 11 - SEGMENT OF BUSINESS REPORTING The Company's four reportable segments are as follows: o Telecommunications services - includes long-distance toll services (I-Link and Nexbell) and enhanced calling features such as V-Link. The telecommunications services products are marketed primarily to residential and small business customers. o 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. o 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. o Technology licensing and development - provides research and development to enhance the Company's product and technology offerings. Products developed by this segment include V-Link, Indavo, and other proprietary technology. The Company licenses certain developed technology to third party users, such as Red Cube, Lucent, Brooktrout and others. 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 June 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 telecommunication services has increased by approximately $10,000,000 due to the acquisition of WebToTel and segment assets for dial-around telecommunication services has increased by approximately $33,000,000 due to the acquisition of WorldxChange.
FOR THE THREE-MONTH FOR THE SIX-MONTH PERIOD ENDED PERIOD ENDED -------------------------------------- --------------------------------------- JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000 ---------------- ------------------ ----------------- ----------------- REVENUES FROM EXTERNAL CUSTOMERS: Telecommunications services $13,995,000 $5,598,000 $19,082,000 $11,187,000 Dial-around telecommunication services 5,932,000 - 5,932,000 - Marketing services - - - 464,000 Technology licensing and development 1,420,000 1,740,000 2,857,000 6,646,000 ---------------- ------------------ ----------------- ----------------- Total revenues from external customers for reportable segments $ 21,347,000 $ 7,338,000 $27,871,000 $18,297,000 ================ ================== ================= ================= 12 SEGMENT INCOME (LOSS): Telecommunications services $ 714,000 $ (1,558,000) $(2,142,000) $(3,787,000) Dial-around telecommunication services (1,242,000) - (1,242,000) - Marketing services - (58,000) - (154,000) Technology licensing and development 406,000 309,000 378,000 3,971,000 ---------------- ------------------ ----------------- ----------------- Total segment income (loss) for reportable segments (122,000) (1,307,000) (3,006,000) 30,000 Unallocated non-cash amounts in consolidated net loss: Settlement expense - 720,000 - (640,000) Amortization of discount on notes payable (74,000) - (104,000) - Amortization of deferred compensation on stock options issued for services - (189,000) - (381,000) Amortization of intangible assets (548,000) (719,000) (1,096,000) (1,438,000) Other corporate expenses (2,095,000) (4,404,000) (5,303,000) (7,305,000) ---------------- ------------------ ----------------- ----------------- $(2,839,000) $(5,899,000) $(9,509,000) $(9,734,000) ================ ================== ================= =================
13 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 quarter ended March 31, 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 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 efficiently integrate our recent acquisitions; 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; dependence upon key personnel; subscriber attrition; the adoption of new, or changes in, accounting principles; 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 METS, dial-around service, V-Link(TM) and Indavo(TM)); the migrating of subscribers from a retail billing basis to a wholesale billing basis; the continued increasing revenues from GateLink(TM) and other wholesale clients as well as 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. OPERATIONS We are an integrated voice and data communications company focused on simplifying the delivery of "Unified Communication." Unified Communication is the integration of traditional telecommunications with new data IP (Internet Protocol) communications systems with the effect of simplifying communications, increasing communication capabilities and lowering overall communication costs. Unified Communication platforms integrate telecommunication, mobile communication, paging, voice-over-IP (VoIP) and Internet technologies. We provide enhanced telecommunications services on a wholesale and retail basis. 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. We are a leader in the delivery of unified communications as a result of our core technology offerings: I-Link's Intranet, Softswitch Plus(TM), GateLink(TM) and Indavo(TM). We merged with WebToTel Inc. ("WebToTel") and its subsidiary Nexbell Communications Inc. ("Nexbell") on April 17, 2001. However as I-Link, WebToTel and Nexbell were under common control of Counsel Communications LLC, a wholly owned subsidiary of Counsel Corporation (collectively "Counsel") as of March 1, 2001, we have reflected the merger as if it had occurred on March 1, 2001. As a result of the merger, we purchased a private, managed IP telephony network that delivers packet voice services to over 400 key metropolitan areas in the United States. Nexbell's first product offering, Multi-Exchange 14 Transport Service ("METS"), provides customers with VoIP based local access origination and termination services through 13 domestic points of presence. On June 4, 2001, I-Link Incorporated, through it's wholly owned subsidiary WorldxChange Corp. ("WorldxChange"), purchased certain assets and assumed certain liabilities of WorldxChange Communications, Inc. out a bankruptcy. 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. A dial-around product allows a customer to make a call from any phone by dialing a 10-10-XXX prefix. The phone call will then be 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. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of June 30, 2001 were $1,744,556 and the working capital deficit was $31,364,705. Cash used by operating activities during the six-month period ended June 30, 2001 was $15,023,581 as compared to cash provided by operations of $3,717,922 during the same period ended June 30, 2000. The primary reason for the change from 2000 was that cash provided by operating activities in 2000 included $10,000,000 received as of June 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 six-month period ended June 30, 2001 was $13,483,166 as compared to net cash used of $2,950,760 in the same period ended June 30, 2000. Cash used by investing activities in 2001 was attributed to $13,000,000 used to purchase the net assets of WorldxChange and $716,953 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 $2,970,434 which was offset by $19,674 received from the sale of certain assets from discontinued operations. Financing activities provided net cash of $28,095,675 in the first six-months of 2001 as compared to cash provided of $3,441,456 in the same period of 2000. Cash provided in the first six-months of 2001 included loans from Counsel of $28,325,700 and $2,100 from issuances of common stock which were offset by repayment of notes payable and capital lease obligations of $232,125. Cash provided in 2000 included proceeds of $2,600,000 from a note payable to a related party, $3,532,719 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 $66,544 and repayments of $24,719 on certain notes in discontinued operations offset these proceeds. We incurred a net loss from continuing operations of $9,508,781 for the first six-months of 2001, and as of June 30, 2001 had an accumulated deficit of $131,145,624. We anticipate that revenue generated from continuing operations will not be sufficient during the remainder of 2001 to fund our operations or continued expansion of our private telecommunications network facilities and anticipated growth in subscriber base. We continue to be dependent upon funding from Counsel to fund our operational cash needs. CURRENT POSITION/FUTURE REQUIREMENTS While revenues from operations have increased significantly, operational expenses have also increase 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. 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, and the financial position and 15 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 six months ended June 30, 2001 as compared to the same three and six 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 subsidiary Nexbell Communications 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 subsequent to March1, 2001. 2. On June 4, 2001 we completed the purchase of certain assets and liabilities of WorldxChange Communication, Inc. We continue to offer the dial-around telecommunications product, which this company had previously offered. We did not offer a comparable product prior to June 4, 2001. THREE-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 2000 REVENUES Telecommunications service revenue increased $14,819,329 to $19,408,441 in the three months ended June 30, 2001 as compared to $4,589,112 in the three months ended June 30, 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, 2001were 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 second quarter increased $5,932,000 related to the dial-around business of WorldxChange and $868,000 related to telecommunications services offered by Nexbell. Excluding the above revenues, recurring revenues decreased as a direct result of a shift in focus from retail to wholesale sales resulting in a decrease in revenues of $1,524,000 which was due to a combination of a 44% drop in the rate per minute and a 52% increase in minutes billed. We anticipate that reported revenues for the third quarter from WorldxChange will be approximately three times those for the second quarter (due to inclusion of three months of revenue in the third quarter versus one month in the second quarter). We anticipate revenues from other recurring sources will increase slightly in the third quarter. Technology licensing and development revenue decreased $319,908 to $1,419,998 in the second quarter of 2001 as compared to $1,739,906 in the same quarter of 2000. During the three months ended June 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 second quarter of 2001 as compared to $833,333 in the same quarter of 2000. As of June 30, 2001, the unearned balance of $4,166,667 has been recorded as unearned revenue. Other than Red Cube as discussed above, technology licensing and development revenues decreased $737,000 due to the contracts occurring in the second quarter of 2000 which did not recur in the same period of 2001. Revenue from this source will vary from quarter to quarter based on timing of future technology licensing and development projects. Other revenues in the second quarter of 2001 decreased $490,104 to $518,459 as compared to $1,008,563 in the same period of 2000. The revenues relate primarily to customer care, billing and accounts receivable services performed primarily for our single largest customer. The decrease from the second quarter of 2000 to the second quarter of 2001 was anticipated as many of the services previously rendered to this customer were transitioned to the customer. Revenues from these services are expected 16 to remain constant in the third 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 $8,177,860 in the second quarter of 2001 to $13,715,806 as compared to $5,537,946 for the same quarter of 2000. The primary increase was related to inclusion of network expense 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. 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 inclusion of WebToTel as of March 1, 2001, increased telecommunication expenses $1,750,000. The inclusion of WorldxChange for the month of June 2001 increased telecommunication expenses $5,315,000. Telecommunications network expense will increase dramatically in the third quarter as a direct result of additional revenues and the corresponding network expense from WorldxChange in the same period. Selling, general and administrative expense decreased $21,593 to $5,703,360 in the second quarter of 2001 as compared to $5,724,953 in the second quarter of 2000. The primary components of the net decrease consisted of an approximate $1,100,000 due to decreases in salaries and benefits as a result of the work force reductions in January and May of 2001 and a $573,000 reduction in other corporate expenses related to the work force reduction (facilities, materials etc.) and other cost cutting measures instituted by management. These reductions were offset by additional selling, general and administrative cost of approximately $1,144,000 related to the WorldxChange dial-around business that began June 4, 2001and $553,000 relating to WebToTel. The provision for doubtful accounts increased $1,215,210 to $1,269,397 in the second quarter of 2001 as compared to $54,187 in the same quarter of 2000. The increase was directly due to necessary provisions for doubtful accounts associated with two sources of revenues. During the second quarter 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 $280,000 were recorded related to WorldxChange dial-around business, which began June 4, 2001, and WebToTel accounts receivable. Depreciation and amortization increased $769,990 to $2,330,806 in the second quarter of 2001 as compared to $1,560,816 in the second quarter of 2000. The increase is primarily due to depreciation and amortization relating to assets (primarily goodwill amortization of $457,000) acquired in the WebToTel and WorldxChange acquisitions. Additionally, WorldxChange entered into a $9,000,000 capital lease in June of 2001 that resulted in approximately $188,000 of the increase. Depreciation will continue to increase in the third quarter primarily as a result of three months of depreciation, rather than one month in the second quarter, related to WorldxChange assets. Research and development decreased $317,832 to $523,614 in the second quarter of 2001 as compared to $841,446 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. We anticipate that research and development expense will continue at a comparable amount during the remainder of 2001. OTHER INCOME (EXPENSE) Interest expense increased $316,311 to $666,792 in the second quarter of 2001 as compared to $350,481 in the same quarter of 2000. Interest in the second quarter of 2001 was primarily due to interest on related party debt which was $58,000 higher in the second quarter of 2001 compared to the same period of 2000 due to higher average balances outstanding during the six months ended June 30, 2001. We also recorded non-cash interest expense of $172,000 in the second 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 on other debt increased $86,000 as a result of increased average balances of debt outstanding. Interest expense in the third quarter will increase significantly as the Company continues to accrue 17 interest on borrowings from Counsel and non-cash interest related to the value of warrants issued to Counsel in connection with a loan. Interest expense in the third quarter will also increase due to inclusion of interest on WorldxChange's debt related to its capital leases. Interest and other income decreased $89,379 to $23,590 in the second quarter of 2001 as compared to $112,969 in the same quarter of 2000. The decrease was primarily due to a decrease in the average balance of cash on hand in the second quarter of 2001 as compared to the same quarter of 2000. SIX-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THE SIX-MONTH PERIOD ENDED JUNE 30, 2000 REVENUES Telecommunications service revenue increased $13,953,105 to $23,829,424 in the first six months of 2001 as compared to $9,876,319 in the first six 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, 2001were 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 six months of 2001 increased $5,932,000 related to the dial-around business of WorldxChange and $1,161,000 (representing revenues from March to June of 2001) related to Nexbell's METS product. Excluding the above revenues, recurring revenues decreased as a direct result of a shift in focus from retail to wholesale sales resulting in a decrease in revenues of $2,683,000 which was due to a combination of a 52% drop in the rate per minute and a 68% increase in minutes billed. Marketing services revenue, which included revenue from independent representatives for promotional and presentation materials, WebCentre, and ongoing administrative support decreased $464,354 to $0 in the first six-months of 2001 as compared to $464,354 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 with such transition, marketing service revenues ceased. Technology licensing and development revenue decreased $3,389,509 to $2,856,897 in the first six months of 2001 as compared to $6,246,406 in the first six months of 2000. During the first six 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, $2,500,000 was recorded in the first six months of 2001 as compared to $833,333 in the first six months of 2000. As of June 30, 2001, the unearned balance of $4,166,667 has been recorded as unearned revenue. During the first six months of 2000, revenues of $4,000,000 were recorded related to two licensing agreements that did not recur in 2001. Revenue from this source will vary from quarter to quarter based on timing of technology licensing and development projects. Other revenues in the first six months of 2001 decreased $524,625 to $1,185,042 as compared to $1,709,667 in the first six months of 2000. The first six months of 2001 includes $999,000 as compared to $1,310,000 in the same period of 2000, which represent revenues relating to customer care, billing and accounts receivable services performed for our single largest customer. The decrease from the first six months of 2000 to the first six months of 2001 was an anticipated decrease as many of the services rendered in 2000 to this customer were transitioned to the customer. However, revenues from these types of services vary from period to period based upon services requested. During the first six 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. OPERATING COSTS AND EXPENSES Telecommunication network expense increased $8,374,504 in the six months ended June 30, 2001 to $20,025,512 as compared to $11,651,008 for the same period in 2000. These expenses include the costs related to the continuing 18 development and deployment of our communication network and expenses related to the generation of telecommunication service revenue. While telecommunication network expense is directly related to telecommunication services revenues, the relationship is not comparable with the same period in 2000 due to the transition to wholesale rather than retail revenues as a result of the agreement with Big Planet. The inclusion of Nexbell for the period from March to June 2001 increased telecommunication expenses $2,325,000. The inclusion of WorldxChange for the month of June 2001 increased telecommunication expenses $5,315,000. Telecommunications network expense will increase dramatically in the third quarter as a direct result of additional revenues from WorldxChange in the same period. Marketing service costs decreased $349,034 to $0 in the first six months of 2001 as compared to $349,034 for the same period in 2000. The decrease in expense is directly related to the transition of the network-marketing channel to Big Planet in February 2000, which resulted in the cessation of marketing service revenues and accordingly the related expenses. Selling, general and administrative expense decreased $202,300 to $9,441,741 in the first six months of 2001 as compared to $9,644,041 in the first six months in 2000. The primary components of the net decrease consisted of approximately $1,654,000 due to decreases in salaries and benefits as a result of the work force reductions in January and May of 2001 and a $573,000 reduction in other corporate expenses related to the work force reduction (facilities, materials etc.) and other cost cutting measures instituted by management. These reductions were primarily offset by additional selling, general and administrative cost of approximately $1,143,000 related to WorldxChange dial-around business that began June 4, 2001and $721,000 relating to WebToTel. The provision for doubtful accounts increased $997,853 to $1,377,756 in the six months of 2001 as compared to $379,903 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 quarter 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 $350,000 were recorded related to the WorldxChange dial-around business, which began June 4, 2001, and revenues related to the WebToTel acquisition included in our financial statements after March 1, 2001. Excluding the impact of Red Cube, WorldxChange and WebToTel, our provision for doubtful accounts for the first six months of 2001 decreased from 2000 due to the transition of most of our retail business to wholesale effective February 2000 which reduced our bad debt expense. Depreciation and amortization increased $932,086 to $3,981,791 in the first six months of 2001 as compared to $3,049,705 in the first six months of 2000. The increase is primarily due to depreciation and amortization relating to assets (primarily goodwill amortization of $610,000) acquired in the WebToTel and WorldxChange acquisitions. Additionally, WorldxChange entered into a $9,000,000 capital lease in June of 2001 that resulted in approximately $188,000 of the increase. Depreciation will continue to increase in the third quarter primarily as a result of three months of depreciation, rather than one month in the second quarter, related to WorldxChange assets. Research and development decreased $83,986 to $1,590,372 in the first six months of 2001 as compared to $1,674,358 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. We anticipate that research and development expense will approximate $500,000 in the third quarter of 2001. OTHER INCOME (EXPENSE) Interest expense increased $220,310 to $1,014,633 in the first six months of 2001 as compared to $794,323 in the same period of 2000. We recorded non-cash interest expense of $201,500 in the first six months of 2001 related to the amortization of a beneficial conversion feature on convertible debt with Counsel and interest related to the value of warrants issued to Counsel in connection with a loan. Interest on other debt, including related party debt, in the first six months of 2001 was comparable to the same period of 2000. Interest expense in the third quarter will increase significantly as we continue to accrue interest on borrowings from Counsel and record non-cash interest related to the beneficial conversion feature on convertible debt and the value of warrants issued to Counsel in connection with a loan. Interest expense in the third quarter will also increase due to inclusion of three months interest on WorldxChange debt related to its capital leases, as compared to one month in the second quarter. 19 Interest and other income decreased $99,135 to $51,661 in the first six months of 2001 as compared to $150,796 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 six months of 2001. A settlement expense of $639,565 was recorded in the first six months of 2000. This expense is the result of an obligation to issue 129,519 shares of common stock in exchange for 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 six months of 2001. 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 March 31, 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 We have previously reported the lawsuit and arbitration proceeding that were brought against I-Link and I-Link Worldwide LLC by Steven J. Little, a former independent representative of I-Link Worldwide, L.L.C. From April 23, 2001 through April 27, 2001 and on May 14, 2001 an evidentiary arbitration hearing, which is the functional equivalent of trial, was conducted by the arbitrator. During the six day arbitration hearing Mr. Little fully presented his claims against I-Link and I-Link Worldwide, LLC and I-Link and I-Link Worldwide, LLC presented their defenses. On June 1, 2001 the arbitrator issued a written decision concluding that neither I-Link nor I-Link Worldwide, LLC owe Mr. Little any monetary reward. On June 25, 2001, Mr. Little filed a motion to modify the arbitration award in the arbitration proceeding which the arbitrator denied. Also, on June 25, 2001, Mr. Little filed a motion to vacate or modify the arbitration award in the litigation preceding in State Court of Utah. The court denied Mr. Little's motion and confirmed the arbitrator's decision. On January 18, 2001, I-Link Incorporated ("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 AAA 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 it's 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 iswas also currentlyat 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 8,2000. - - 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 (the "Staff"("Nasdaq"), notified the Company that its securities would be de-listed from the Nasdaq SmallCap Market (the "SmallCap Market") for the Company's inability to meet a SmallCap Market continued inclusion requirement for $35,000,000 in market capitalization. Subsequently, the Staff, in its March 8, 2001 correspondence, notified I-Link that the Company no longer complied with the minimum bid price requirement of $1.00 per share as set forth in National Association of Securities Dealers, Inc. ("NASD") Rule 4310(c)(4). Subsequently, on June 11, 2001, the Staff raised additional 21 concern regarding the Company's issuances of stock and debt to Counsel Corporation in connection with the Loan and NexBell transactions (as defined below) (it was alleged that said stock issuances by I-Link should have been approved by I-Link's stockholders). On May 17, 2001, an oral hearing was held before a panel of the Nasdaq Listing Qualifications Panel (the "Panel"), relating to the various concerns raised by the Staff. On July 17, 2001, the Panel issued a decision to continue the listing of I-Link's securities on the SmallCap Market in accordance with the exception from certain continued listing criteria. Under the terms and conditions of the exception, I-Link is required, on or before August 3, 2001, to file a proxy statement with the Securities and Exchange Commission (the "SEC") and Nasdaq evidencing I-Link's intent (1) to seek shareholder approval for a reverse stock sufficient to evidence a closing bid price of at least $1.00 per share, and (2) to seek shareholder ratification for the issuance of shares of its common stock to Counsel Corporation in connection with (i) March 1, 2001 Senior Convertible Loan and Security Agreement with Counsel Communications LLC, a wholly-owned subsidiary of Counsel Corporation (the "Loan transaction") and (ii) April 17, 2001 Agreement and Plan of Merger by and among I-Link and I-Link Acquisition Corp., a Delaware corporation and I-Link's wholly owned subsidiary, on the one hand, and WebToTel, Inc., a Delaware corporation, Counsel Corporation, and certain other shareholders, on the other hand (the "NexBell transaction"). On July 30, 2001, the Company filed a revised preliminary proxy statement with the SEC and Nasdaq. I-Link's compliance with the first requirement necessary for continued listing on the SmallCap was acknowledged in the Staff correspondence dated August 9, 2001. As a result of its compliance with the foregoing requirement, the Panel determined to continue the continued listing exception through September 5, 2001. On August 16, 2001, the Nasdaq Staff satisfied I-Link's request for an extension to effect the proposed reverse stock split and extended the compliance deadline from September 5, 2001 to September 13, 2001. Pursuant to the terms of the August 16, 2001 reiteration of the Panel's determination, on or before September 13, 2001, I-Link is required to submit to Nasdaq documentation evidencing receipt of shareholder ratification for stock issuances to Counsel Corporation in connection with the Loan and NexBell transactions. In addition, the Company, on or before September 13, 2001, must demonstrate closing bid price of at least $1.00 per share and, immediately thereafter, a closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. Further, the Company, on or before September 13, 2001, must demonstrate a market capitalization of at least $35,000,000 and, immediately after, a market capitalization of at least $35,000,000 for a minimum of 10 consecutive trading days. As of the date of this filing, I-Link is not in compliance with the SmallCap Market capitalization continued listing criterion. There is no assurance that I-Link will comply with this requirement even if the proposed reverse stock split is effected as described in this proxy statement. Under the terms of the Panel's July 17, 2001 decision (as well as its August 16, 2001 reiteration), I-Link's non-compliance with the market capitalization criterion, on or before September 13, 2001, will result in the de-listing of its securities from the SmallCap Market. I-Link must comply with all of the foregoing continued listing requirements in order to for its securities to remain listed on the SmallCap Market. In the event the Company fails to meet any one of the requirements as set forth in the July 17, 2001 Panel decision (as well as the August 16, 2001 reiteration of the same), the Company's common stock will be de-listed from the SmallCap Market. Should I-Link's securities cease to be listed on the SmallCap Market, its securities may continue to be listed on the OTC-Bulletin Board. ITEM 2 - CHANGES IN SECURITIES The disclosure set forth in Items 2 and 5 of Form 8-K filed on March 16, 2001 is incorporated herein by reference. On September 28, 2001, Nasdaq issued an order delisting I-Link's common stock from The disclosure set forthNasdaq 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 Item 2default on $690,000 in arrearages and approximately $3,000,000 in total. As of Form 8-K filedSeptember 30, 2001, I-Link was in default on May 2,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, is incorporated herein by reference. The disclosure set forththe leasing company drew against the letter of credit in Item 2the amount of Form 8-K filed$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 June 19, 2001 is incorporated herein by reference.the letter of credit and interest since October 11, 2001. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NoneOur 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 Number Item - ------ ----- 10.1 LoanEXHIBIT NO. EXHIBIT 4.11 2001 Stock Option and security agreement as of June 6, 2001 by and between I-Link Incorporated and Counsel Corporation 10.2 Loan and security agreement as of June 4, 2001 by and between WorldxChange Corp., I-Link Incorporated and Counsel Corporation (US). 10.3 Warrant agreement by and between Counsel Corporation (US) and I-Link Incorporated 10.4 Form of Lease Agreement effective on June 2, 2001 between Telecommunications Finance Group of Siemens Carrier Networks LLC. and WorldxChange Corp. 10.5 Agreement and plan of merger dated April 17, 2001 by and among WebToTel, Inc., Counsel Communications LLC, I-Link Incorporated and other shareholders of WebToTel. 22 Appreciation Rights Plan, filed herewith ITEM 6(b) - REPORTS ON FORM 8-K An 8-KA Current Report on Form 8-K/A#1 was filed on May 2, 2001 to announce I-Link's entering into an Agreement and Plan of Merger to acquire WebToTel, Inc. An 8-K was filed on May 4, 2001 to announce the resignation of John M. Ames as Chief Financial Officer. An 8-K was filed on June 19, 2001 to announce that I-Link Incorporated, through it wholly-owned subsidiary WorldxChange Corp., had acquired certain assets and liabilities out of the bankruptcy proceedings of WorldxChange Communications, Inc. The 8-K also disclosed the financing arrangements of such purchase. An 8-K/A#2 was filed on June 29,August 20, 2001 as an amendment to ana Form 8-K filed on May 2,June 19, 2001, in order to include financial statements and pro forma financial information relative to I-Link's purchase of WebToTel.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 IncorporatedI-LINK INCORPORATED ---------------------- (Registrant) Date: August 20,November 13, 2001 By: /s/ GaryGARY S. Wasserson ---------------------------------WASSERSON ------------------------------- Gary S. Wasserson Chief Executive Officer By: /s/ JamesJAMES A. GiauqueGIAUQUE III ---------------------------------------------------------------- James A. Giauque III Chief Accounting Officer 23