UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 0-17973
MEDCROSS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3227 Bennet Street North, St. Petersburg, Florida 33713
(Address of principal executive offices)
(813) 521-1793
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at July 31, 1996
Common Stock, par value $0.007 11,093,065
Traditional Small Business Disclosure Format (Check One): Yes No X
<PAGE> 1
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
Assets
June 30
1996
<S> <C>
Current assets
Cash and cash equivalents $ 383,954
Accounts receivable less allowance of $681,600 910,124
Inventory 830,098
Prepaid expenses 95,383
Total current assets 2,219,559
Property and equipment 4,304,454
Less accumulated depreciation 2,045,950
Net property and equipment 2,258,504
Investment in unconsolidated subsidiary 6,250
Intangible assets, net of amortization of $881,901 3,243,844
Other assets 30,482
Total assets $ 7,758,639
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 2,483,634
Advance deposits received 233,728
Accrued royalty fees 450,000
Note payable - related party 663,500
Note payable - other 1,805,000
Current portion of long-term debt - related party 39,230
Current portion of long-term debt - other 488,957
Current obligations under capital lease 230,918
Total current liabilities 6,394,967
Long-term debt - related 68,579
Obligations under capital leases 396,762
Minority equity interest in consolidated subsidiaries 333,165
Commitments and contingencies
Stockholders' equity
Preferred stock 75,000
Common stock 59,112
Other stockholders' equity 431,054
Total stockholders' equity 565,166
Total liabilities and stockholders' equity $ 7,758,639
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 2
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Health care service revenue $ 582,490 $ 758,359 $1,174,670 $ 1,537,963
Equipment sales and service - - - 337,889
Network service revenue 61,290 - 72,364 -
Net operating revenue 637,828 758,359 1,247,034 1,875,852
Cost of goods sold - equipment sales and service - 54,641 - 239,798
Salaries and benefits 542,635 311,487 795,083 640,418
Repairs and maintenance 74,944 77,542 143,907 154,488
Network expenses 224,302 - 322,535 -
Provision for doubtful accounts 49,619 ( 3,943) 90,863 323,645
Depreciation and amortization 515,923 116,741 797,626 234,693
Purchased research and development - - 2,034,103 -
Other operating expenses 623,103 297,748 1,129,888 614,536
Operating loss (1,392,698) ( 95,857) (4,066,971) ( 331,726)
Interest expense 75,127 41,692 122,766 80,820
Other (income) expense 2,765 ( 19,583) ( 12,762) ( 23,399)
Loss before minority interest in net loss
of consolidated subsidiaries and income
tax provision (1,470,590) ( 117,966) (4,176,975) ( 389,147)
Minority interest in net loss of consolidated
subsidiaries ( 2,006) ( 20,623) ( 63) ( 7,844)
Loss before income tax provision (1,468,584) ( 97,343) (4,176,912) ( 381,303)
Income tax provision - - - -
Net loss $(1,468,584) $( 97,343) $(4,176,912) $( 381,303)
Loss per common and equivalent share after
preferred dividends $( .17) $( .07) $( .52)$( .25)
Weighted average common and equivalent shares
outstanding 8,420,712 1,749,163 7,989,391 1,749,163
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Cash provided (used) by operating activities $( 253,491) $ 105,914 $( 866,315) $ 155,982
Cash flows from investing activities
Purchase of property and equipment ( 659,888) ( 375) ( 666,715) ( 15,375)
Proceeds from sale of property and equipment 3,171 4,500 3,251 4,500
Net cash provided (used) by
investing activities ( 656,717) 4,125 ( 663,464) ( 10,875)
Cash flows from financing activities
Proceeds (reduction) of notes payable - related party 5,500 - ( 117,833) 218,000
Proceeds (reduction) of notes payble - other 284,860 - 1,300,425 ( 101,000)
Release of certificate of deposit as collateral - - 60,000 -
Reduction of long-term debt - other - ( 97,285) - ( 194,571)
Proceeds from capital leases 659,888 - 659,888 -
Reduction of long-term debt - related ( 9,676) - ( 51,751) -
Reduction of capital lease obligations ( 213,065) ( 60,851) ( 286,354) (120,251)
Issuance of common stock 1,336 - 1,979 -
Additional paid-in capital 180,433 - 304,086 -
Minority interest distributions ( 36,865) - ( 36,865) ( 36,500)
Net cash provided (used) by
financing activities 872,411 ( 158,136) 1,833,575 (234,322)
Effect of foreign currency translation
on cash flows - ( 1,870) 1 ( 1,858)
Increase (decrease) in cash and cash equivalents ( 39,797) ( 49,967) 303,797 ( 91,073)
Cash and cash equivalents at beginning of period 421,751 320,051 80,157 361,157
Cash and cash equivalents at end of period $ 383,954 $ 270,084 $ 383,954 $ 270,084
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Supplemental cash flow information
In February 1995 a holder of Class B Preferred Stock converted 9,350 shares into
227,714 shares of Common Stock.
In February 1996, the Company acquired all of the issued and outstanding shares
of I-Link Worldwide, Inc. in exchange for the issuance of 4,000,000 shares of
Common Stock of the Company, of which 2,600,000 shares are held in escrow.
<PAGE> 4
Supplemental Cash Flow Information - continued
In February 1996, a holder of Class A Preferred Stock converted 40,000 shares
into 978,891 shares of Common Stock.
In April 1996, holders of promissory notes issued by the Company in February
1996 converted $10,000 in the aggregate into 140,000 shares of Common Stock.
In June 1996, holders of certain promissory notes issued by the Company in June
1993 converted $180,542 in the aggregate into 64,372 shares of Common Stock.
In June, 1996, a holder of Class A Preferred Stock converted 160,000 shares into
3,915,570 shares of Common Stock.
<PAGE> 5
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three-month and six-month periods ended June 30, 1996 and
June 30, 1995, (b) the financial position at June 30, 1996, and (c) cash flows
for the three-month and six-month periods ended June 30, 1996 and June 30, 1995,
have been made.
The unaudited consolidated financial statements and notes are presented as
permitted by Form 10-QSB. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The
accompanying consolidated financial statements and notes should be read in
conjunction with the audited financial statements and notes of the Company for
the fiscal year ended December 31, 1995. The results of operations for the
three-month and six-month periods ended June 30, 1996 are not necessarily
indicative of those to be expected for the entire year.
Note 2 - Acquisition of subsidiary
In February 1996, the Company closed its acquisition of all of the issued and
outstanding common stock of I-Link Worldwide Inc., a Utah corporation ("I-Link")
from ILINK, Ltd., a Utah limited partnership in exchange for the issuance of an
aggregate of 4,000,000 shares of common stock of the Company. The purchase
price was determined through arms length negotiation. The acquisition was
accounted for using the purchase method of accounting. The results of
operations of the acquired enterprise are included in the consolidated financial
statements beginning February 13, 1996. Pursuant to the terms of the stock
purchase agreement, 2,600,000 shares of the common stock issued pursuant to the
acquisition of I-Link were placed in escrow to be released as follows:
1. 1,600,000 shares of common stock are to be released upon the receipt
of proceeds greater than or equal to $4,000,000 from the sale of the
Company's securities pursuant to the conduct of one or more private
or public offerings prior to December 31, 1996; and
2. 1,000,000 shares of common stock are to be released upon the first to
occur of the following:
(i) the monthly revenue derived from subscribers serviced by
I-Link and revenue derived from the sale of related
products and/or services equals or exceeds $1,000,000; or
(ii) the number of subscribers serviced by I-Link exceeds
100,000 one year from the date of receipt by the Company
of gross proceeds equal to $4,000,000 from the sale of its
securities pursuant to one or more private or public
offerings.
I-link is in the business of delivering business communications services via the
emerging worldwide data communication networks (which includes the Internet).
I-Link seeks to provide business communications solutions and enhanced
capabilities to existing users of traditional telecommunications services, at
substantial cost savings to its customers through utilization of the Internet
and other existing data communications networks. I-Link's first business
communications product is marketed under the name "Fax4Less[TM]".
<PAGE> 6
Note 2 - Acquisition of subsidiary - continued
The following presents the proforma financial information of the Company and I-
Link, as applicable for the six months ended June 30, 1996 assuming such
transaction had occurred on January 1, 1996 and for the six months ended
June 30, 1995 assuming such transaction had occurred on January 1, 1995:
<TABLE>
<CAPTION>
Six Months Ended Net Loss Per Common
June 30, 1996 Revenue Net Loss and Equivalent Share
<S> <C> <C> <C>
Company1/ $1,247,034 $(4,176,192) $( .52)
I-Link2/ 48,585 ( 139,683)
Combined 1,295,619 (4,315,875)
Proforma adjustment - ( 190,378)
Proforma combined $ 1,295,619 $(4,506,253) $( .57)
<CAPTION>
Six Months Ended Net Loss Per Common
June 30, 1995 Revenue Net Loss and Equivalent Share
<C> <C> <C> <C>
Company $ 1,875,852 $( 381,303) $( .25)
I-Link 102,368 ( 571,879)
Combined 1,978,220 ( 952,182)
Proforma adjustment - (2,796,813)
Proforma combined $ 1,978,220 $(4,748,995) $(1.51)
<FN>
<F1> 1/Includes I-Link operations from February 13, 1996 through June 30, 1996
<F2> 2/For the period January 1, 1996 through February 12, 1996.
</FN>
</TABLE>
Note 3 - Intangible Assets
Intangible assets of $4,969,314 were recorded by the Company as a result of the
acquisition of the common stock of I-Link. The intangible assets recorded by
the Company were as follows:
Acquisition costs $ 116,279
Subscriber list 323,100
FaxLink patent 456,764
VoiceLink patent 456.987
FaxLink research and development 1,356,068
VoiceLink research and development 678,035
Goodwill 1,582,081
The acquisition costs and the subscriber list are amortized over 12 months, the
patents will be amortized over a period to be determined at the time the patents
are approved, the research and development was amortized immediately and the
goodwill is amortized over 24 months.
Note 4 - Notes Payable
Simultaneous with the closing of its acquisition of I-Link, the Company
completed a private placement of $1,000,000 in aggregate principal amount of
convertible promissory notes (the "10% Notes"). The 10% Notes are payable upon
the earlier of August 31, 1996 (subject to extension) or the Company's receipt
of proceeds of at least $4,000,000 from subsequent debt or equity offerings.
The 10% Notes bear interest payable semi-annually at the rate of 10% until
August 31, 1996 (13% after such date if the term of the 10% Note is extended).
Up to $1,250 of each $50,000 in principal amount of note is convertible at any
time at the option of the holder, into a maximum of 350,000 shares of Common
Stock at the rate of
<PAGE> 7
Note 4 - Notes Payable - continued
approximately $.0714 per share, subject to certain antidilution adjustments. The
10% Notes may be extended until February 28, 1997 upon payment by the Company of
2.5% of the then outstanding principal balance of the 10% Note. The proceeds of
such offering were used to pay outstanding accounts payable and other debts of
I-Link.
In addition, the Company assumed notes payable to limited partners of ILINK,
Ltd. in the amount of $643,333 and to other parties in the amount of $104,575.
In June 1996, the Company issued promissory notes in the amount of $375,000.
These promissory notes were due on the earlier of December 31, 1996 or the
receipt of at least $4.8 million from debt or equity financings, with interest
at the rate of 8% per annum. The proceeds of the promissory notes were used
for I-Link working capital purposes. These notes were paid in full in
September 1996.
Note 5 - Long Term Debt
As part of the common stock acquisition of I-Link, the Company assumed the
obligations under capital leases in the amount of $99,001. The leases vary in
rates and have terms from 36 to 41 months expiring February 1998. Monthly
payments total approximately $2,000.
Note 6 - Commitments and Contingencies
The portion of the I-Link common stock purchase price placed in escrow will be
released upon the satisfaction of the contingencies described in Note 2 above.
The fair market value of the Common Stock at the time of its release from escrow
will be charged to goodwill and amortized over the remaining life of the
goodwill.
Note 7 - Earnings Per Common Share
Earnings per common share are based upon the weighted average number of common
shares outstanding and the dilutive effect of common stock equivalents
consisting of stock options and convertible preferred stock. Fully diluted
earnings per share are not presented because it approximates earnings per common
share.
Note 8 - Lease Commitments
I-Link leases approximately 1,500 square feet of space, which housed its
corporate offices in Austin, Texas. Such lease has a term of three years, which
is scheduled to expire on November 30, 1997 but which I-Link is negotiating to
terminate. Pursuant to the terms of such lease, I-Link pays rent on a monthly
basis of $1,740. I-Link has recently entered into a ten-month lease for 5,000
square feet of space in Austin, Texas, which housed its corporate offices.
Pursuant to such lease, I-Link will pay rent of $5,000 per month. I-Link also
leases several other spaces to house its POPs throughout the United States.
Such spaces vary in size and are rented on a month-to-month basis.
I-Link currently leases and occupies approximately 6,500 square feet of office
space, in Draper Utah, pursuant to a commercial lease dated May 21, 1996, with
an unrelated third party. The initial lease term is five years commencing on
July 8, 1996 at a base rent of $5,451 per month. In addition, I-Link will be
responsible for certain improvements to such facilities above $97,120.
<PAGE> 8
Note 9 - Geographic Segment Information
The Company's operations consist of providing network services and diagnostic
and clinical outpatient health care services domestically and the sale and
service of used medical equipment in the People's Republic of China (PRC). The
corporate office provides management and operational services for network
services and domestic outpatient health care services. The eliminations
represent charges for these services to entities included in the consolidation.
Financial information for the different geographic segments is as follows:
<TABLE>
<CAPTION>
Domestic
Six Months Ended Network Corporate/
June 30, 1996 Health Care Services China Management Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,052,090 $ 72,364 $ - $ 167,675 $( 45,095) $ 1,247,034
Operating Profit (Loss) $ 93,233 $(3,929,400) $( 18,098) $( 167,611) $( 45,095) $(4,066,971)
Identifiable Assets $ 2,753,208 $ 3,881,981 $1,011,818 $ 261,482 $( 149,850) $ 7,758,639
<CAPTION>
Domestic
Six Months Ended Network Corporate/
June 30, 1995 Health Care Services China Management Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,373,862 $ - $ 337,889 $ 245,315 $( 81,214) $ 1,875,852
Operating Profit (Loss) $ 237,130 $ - $( 242,151) $( 245,491) $( 81,214) $( 331,726)
Identifiable Assets $ 3,363,018 $ - $ 1,009,718 $ 201,175 $( 66,064) $ 4,507,847
</TABLE>
Item 2 - Management's Discussion and Analysis
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 the Company's Form 10-KSB/A#1 for the fiscal year
ended December 31, 1995.
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited to,
the existence of demand for and acceptance of the Company's products and
services, regulatory approvals and develpments, economic conditions, the impact
of competition and pricing results of financing efforts and other factors
affecting the Company's business that are beyond the Company's control. The
Company undertakes no obligation and does not intend to update, revise or
otherwise publicly release the result of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
Results of Operations
The following Table represents the net operating revenue and operating profit
(loss) of the Company for each category of service offered. The net operating
revenue and operating profit (loss) shown are net of intercompany transactions
that were eliminated in consolidation.
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
1996 1995 1996 1995
NET OPERATING REVENUE
<S> <C> <C> <C> <C>
Diagnostic Imaging $ 521,200 $ 677,044 $1,052,090 $ 1,373,862
Sales and Services of Medical Equipment - - - 337,889
Network Services 55,338 - 72,364 -
Management and Other 61,290 81,315 122,580 164,101
$ 637,828 $ 758,359 $ 1,247,034 $ 1,875,852
<CAPTION>
OPERATING PROFIT (LOSS)
<S> <C> <C> <C> <C>
Diagnostic Imaging $ 26,271 $ 90,945 $ 93,233 $ 237,130
Sales and Services of Medical Equipment ( 16,326) ( 31,164) ( 18,098) ( 242,151)
Network Services (1,305,830) - (3,929,400) -
Management and Other ( 96,813) ( 155,638) ( 212,706) ( 326,705)
$(4,066,971) $( 331,726) $(1,392,698) $( 95,857)
</TABLE>
Diagnostic Imaging
Net operating revenue from diagnostic imaging services decreased by 23.4% for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. Medcross Imaging, Ltd. accounted for $107,802 and
$260,783 of the decrease for the three and six months ending June 30, 1996, as
compared to the same period in 1995. This decrease in revenue is mainly due to
the decrease in the average revenue per patient, which was caused by a decrease
in the per patient charge to the hospital clients pursuant to service contracts
placed into effect on October 1, 1995. These contracts extended the service
period to the hospitals from February 29, 1996 to February 28, 1997. While the
charge per procedure is reduced, each hospital must meet specific monthly
minimums quotas.
The decrease in average revenue per patient was offset by an increase of 39% and
5% in the number of procedures performed for the three months and six months
ended June 30, 1996, respectively, compared to the corresponding period in 1995.
MRI revenue of Tampa MRI decreased $34,273 and $20,472 for the three and six
ending June 30, 1996, respectively, as compared to the same periods in 1995.
This decrease in due to a decrease in the average revenue per patient offset by
increases in the number of procedures performed of 19% for the three-month
period ending June 30, 1996 and 28% for the six-month period ended June 30,
1996, as compared to the same periods in the prior year. Tampa MRI has obtained
and will continue its efforts to obtain managed care contracts. The
participation in the managed care environment has caused a decrease in the
charges per procedure, however, these decreases have been significantly offset
by increases in the number of procedures performed. The revenue of the
ultrasound operations decreased 16% and 21% for the three-month and six-month
periods ending June 30, 1996, respectively, as compared to the same periods in
1995. This decrease is mainly due to the decrease in the number of procedures
performed of 12% and 13% for the three months and six months ending June 30,
1996, respectively, as compared to the same periods in 1995.
The operating profit from diagnostic imaging services, while remaining
profitable, decreased by $64,674 and $143,897 for the three and six month
periods ended June 30, 1996, respectively, as compared to the same periods in
1995. These decreases were caused by a decline in operating profit from
Medcross Imaging, Ltd. of $79,791 and $182,665 for the three-month and six-month
periods ending June 30, 1996, respectively, compared to the corresponding
periods of the prior year. This decline was offset by an increase in operating
profit from MRI operations of Tampa MRI of $11,515 for the three months ended
June 30, 1996 and $53,836 for the six months ended June 30, 1996, as compared to
the same periods in 1995. In addition, the operating profit from the ultrasound
operations increased $3,602 for the three months ended June 30, 1996 and
decreased $15,068 for the six months ended June 30, 1996 as compared to the
prior year. The decline in the MRI operating profit for the three-month and
six-month periods ending June 30, 1996 was a result of the decrease in MRI
revenue, offset by a decrease in total other operating expenses for diagnostic
imaging of $91,170 for the three months ended June 30, 1996 and $177,875 for the
six months ended June 30, 1996 as compared to the same period in 1995.
<PAGE> 10
During the past several years, there has been increasing pressure from federal
and state regulatory and legislative bodies to prevent physicians from referring
patients to diagnostic imaging facilities in which they have an ownership
interest. Legislation passed in the State of Florida, where all of the
Company's diagnostic imaging services operate, placed a fee cap on diagnostic
imaging services. An injunction has been obtained preventing the State of
Florida from enforcing the fee cap. See "Item 3. Legal Proceedings" in the
Company's Annual Report on Form 10-KSB/A#1 for the year ended December 31, 1995.
Sales and Service of Medical Equipment
The Company sells and services used and refurbished computerized tomography (CT)
scanners in the People's Republic of China through a joint venture company,
Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of which it
owns 51%. In the first quarter 1995, the Company's Beijing office, which was
closed on May 31, 1995, completed the installation of two CT scanners. The
responsibilities for the parts depot and the inventory of the Company's Beijing
office were transferred to SMHME. The Company has elected to fully reserve for
all amounts due from the sale of the CT scanners sold by its Beijing office.
This resulted in an expense of $281,438 in the first quarter of 1995 and an
allowance for doubtful accounts of $315,753 as of June 30, 1996. The Company
has held discussions regarding the sale of its Beijing operations. No assurance
can be given regarding the outcome of such discussions.
Management and Other
Net operating revenue from management and other activities decreased by $20,025
in the second quarter of 1996 as compared to the same period in 1995 and by
$41,521 for the six months ended June 30, 1996 as compared to the same period in
1995. The decrease was primarily related to the management contracts with Bay
Area Renal Stone Center ("BARSC"). The BARSC contract accounted for $11,775 and
$23,550 in management fees for the three and six month periods in 1995,
respectively, and no management fees in 1996. The net operating loss from
management and other activities decreased 38% and 35% in the three-month and
six-month periods ended June 30, 1996, respectively, as compared to the same
periods in 1995. This decrease in net operating loss was due to the decreased
corporate overhead expenses of $78,850 and $155,520 for the three-month and six-
month periods ended June 30, 1996, respectively, as compared to the same periods
in the prior year. These decreases were offset by the decreases in net
operating revenue. Salaries and benefits decreased 42% and 48% for the three-
month and six-month periods ended June 30, 1996, respectively, as compared to
the same periods of 1995.
Network and Related Services
The operating revenue of network and related services from I-Link, was $55,338
for the second quarter of 1996 and $72,364 for the six months ended June 30,
1996. The net operating loss from network and related services was $1,305,830
and $3,929,400 for the three and six months ending June 30, 1996. This was
mainly due to the write-off of research and development costs purchased of
$2,034,103 in the first quarter of 1996 and the additional amortization of
intangibles of $307,609 and $461,408 for the three and six months ending June
30, 1996, respectively. These intangible assets were recorded pursuant to the
purchase of the common stock of I-Link by the Company. Excluding the research
and development costs written-off and the additional amortization, the operating
loss of network and related services was $998,221 and $1,448,424 for the three
and six months ending June 30, 1996.
Consolidated Operating Results
Net operating revenue of the Company decreased $120,531 in the second quarter of
1996 as compared to the same quarter of 1995 and $628,818 for the six months
ended June 30, 1996 compared to the same period in the prior year. This
decrease was mainly due to the sale of CT scanners in China during the first
quarter of 1995 and not in 1996 and the decrease in the net operating revenue
of diagnostic imaging services in 1996 as compared to 1995. Salaries and
benefits decreased by $91,638 and $218,249 for the three and six months ending
June 30, 1996, respectively, as compared to the same periods in 1995. The
decrease was offset by the inclusion of salaries and benefits of $322,786 and
$372,914 from network and related services during the second quarter 1996 and
the six months ended June 30, 1996, respectively. The decrease in repairs and
<PAGE> 11
maintenance was mainly due to diagnostic imaging. Depreciation and amortization
increased $399,812 in the second quarter of 1996 as compared to the second
quarter of 1995 due to the inclusion of I-Link, offset by a decrease from
diagnostic imaging. Depreciation and amortization increased $562,933 for the
six months ended June 30, 1996 compared to the six months ended June 30, 1995
due to the inclusion of I-Link, offset by a decrease from diagnostic imaging.
The provision for doubtful accounts increased $53,562 in the second quarter of
1996 as compared to second quarter of 1995 and decreased $232,782 for the six
months ended June 30, 1996 compared to the six months ended June 30, 1995. This
change is due to the collection, in the second quarter of 1995 of amounts
previously written-off, and the write-off of the receivables due from the
foreign operations in the first quarter of 1995, none of which occurred in 1996.
Other operating expenses increased $325,355 in the second quarter of 1996
compared to the second quarter of 1995. This increase is due to the inclusion
of $402,750 from network and related services, offset by decreases of $77,395
from diagnostic imaging, sales and service of medical equipment, and management
and other activities. In the six months ended June 30, 1996, other operating
expenses increased $515,352 compared to six months ended June 30, 1995. This
increase is due to the inclusion of operating expenses from network and related
services of $684,318 offset by a decrease of $168,966 from diagnostic imaging,
sales and service of medical equipment, and management and other activities.
Liquidity and Capital Resources
Working capital used by operations was $908,219 for the second quarter of 1996
as compared to working capital used by operations of $49,190 in the second
quarter of 1995. The working capital used by operations for the six months
ended June 30, 1996 was $1,257,634, compared to working capital provided by
operations of $173,212 for the six months ended June 30, 1995. The working
capital position of the Company was a deficit of $4,175,408 at June 30, 1996 and
$315,573 at December 31, 1995, which includes $488,957 at June 30, 1996 and
$669,799 at December 31, 1995 of the current portion of long-term debt, which
is payable in common stock of the Company, and $1,465,000 million in promissory
notes issued concurrent with and subsequent to the I-Link acquisition. Cash
flow used by operating activities was $253,491 and $866,315 for the three and
six months ending June 30, 1996 compared to cash flow provided by operations
of $105,914 and
$155,982 for the same periods in 1995. Cash flow used by operating activities
includes $206,597 and $807,153 attributable to the inclusion of I-Link in 1996.
Investing activities expenditures during the first six months of 1996 related to
the purchase of additional computer equipment for I-Link.
During the six months ending June 30, 1996, the Company reduced its long term
debt and capital lease obligations by $51,754 and $286,354, respectively, notes
payable to related parties by $73,333, notes payable to others by $24,435 and
the outstanding balance of its line of credit by $60,000. These reductions
include indebtedness of I-Link. The inclusion of I-Link in the first quarter
of 1996 increased capital lease obligations by $99,001, notes payable to related
parties by $693,333, and notes payable to others of $104,575. As of June 30,
1996, the balance outstanding under the line of credit was $340,000. The
Company was in violation of loan covenants regarding cash balances, consolidated
equity ratios, debt to equity ratios, cash flow coverage ratios and past days
sales in accounts receivable under the line of credit at June 30, 1996, However,
the FUNB has waived such non-compliance through June 30, 1996. The Company and
FUNB have reached an agreement pursuant to which the Company has agreed to
secure alternative financing to repay amounts outstanding under the Line of
Credit by June 30, 1996. The Company was unable to secure such financing, so
that the Company will be obligated to repay amounts outstanding under the Line
of Credit in increments of $10,000 per month commencing July 1, 1996, pursuant
to the Company's agreement with FUNB, subject to negotiation of the terms of a
balloon payment thereafter. Concurrent with the Company's acquisition of the
securities of I-Link in February 1996, the Company issued an aggregate of $1
million in 10% Notes and received net proceeds of $845,000. The proceeds of
such offering were used to pay operating expenses and certain other indebtedness
of I-Link. In the second quarter of 1996, three loans evidenced by promissory
notes were made, totalling $500,000, were made to the Company. The proceeds of
these notes were used to pay operating expenses and certain outstanding
indebtedness of I-Link. Warrants to purchase up to 145,000 shares of the common
stock of the Company were issued in conjunction with these promissory notes.
During the first quarter of 1995, the Company received advances totaling
$218,000 from Mortgage Network International, payable on demand. The Company's
Vice Chairman/President has management control over Mortgage Network
<PAGE> 12
International. The advances were subsequently formalized by the Company issuing
a Promissory Note bearing interest at 1% over prime rate of Southwest Bank of
Texas, N.A. with a maturity of October 1, 1995. Subsequent to October 1, 1995,
the Company and Mortgage Network International modified the note such that: (i)
a principal payment in the amount of $88,000 is due and payable on December 31,
1996; (ii) interest thereon is payable monthly at a rate of 10.5%; and (iii) the
remaining principal amount of $130,000 with interest thereon at the rate of
10.5% will be paid in 36 equal monthly payments of $4,225.32 beginning December
10, 1995.
The Company will require additional financing in order to successfully integrate
the business of I-Link, to fund the cash flow operating deficit of I-Link, to
expand its business and to discharge outstanding indebtedness, including the 10%
Notes, the Mortgage Network International advances, and the outstanding balance
of the Company's line of credit with First Union National Bank. Additional
funding through one or more debt or equity offerings in the capital markets will
be necessary to continue to implement the growth of the Company's business and
expand its operations, including those of I-Link. The availability of such
capital sources will depend on prevailing market conditions, interest rates, and
financial position and results of operations of the Company. Therefore, there
can be no assurance that such financing will be available or that the Company
will not be required to issue significant debt or equity securities in order to
obtain such financing.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A Complaint was filed on April 12, 1996, by JW Charles Financial Services, Inc.
("JWC") against the Company in Palm Beach County Florida Circuit Court, JW
Charles Financial Services, Inc. v. Medcross, Inc., Case No: CL96-3218. JWC was
issued a Common Stock Purchase Warrant ("Warrant") on or about November 3, 1994
by the Company. The alleged terms of the Warrant granted JWC the right to
purchase from the Company 250,000 shares of the Company's Common Stock subject
to adjustment. On or about February 12, 1996, JWC made written demand to the
Company to invoke its rights to have the common shares underlying the Warrant
registered pursuant to the terms of the Warrant. The Complaint alleges that the
Company breached the terms of the Warrant by failing to prepare and file with
the Securities and Exchange Commission ("SEC"), a registration statement
covering the common stock underlying JWC's Warrant. JWC alleges a breach of
contract; andrequests specific performance, i.e., registering the shares with
the SEC, against the Company. JWC also demands damages in the amount of
$2,728,478.00 plus interest, reasonable attorneys fees, and forum costs. The
Company believes that it has a meritorious defenses to the Complaint.
On May 6, 1996, the Company filed an Answer, Affirmative Defenses and
Counterclaim to the Complaint filed by JWC. The Company's counterclaim seeks
damages, cancellation of warrants, and interest and costs.
Item 5. Other Information
In August 1996, William Flury, Vice President of Sales & Marketing of I-Link
loaned I-Link the sum of $100,000, with $105,000 (including a loan origination
fee of $5,000) due and payable the earlier of September 6, 1996 or upon the
closing of a debt or equity offering by the Company. In connection with such
loan, the Company agreed to issue Mr. Flury a warrant to purchase 5,000 shares
of Common Stock for two years at $2.50 per share. The funds from the loan were
used to general working capital purposes of I-Link.
On August 6, 1996, John Edwards, President and Chief Executive Officer of
I-Link, loaned I-Link the sum of $131,250 (including a $6,250 original issued
discount), which sums are due and payable the earlier of September 6, 1996, or
upon the receipt of proceeds from a debt or equity financing of the Company. In
connection with such loan, the Company agreed to issue Mr. Edwards a warrant to
purchase 25,000 shares of Common Stock for two years at $4.87 per share. Funds
from the loan were used to pay a $100,000 payment due to AT&T and for general
working capital purposes.
Effective July 30, 1996, Joel S. Kanter, previously a Director of the Company,
resigned for personal reasons.
<PAGE> 13
On July 17, 1996, the Company announced that it has commenced a Private
Placement of up to 240,000 shares of its Class C Preferred Convertible
Cummulative Redeemable Preferred Stock, $10 par value per share, at $60 per
share. The offering is being conducted on a "best efforts, minimum-maximum"
basis as to an aggregate of $4.8 and $14.4 million, respectively. The Company
prepared and disseminated the information in accordance with Rule 135c under
the Securities Act of 1933.
On June 21, 1996, I-Link entered into an Agreement for Terminal Facility
Collocation Space with MFS Telecom, Inc. ("MFS"). Under the agreement, I-Link
has the right, but is not obligated, to elect to occupy certain office and
storage space and to utilize MFS co-location services within commercial
buildings at one or more lease hold sites held by MFS for the placement and
operation of I-Link's telecommunications equipment and cabling. The agreement
provides that MFS will make facilities in 21 major cities throughout the U.S.
available to I-Link and excepts to have an additional 30 sites in the US and 7
international sites available to I-Link by year end. I-Link may elect to occupy
any of such sites on a location-by-location basis. Although minimum occupancy
terms, rentals, and service charges vary some from site to site and will be set
forth in schedules to the agreement, rentals presently range from $500-1,000 per
month with a $500 per month average and an $800 one-time initial charge per site
and certain other additional charges for power, cross-connection fees, and alike
to be agreed upon at the time of the election to occupy that site. Management
of I-Link believes that the MFS agreement provides agreement with the
opportunity to avail itself of strategic locations for pops at competitive rates
together with co-location and administrative services provided by MFS without
the burden of long-term leases.
In June 1996, John Edwards, President and Chief Executive Officer of I-Link, was
selected to fill a vacancy on the Board of Directors of the Company as a Class
III Director.
On April 29, 1996, the Company was notified that I-Link was in breach of its
contractual obligation to make payments to Spyglass. Spyglass provides software
licenses to I-Link. I-Link was obligated to pay Spyglass Initial and Quarterly
Minimum License Fees in the amount of $45,000 and $63,750, respectively no later
than 30 days subsequent to the end of each calendar quarter that the payments
were due. Total indebtedness claimed by Spyglass is $273,606, including late
payment fees. The Company was notified by Spyglass that it claims the right to
terminate the agreement in its entirety in the event the breach of the agreement
is not cured within 30 days. Management of I-Link is discussing the matter with
Spyglass but there can be no assurance that a satisfactory resolution will be
obtained.
On April 8, 1996, I-Link entered into a three year Employment Agreement with
John Edwards. Pursuant to the terms of the Employment Agreement, Mr. Edwards
will be employed as the Chief Executive Officer and a Director of I-Link, and
will be required to devote substantially all of his working time to the business
and affairs of I-Link. Mr. Edwards is entitled under his Employment Agreement
to receive compensation at the rate of $175,000 per year and is entitled to a
profitability bonus in the discretion of the I-Link Board of Directors and to
participate in fringe benefits of the Company as are generally provided to
Executive Officers. In addition, Mr. Edwards is entitled to receive an option
to purchase 1 million shares of Common Stock of the Company at an exercise price
of $7.00. Of such options, 83,333 vest and become exercisable upon the first
calendar day of each quarter for the 12 quarters after April 8, 1996. In the
event of termination by I-Link or in the event of a "Change in Control" (as
defined in the agreement), Mr. Edwards is entitled to receive, as liquidated
damages and severance pay, an amount equal to the monthly capital and
Compensation (as defined in the agreement) for the remaining term of the
agreement. The agreement contains non-competition and confidentiality
provisions.
I-Link is a party to a 12-month consulting agreement with Benchmark Equity
Group, Inc., dated August 10, 1995, pursuant to which I-Link is obligated to
pay $6,000 per month to Benchmark Equity Group, Inc. for consulting services
rendered. Those payments accrued and are deferred pending the Company's
obtaining stockholders equity of $2,500,000. $73,000 in consulting fees are
due and payable to Benchmark Equity Group, Inc. Benchmark Equity Group, Inc. is
also party to certain options to purchase shares of Common Stock owned by Four M
International, Ltd. and party to certain options to purchase shares of Common
Stock owned by R. Huston Babcock, M.D. See Item 11 - Security Ownership of
Certain Beneficial Owners and Management in the Company's Form 10-KSB/A#1 for
the year ended December 31, 1995.
I-Link has entered into a consulting agreement with T6-G Limited Partnership for
two years commencing upon the successful completion of at least $4 million in
funding. The agreement requires the payment of $70,000 payable monthly over 24
months. In addition, I-Link is indebted to T6-G Limited Partnership in the
amount of $300,000. T6-G Limited Partnership owns a 9.5% interest in ILINK,
Ltd.
Item 6(a) - Exhibits
Page
3(a) Amendment to the Amended and Restated Articles of
Incorporation dated August 15, 1996. 3(a).1
3(b) Composite copy of the Amended and Restated Articles
of Incorporation incorporating all amendments through
the date of the filing of this Form 10-QSB. 3(b).2
10(a) Agreement for Terminal Facility Collocation Space,
dated June 21, 1996, by and between I-Link Worldwide, Inc.
and MFS Telecom, Inc. 10(a).1
11 Statement regarding computation of earnings per common share. 11.1
27 Financial Data Schedule 27.1
<PAGE> 14
99(c) Press Release dated July 17, 1996 99(c).1
Item 6(b) - Reports on Form 8-K
An amendment to the report on Form 8-K dated February 23, 1996 was filed by the
Company regarding the acquisition of the securities of I-Link Worldwide Inc.,
the completion of a private placement of $1,000,000 in aggregate principal
amount of convertible promissory notes, and the conversion of Class A Preferred
Stock into Common Stock. The amendment included financial statements of the
business acquired and proforma financial statements.
A report on Form 8-K was filed by the Company regarding the complaint filed by
JW Charles Financial Services, Inc., the appointment of Clay Wilkes as a
director of the Company and appending an updated Statement of Risk Factors.
A report on Form 8-K was filed by the Company regarding the resignation of Po
Shin Wong as the Chairman of the Board of Directors and a director of the
Company, for personal reasons.
<PAGE> 15
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.
MEDCROSS, INC.
(Registrant)
Date: December 12, 1996 By: /s/ JOHN EDWARDS
John Edwards
President, Chief Executive
Officer
<PAGE> 16
