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As filed with the Securities and Exchange Commission on October 15, 1997
Registration No. 333-17861
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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I-LINK INCORPORATED
(Name of small business issuer in its charter)
(formerly Medcross, Inc.)
Florida 4822 59-2291344
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code No.)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801/576-5000)
(Address and telephone number of registrant's principal executive offices)
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John W. Edwards
Chairman of the Board, President and Chief Executive Officer
I-Link Incorporated
13751 S. Wadsworth Park Drive, Suite 200
Draper, Utah 84020
(801) 576-5000
(Name, address and telephone number of agent for service)
Copies to:
Ralph V. De Martino, Esquire
De Martino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, D.C. 20036-2492
Phone: (202) 659-0494
Fax: (202) 659-1290
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Approximate date of proposed sale to the public: As soon as practicable
after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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PROSPECTUS
I-LINK INCORPORATED
331,126 shares of Common Stock issuable upon exercise of Settlement Warrants
8,083,857 shares of previously issued and outstanding Common Stock
6,046,800 shares of Common Stock issued or issuable upon conversion of Class C
Preferred Stock Warrants to Purchase 750,000 shares of Common Stock
750,000 shares of Common Stock issuable upon exercise of Commonwealth Warrants
183,542 shares of Common Stock issuable upon Conversion of Class B Preferred
Stock Option to Purchase 100,000 Shares of Common Stock
100,000 shares of Common Stock issuable upon exercise of Cook Option Warrants to
Purchase 80,000 shares of Common Stock 80,000 shares of Common Stock issuable
upon exercise of E&M RP Trust Warrants Warrants to Purchase 40,000 shares of
Common Stock
40,000 shares of Common Stock issuable upon exercise of Mandarino Warrants
Warrants to Purchase 175,000 shares of Common Stock
175,000 shares of Common Stock issuable upon exercise of Hardy Group Warrants
This Prospectus relates to (i) 331,126 shares of Common Stock (the "Settlement
Shares") issuable upon exercise of a Common Stock Purchase Warrant (the
"Settlement Warrant") issued to JW Charles Financial Services, Inc. ("JW
Charles") in November 1994; (ii) the offer and sale by the holders thereof of an
aggregate of 8,083,857 shares (the "Shares") of common stock, par value $.007
per share (the "Common Stock") previously issued by I-Link Incorporated, a
Florida corporation formerly known as Medcross, Inc. (the "Company") (a) to I-
Link, Ltd., a Utah limited partnership, in connection with the Company's
acquisition of I-Link Worldwide, Inc. ("I-Link") as to 3,206,122 of the Shares,
including the distribution of such shares by I-Link, Ltd. to its beneficial
holders and the subsequent offer, transfer and/or sale by such holders; (b) to
the holders of 10% Convertible Notes (the "10% Notes") issued in February 1996
as to 70,000 of the Shares; (c) to the holder of a Non-Negotiable 10%
Convertible Promissory Note (Series II) (the "Series II Note") upon the
conversion of a portion thereof as to 35,000 of the Shares; (d) the offer and
sale of up to 3,858,844 shares (the "Four M Shares") of Common Stock owned by
Four M International, Ltd. ("Four M"), which shares are subject of options (the
"Four M Options") or heretofore subject of such Four M Options; and (e) the
offer and sale of up to 913,891 shares of Common Stock acquired by the holders
of such shares (the "Kanter Shares") pursuant to options (the "Kanter Options")
granted by Walnut Capital Corp., Windy City, Inc. and Canadian Imperial Bank,
for which entities Joel Kanter served as representative; (iii) the issuance to
and the offer and sale by the holders thereof of up to 6,046,800 shares of
Common Stock (the "Conversion Shares") issuable or heretofor issued upon
conversion of 240,000 shares of Class C Convertible Cumulative Redeemable
Preferred Stock, $10.00 par value per share (the "Class C Preferred Stock") and
issuable upon conversion of up to 11,950 shares of Class C Preferred Stock
issuable upon conversion by the holders thereof of up to $717,000 in principal
amount of Convertible Promissory Notes (the "Convertible Notes") assuming
certain conditions
(continued overleaf)
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
DILUTION. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is October __, 1997
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are met; (iv) the offer and sale of up to 250,000 Placement Agent's Warrants to
purchase Common Stock and 500,000 Consultant's Warrants to purchase Common Stock
(collectively, the "Commonwealth Warrants") issued to Commonwealth Associates
("Commonwealth") in connection with the Company's offering in 1996 of the Class
C Preferred Stock and Convertible Notes (the "Class C Offering"), including the
distribution of certain of the Commonwealth Warrants, and/or shares of Common
Stock issuable upon exercise of such Commonwealth Warrants, to certain employees
of Commonwealth Associates; (v) the issuance to and the offer and sale by the
holders thereof of up to 750,000 shares of Common Stock (the "Commonwealth
Shares") issuable upon exercise of the Commonwealth Warrants; (vi) the issuance
to and the offer and sale of up to 183,542 shares (the "Babcock Shares") of
Common Stock issuable to R. Huston Babcock upon conversion of outstanding shares
of Class B Preferred Stock, $10.00 par value (the "Class B Preferred Stock") and
upon exercise of options to purchase 91,777 shares of Common Stock issued by R.
Huston Babcock (the "Babcock Options"); (vii) the issuance to and the
offer and sale of up to 100,000 shares (the "Cook Shares") of Common Stock
issuable to Scott Cook upon exercise of the Common Stock Purchase Option to
Purchase Common Stock of Medcross, Inc. (the "Cook Option"); (viii) the offer
and sale of warrants to purchase up to 80,000 shares of Common Stock issued to
E&M RP Trust (the "E&M Warrants"); (ix) the issuance to and the offer and sale
by the holders thereof of up to 80,000 shares of Common Stock (the "E&M Shares")
issuable upon exercise of the E&M Warrants; (x) the offer and sale of warrants
to purchase up to 40,000 shares of Common Stock issued to Joseph Mandarino (the
"Mandarino Warrants"); (xi) the issuance to and the offer and sale by the
holders thereof of up to 40,000 shares of Common Stock (the "Mandarino Shares")
issuable upon exercise of the Mandarino Warrants; (xii) the offer and sale of
warrants to purchase up to 175,000 shares of Common Stock issued to the Hardy
Group (the "Hardy Group Warrants"); and (xiii) the issuance to and the offer and
sale by the holders thereof of up to 175,000 shares of Common Stock (the "Hardy
Group Shares") issuable upon exercise of the Hardy Group Warrants. The
Settlement Shares, the Shares, the Conversion Shares, the Commonwealth Warrants,
the Commonwealth Shares, the Babcock Shares, the Babcock Options, the Four M
Options, the Kanter Options, the Cook Shares, the E&M Warrants, the E&M Shares,
the Mandarino Warrants, the Mandarino Shares, the Hardy Group Warrants and the
Hardy Group Shares are sometimes collectively referred to as the "Securities."
Holders of the Settlement Warrants and/or Settlement Shares, the Shares
(including (A) those partners of I-Link, Ltd. as set forth in footnote 15 of the
Selling Securityholders table hereinbelow and (B) those individuals associated
with Commonwealth as set forth in footnote 30 of the Selling Securityholders
table hereinbelow), the Conversion Shares, the Commonwealth Warrants and/or the
Commonwealth Shares, the Four M Options, the Babcock Options and/or the Babcock
Shares, the Kanter Options, the Cook Shares, the E&M Warrants and/or the E&M
Shares, the Mandarino Warrants and/or the Mandarino Shares, the Hardy Group
Warrants and/or the Hardy Group Shares may be referred to hereinafter as
"Selling Securityholders." See "Description of Securities" and "1996 Offerings."
On September 30, 1997 the closing sale price of the Company's Common
Stock as reported by the Nasdaq SmallCap Market ("Nasdaq") on such date was
$8.75
So long as the Registration Statement of which this Prospectus forms
a part is effective and the disclosure set forth herein is current, the Selling
Securityholders may sell the Securities publicly and may sell their Settlement
Warrants, their Cook Options, their Kanter Options, their Four M Options, their
Commonwealth Warrants, their E&M Warrants, their Mandarino Warrants and/or their
Hardy Group Warrants publicly or exercise such Settlement Warrants, Cook
Options, Kanter Options, Four M Options, Commonwealth Warrants, E&M Warrants,
Mandarino Warrants and/or their Hardy Group Warrants and either (i) hold the
Settlement Shares and/or the Cook Shares and/or the Kanter Options and/or the
Four M Options and/or the Commonwealth Shares and/or the E&M Shares and/or the
Mandarino Shares and/or the Hardy Group Shares or (ii) resell the Settlement
Shares and/or the Cook Shares and/or the Kanter Shares, and/or the Four M
Options and/or the Commonwealth Shares and/or the E&M Warrants and/or the E&M
Shares and/or the Mandarino Warrants and/or the Mandarino Shares and/or the
Hardy Group Warrants and/or the Hardy Group Shares publicly. To the extent that
Four M Options may lapse prior to exercise, the subject Four M Shares may be
offered and sold by Four M to the public pursuant to this Prospectus. The
Securities offered by this Prospectus may be sold from time to time by the
Selling Securityholders. The distribution of the Securities by the Selling
Securityholders may be effected in one or more transactions that may take place
on the over-the-counter market including ordinary broker's transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of such securities as principals at market prices prevailing at the time
of sale at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders in connection with sales
of such Securities.
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The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered and any profits realized or commission received may be deemed
underwriting compensation. The Company has agreed to indemnify certain of the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act. The Company will receive the proceeds, if any, from the
exercise of the Settlement Warrants, the Commonwealth Warrants, the Cook
Options, the E&M Warrants, the Mandarino Warrants and the Hardy Group Warrants,
but will not receive any of the proceeds from the resale of the Settlement
Shares, the Shares, the Conversion Shares, the Commonwealth Shares, the Babcock
Shares, the Cook Shares, the E&M Shares, the Mandarino Shares or the Hardy Group
Shares by Selling Securityholders. All costs incurred in the registration of the
Securities offered hereby have been borne by the Company. See "Use of Proceeds"
and "Selling Securityholders."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, files reports, proxy statements and other information
including annual and quarterly reports on Forms 10-KSB and 10-QSB (File No.
0-17973) (the "1934 Act Filings") with the Securities and Exchange Commission
(the "Commission"). The Company filed with the Commission in Washington, D.C. a
Registration Statement on Form SB-2 under the Securities Act with respect to the
securities described herein. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information about the Company and the securities described herein,
reference is made to the Registration Statement and to the exhibits filed
therewith. The statements contained in this Prospectus with respect to the
contents of any agreement or other document referred to herein are not
necessarily complete and, in each instance, reference is made to a copy of such
agreement or document as filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by reference to the provisions of
the relevant documents. The Registration Statement, including the exhibits
thereto, and the Company's 1934 Act Filings may be inspected at: (i) the public
reference facilities of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and (ii) the offices of the
Commission located at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, Illinois 60661, and (iii) the offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may also be obtained upon request and payment of the appropriate fee
from the Public Reference Section of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
the Commission maintains a website on the Internet that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's website is
http://www.sec.gov.
The Company will provide without charge to each person who receives
this Prospectus, upon written or oral request of such person, a copy of any
information which has been incorporated by reference herein (not including
exhibits to the information incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Such requests should be made
to I-Link Incorporated, 13751 S. Wadsworth Park Drive, Suite 200, Draper,
Utah 84020, Attention: Secretary.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to,
and should be read in conjunction with, the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus.
Each prospective investor is urged to read this Prospectus in its entirety.
The Company
I-Link Incorporated (formerly known as Medcross, Inc.), a Florida
corporation (the "Company") was formed in 1983. On February 23, 1996, the
Company acquired (the "I-Link Acquisition") I-Link Worldwide Inc., a Utah
corporation (subsequently renamed I-Link Systems, Inc.), and effective January
1, 1997, the Company acquired (the "FTI Acquisition") Family Telecommunications
Incorporated, a Utah corporation (subsequently renamed I-Link Communications,
Inc., and for clarity and ease of reference, sometimes referred to herein as
"FTI"). In June 1997, the Company formed its marketing subsidiary, I-Link
Worldwide, LLC. These three subsidiaries are collectively referred to herein as
"I-Link." See "The Company." I-Link is in the business of delivering
communications capabilities to business and residential customers via both a
proprietary data communication network, established by I-Link, that operates in
the same manner as the Internet (the "I-Link Intranet") and existing switched
telecommunications networks. I-Link seeks to provide communications solutions
and enhanced capabilities to users of traditional telecommunications services,
at substantial cost savings through utilization of the I-Link Intranet and other
existing data communications networks, as well as through volume purchasing of
capacity on traditional switched telecommunications networks. I-Link has
developed patent-pending technology and has deployed a national network
infrastructure of communications equipment and dedicated lines that enables it
to route traditional telecommunications services over the I-Link Intranet in a
manner that is transparent to the user, utilizing the user's existing
telecommunications equipment.
With its acquisition of FTI, a regional long-distance
telecommunications carrier with nationwide delivery of telecommunications
services over traditional switched telecommunications networks, the Company in
January 1997 launched its marketing efforts and began to obtain customers for
its long-distance telecommunications services through I-Link. In June 1997, the
Company launched its multi-level sales program through its wholly-owned
subsidiary, I-Link Worldwide, LLC, to market the I-Link communications services
to the residential and small business markets. Through its marketing activities
and through strategic acquisitions of existing customer bases, I-Link will
aggressively seek to enlarge its overall customer base. The I-Link services will
initially be delivered across existing switched telecommunications networks;
then, as I-Link reaches targeted customer-base size in given geographic areas,
customer traffic in those areas will be moved from the traditional switched
telecommunications networks to the network of dedicated lines I-Link has
established and over which its proprietary technology is deployed (the I-Link
Intranet). The move from the traditional switched telecommunications network to
the I-Link Intranet is transparent to the customer and will result in a
significant reduction in the cost of delivering the services, both increasing
profitability and permitting I-Link to offer increased savings to its customers,
as well as differentiating I-Link and its services in a highly commoditized
market. I-Link believes this strategy of building customer bases in geographic
areas on traditional switched networks and transitioning the traffic to the
I-Link Intranet as the size of the customer base increases will result in the
most cost effective nationwide deployment of the I-Link Intranet.
For a discussion of the recent acquisition of MiBridge, Inc. see
"The Company" and "Recent Transactions."
The Company is also an owner and operator of medical diagnostic
and therapeutic facilities and equipment including MRI, kidney lithotripsy, and
ultrasound. The Company is also a joint venture partner with China National
Equipment and Supplies Import and Export Shenyang Corporation, which exports
medical equipment to China. See "Business of the Medical Imaging Division."
The Company's corporate offices are located at 13751 S. Wadsworth
Park Drive, Suite 200, Draper, Utah 84020; telephone: (801) 576-5000.
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Securities Offered
Each share of Common Stock of the Company comprising the Settlement
Shares, the Shares, the Conversion Shares, the Commonwealth Shares, the Babcock
Shares, the Cook Shares, the E&M Shares, the Mandarino Shares and the Hardy
Group Shares has a par value of $.007 and entitles the holder thereof to equal
ratable rights to dividends from funds legally available therefor when, as and
if declared by the Board of Directors, to share ratably in all of the assets of
the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company and to have
one non-cumulative vote per share upon all matters which stockholders may vote
at all meetings of stockholders. Holders of shares of Common Stock do not have
preemptive, subscription or conversion rights and there are no redemption or
sinking fund provisions applicable thereto. See "Description of Securities."
The 331,126 Settlement Shares are issuable by the Company upon the
exercise of the Settlement Warrants at an exercise price of $1.51 at any time
prior to November 3, 1999 by the holders of the Settlement Warrants. Such
warrants were issued to JW Charles in November 1994 pursuant to a Financial
Consulting Agreement dated as of November 1, 1994 between the Company and
Corporate Management Group, Inc. For a description of litigation commenced by JW
Charles against the Company, see "Legal Proceedings." Pursuant to the settlement
of such litigation (the "JW Charles Settlement"), the Settlement Warrants were
obtained by a group of investors (the "Hardy Group"), two of whom are officers
of the Company. See "Description of Securities--Settlement Warrant" and "Certain
Relationships and Related Transactions."
The 175,000 Hardy Group Shares are issuable by the Company upon the
exercise of the Hardy Group Warrants at an exercise price of $2.50 per share at
any time prior to April 29, 2007 by the holders of the Hardy Group Warrants. The
Hardy Group Warrants were issued to the members of the Hardy Group in April 1997
pursuant to the JW Charles Settlement. See "Description of Securities--
Settlement Warrant" and "Certain Relationships and Related Transactions."
Of the 8,083,857 Shares covered by this Prospectus, (i) 4,000,000
shares of Common Stock were issued to the holders thereof in consideration for
the Company's acquisition (the "I-Link Acquisition") in February 1996 of the
issued and outstanding shares of common stock of I-Link (793,878 of which have
since been sold or transferred); (ii) 350,000 of such Shares were issued upon
conversion in August 1996 of a portion of the principal amount of 10% Promissory
Notes (the "10% Notes") offered and sold by the Company in February 1996 (the
"10% Notes Offering") in conjunction with the I-Link Acquisition (280,000 of
which have since been sold or transferred) and (iii) 70,000 of such Shares were
issued to each of Trident I, LLC and Joseph Wong upon conversion of Series III
and Series II Notes, respectively, issued in February 1996 (an aggregate of
105,000 of which have since been sold or transferred). Outstanding Four M Shares
are owned by Four M as to an aggregate of 2,329,155 shares, 1,957,675 of which
may be acquired by holders of the Four M Options, including certain affiliates
of the Company, Commonwealth and affiliates of Commonwealth, from Four M at a
purchase price of $1.79 per share. Additional Four M options to purchase an
aggregate of 1,586,415 shares have been exercised by the holders thereof at
purchase prices varying from $1.79 to $2.54 per share (of which 56,726 shares
were subsequently sold or transferred). The 978,891 Kanter Shares were issued to
affiliates of Commonwealth and others upon exercise of options granted to such
persons by Walnut Capital Corp., Windy City, Inc. and Canadian Imperial Bank,
for which entities Joel Kanter ("Kanter"), a former director of the Company,
served as representative (65,000 of which Kanter Shares have since been sold or
transferred). See "The Company," "1996 Offerings," "Certain Relationships and
Related Transactions" and "Description of Securities."
Of the 6,046,800 Conversion Shares, an aggregate of 5,760,000
Conversion Shares are issuable or have been issued upon conversion of
outstanding shares of Class C Preferred Stock issued in August and September
1996 and an aggregate of 286,800 Conversion Shares are issuable or have been
issued upon the conversion of Class C Preferred Stock issuable upon conversion
of the aggregate of $717,000 in principal amount of Convertible Notes issued in
September 1996. The Convertible Notes automatically convert into 11,950 shares
of Class C Preferred Stock upon the amendment of the Company's Articles of
Incorporation to increase the authorized shares of Common Stock and Preferred
Stock and designation of
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at least 11,950 shares of Class C Preferred Stock. See "1996 Offerings,"
"Description of Securities--Class C Preferred Stock" and "Description of
Securities--Convertible Promissory Notes."
The Commonwealth Warrants were issued to Commonwealth in August 1996
pursuant to a Selling Agent's Agreement and a Consulting Agreement entered into
in connection with the Class C Offering. The Commonwealth Warrants entitle the
holder to purchase an aggregate of 750,000 shares of Common Stock (previously
defined as the "Commonwealth Shares") at an exercise price of $2.50 subject to
adjustment, at any time from March 1, 1997 until August 20, 2001. The Company
has been informed by Commonwealth that Commonwealth intends to transfer or has
transferred interest in 287,293 of such warrants to certain Commonwealth
employees. See "Description of Securities--Commonwealth Warrants" and "1996
Offerings."
The 183,542 Babcock Shares are issuable upon conversion of Class B
Preferred Stock and 91,777 of such Babcock Shares may be acquired by Benchmark
Equity Group, Inc. ("Benchmark"), the holder of the Babcock Option from R.
Huston Babcock, at an exercise price of $1.79 per share commencing July 1, 1996.
See "Description of Securities--Babcock Shares."
The 100,000 Cook Shares are issuable by the Company upon the
exercise of the Cook Option by Scott Cook ("Cook"), the holder of the Cook
Option, at an exercise price of $1.00 per share commencing January 1, 1996
through December 31, 1999. See "Description of Securities--Cook Option."
The 80,000 E&M Shares are issuable by the Company upon the exercise
of the E&M Warrants by the holder thereof at an exercise price of $4.00 per
share at any time prior to June 9, 1999. See "Description of Securities--E&M
Warrants."
The 40,000 Mandarino Shares are issuable by the Company upon the
exercise of the Mandarino Warrants by the holder thereof at an exercise price of
$4.00 per share at any time prior to June 1999. See "Description of Securities--
Mandarino Warrants."
<TABLE>
<S> <C>
Common Stock Outstanding Prior to Offering and Exercise of the Settlement 12,180,165/(1)/
Warrants, the Commonwealth Warrants, the Cook Option, the E&M Warrants, the
Mandarino Warrants and the Hardy Group Warrants
Common Stock Outstanding Assuming Conversion of the Class C Preferred Stock, 19,334,065/(2)/
Including the Class C Preferred Stock Issuable Upon Conversion of the Convertible
Notes, Exercise of the Settlement Warrants and the Commonwealth Warrants,
Conversion of the Class B Preferred Stock and Issuance of the Common Stock,
Exercise of the Cook Option, Exercise of the E&M Warrants, Exercise of the
Mandarino Warrants and Exercise of the Hardy Group Warrants
Estimated Net Proceeds from the Exercise of the Settlement Warrants, the $3,242,500/(3)/
Commonwealth Warrants, the Cook Option, the E&M Warrants, the Mandarino
Warrants and the Hardy Group Warrants
Nasdaq Symbol ILNK
</TABLE>
- -----------------------------
(1) As of September 30, 1997. Does not include: (a) 331,126 shares of
Common Stock issuable upon exercise of the Settlement Warrants; (b)
183,542 shares of Common Stock issuable upon conversion of the Class
B Preferred Stock; (c) 5,519,232 shares of Common Stock issuable
upon conversion of the outstanding Class C Preferred Stock and
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the shares of Class C Preferred Stock issuable in the event of
conversion of the Convertible Notes; (d) options to purchase
6,028,619 shares of Common Stock granted to officers and directors
of the Company and options to be issued to officers of I-Link; (e)
1,685,000 shares of Common Stock reserved for issuance pursuant to
stock options granted to other employees; (f) 750,000 shares of
Common Stock issuable upon exercise of Commonwealth Warrants issued
to Commonwealth; (g) 30,000 shares of Common Stock issuable upon
exercise of warrants issued in connection with certain bridge loans;
(h) 100,000 shares of Common Stock issuable upon exercise of the
Cook Option; (i) 80,000 shares of Common Stock issuable upon
exercise of the E&M Warrants; (j) 40,000 shares of Common Stock
issuable upon exercise of the Mandarino Warrants; (k) 175,000 shares
of Common Stock issuable upon exercise of the Hardy Group Warrants;
and (l) 400,000 shares of Common Stock issuable in connection with
the FTI Acquisition.
(2) Does not include: (a) options to purchase 6,028,619 shares granted
to or to be granted to officers and directors of the Company and
options issued or to be issued to officers of I-Link; (b) 1,685,000
shares of Common Stock reserved for issuance pursuant to stock
options granted to other employees; (c) 30,000 shares of Common
Stock issuable upon exercise of warrants issued in connection with
certain bridge loans; (d) 400,000 shares of Common Stock issuable in
connection with the FTI Acquisition; (e) shares of Common Stock
issuable upon conversion of the Series D Preferred Stock issued in
connection with the MiBridge acquisition; and (f) shares of Common
Stock issuable upon conversion of the Series M Preferred Stock
issued to Winter Harbor, L.L.C. See "Recent Transactions."
(3) Assumes maximum gross cash proceeds of $3,392,500 from the exercise
of all the Settlement Warrants, the Commonwealth Warrants, the Cook
Option, the E&M Warrants, the Mandarino Warrants and the Hardy Group
Warrants, less estimated filing, legal, printing, accounting and
miscellaneous expenses of $150,000, and assumes that no cashless
exercise of the Commonwealth Warrants will occur. See "Description
of Securities--Settlement Warrants," "Description of Securities--
Commonwealth Warrants," "Description of Securities--Cook Option,"
"Description of Securities--E&M Warrants," "Description of
Securities--Mandarino Warrants," and "Description of Securities--
Hardy Group Warrants." The Company will not receive any of the
proceeds from the exercise of the Four M Options.
Use of Proceeds
The Company will not receive any of the proceeds from the offer and
sale of the Settlement Shares, the Shares, the Conversion Shares, the Babcock
Shares, the Cook Shares, the Commonwealth Shares, the E&M Shares, the Four M
Shares, the Mandarino Shares or the Hardy Group Shares. The Settlement Warrants
have been previously issued to JW Charles (and subsequently transferred to the
Hardy Group), the Commonwealth Warrants have been previously issued to and are
being offered for sale by Commonwealth, the Cook Option has previously been
issued to Cook, the E&M Warrants have been previously issued to and are being
offered for sale by E&M, the Mandarino Warrants have been previously issued to
and are being offered for sale by Mandarino and the Hardy Group Warrants have
been previously issued to and are being offered for sale by the Hardy Group. The
Company will receive the proceeds, if any, from the exercise of the Settlement
Warrants, the Commonwealth Warrants, the Cook Option, the E&M Warrants, the
Mandarino Warrants and the Hardy Group Warrants, which proceeds will be used for
working capital purposes. See "Use of Proceeds."
RISK FACTORS
THE SECURITIES DESCRIBED HEREIN ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. SUCH SECURITIES SHOULD BE PURCHASED ONLY BY PROSPECTIVE
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH
PROSPECTIVE INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH
ELSEWHERE HEREIN AND IN THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS
AND THE NOTES THERETO.
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Ongoing Capital Requirements; Need to Raise Additional Financing
The conduct of the Company's business and the continued
implementation of its business plans and operations (including those of I-Link)
will require the availability of additional funds in the future. While the
Company currently has no material commitments for capital or other expenditures,
other than as set forth herein, it is the Company's intention to continue to
implement the growth of its business and expand its operations (including those
of I-Link). The Company will require additional financing in order to fund the
cash flow operating deficit of I-Link, to expand its business and to discharge
outstanding indebtedness. If needed, there can be no assurance that the Company
will be able to successfully negotiate or obtain additional financing. Nor can
there be any assurance that, if available, such financing will be on terms
favorable or acceptable to the Company or its securityholders. The Company has a
line of credit (the "Line of Credit") with First Union National Bank ("FUNB").
As of June 30, 1997, there was $240,000 outstanding thereunder. The Company had
been for months in violation of certain financial covenants contained in the
loan agreement governing the Line of Credit, including covenants relating to:
(i) cash balances; (ii) consolidated equity; (iii) debt-to-equity ratios; and
(iv) cash flow coverage ratios. However, FUNB waived such non-compliance through
June 30, 1996. The Company 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 is 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. The Company is currently in
violation of cash flow coverage ratios and past days sales on accounts
receivable covenants. In June 1997, the Company entered into an agreement with
Winter Harbor, L.L.C. pursuant to which it borrowed $2,000,000 at an annual
interest rate of prime plus 2%. In August 1997, such agreement was amended and
the Company borrowed an additional $3,000,000 on similar terms. Pursuant to a
Securities Purchase Agreement dated as of September 30, 1997, the Company
closed an equity investment by Winter Harbor on October 10, 1997
whereby Winter Harbor purchased an aggregate of 4,400 shares of Series M
Preferred Stock, in consideration of $12,100,000, paid by a
combination of cash and the exchange of outstanding indebtedness and accrued
interest. See "Recent Transactions-Transactions With Winter Harbor, L.L.C.;
Series M Preferred Stock." In the event that the Company needs additional
financing, the absence thereof or the lack of availability thereof on favorable
terms could have a material adverse impact on the Company.
Negative Effect of Amortization Expense on Financial Results
The excess of fair market value of the shares issued in the I-Link,
FTI and MiBridge Acquisitions over the fair value of the net tangible assets
purchased was recorded by the Company as intangible assets. Subsequently,
certain related amortization expense was also realized. Further, the Company
recorded acquired in-process research and development expense of $14,577,942 in
the fiscal year ended December 31, 1996. The Company anticipates recording
approximately $4,240,000 of in-process research and development in the third
quarter of 1997, which is related to the Company's acquisition of MiBridge.
Reliance on Key Personnel
The Company's operations including those of I-Link are dependent
upon the continued efforts and employment of its senior management. The officers
of the Company have the principal responsibility for management of the Company
and are responsible for making recommendations to the Board of Directors which
exercises final authority over business decisions. While the Company and I-Link
have entered into employment agreements with senior management, the loss of the
services of any of the officers or directors could be detrimental to the Company
and I-Link.
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Furthermore, the future performance of I-Link, FTI and MiBridge
depends in significant part upon their ability to attract and retain key
technical, systems and sales personnel, most of whom are not bound by an
employment agreement. Competition for such personnel is intense and there can be
no assurance that I-Link will be able to retain its key technical, systems and
sales personnel or that it will be able to attract highly qualified personnel in
the future.
Growth Strategy and Acquisition Activities
The Company's ability to achieve planned levels of growth and the
timing thereof will be materially impacted by its ability to acquire business
communication companies and related businesses. The Company intends to acquire
such additional companies with cash and equity securities such as common stock
or preferred stock, and/or debt instruments. To the extent that the Company
issues equity securities in connection with acquisitions, the equity interest of
its then current stockholders will be diluted. There can be no assurance,
however, that the Company will be able to acquire such additional companies or
that it will be able to use its securities in connection with such purchases or
that it will have the necessary capital resources to purchase such companies.
Although the Company believes that its acquisition strategy will make it
attractive to acquisition candidates, there can be no assurance that the Company
will successfully implement its acquisition program. See "The Company."
Potential Liability in Connection with Acquisitions
The Company could become subject to liabilities arising from any
acquisition which it has effected or may hereafter effect in the event that the
Company assumes unknown or contingent liabilities or in the event that such
liabilities are imposed on the Company under theories of successor liability. If
the Company becomes subject to such a liability of sufficient magnitude, such
liability could have a material adverse effect on the financial condition and
results of operations of the Company. See "The Company."
Expectation of Growth
The Company plans to expand I-Link's network, which expansion will
require additional capital expenditures. There is no assurance that such capital
will be available or that it will be available on terms beneficial to the
Company. Moreover, the Company's ability to effectively achieve growth will
require it to implement and improve operational, financial and management
information systems and to train, motivate and manage employees, as well as to
successfully market its products and services. These demands require the
addition of new management personnel and the development of additional expertise
by existing management. Failure to enhance customer support resources adequately
to support increases in subscribers, or to adequately expand and enhance
telecommunications infrastructure, may adversely affect the Company's ability to
successfully conduct I-Link's business in the future. There can be no assurance
that customer support or other resources will be sufficient to achieve future
growth or that the Company will be able to implement in whole or in part the
planned expansion. Any failure to do so could have a material adverse effect on
the Company's future operating results. See "Business of I-Link."
I-Link Business Competition
The market for business communications services is extremely
competitive. The Company believes that its ability to compete in I-Link's
business successfully will depend upon a number of factors, including the
pricing policies of competitors and suppliers; the capacity, reliability,
availability and security of I-Link's Intranet infrastructure; market presence
and channel development; the timing of introductions of new products and
services into the industry; ease of access to and navigation of the Internet or
other such Data Communication Networks; the Company's ability in the future to
support existing and emerging industry standards; the Company's ability to
balance network demand with the fixed expenses associated with network capacity;
and industry and general economic trends.
While the Company believes there is currently no competitor in the
North American market providing the same type of capabilities in the same manner
as I-Link will offer using the I-Link Intranet, there are many companies
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that offer business communications services, and therefore compete with the
Company at some level. These range from large telecommunications companies and
carriers such as AT&T, MCI, Sprint and LDDS, to smaller, regional resellers of
telephone line access. These companies, as well as others, including
manufacturers of hardware and software used in the business communications
industry, could in the future develop products and services that could compete
with those of the Company on a more direct basis. These entities are far better
capitalized than the Company and control significant market share in their
respective industry segments. In addition, there may be other businesses that
are attempting to introduce products similar to the Company's for the
transmission of business information over the Internet. There is no assurance
that the Company will be able to successfully compete with these market
participants. See "Business of I-Link."
Dependence on Suppliers
I-Link relies on other companies to provide data communications
capacity via leased telecommunications lines. A significant portion of the
leased telecommunications lines used by I-Link are currently provided by AT&T.
Further, the Company uses MCI for the supply of inbound and outbound telephone
services. As of June 30, 1997, the Company owed AT&T $826,000 and MCI
approximately $4,900,000. If AT&T or MCI are unable or unwilling to provide or
expand their current levels of service to the Company in the future, the
Company's operations could be materially adversely affected. Moreover, there are
significant billing disputes between the Company and MCI. Management has
established reserves in connection with the same that it views to be adequate.
There can be no assurance that the disputes will be resolved in favor of the
Company, or that the dollar amount of any adverse resolution would be fully
covered by such reserves. Although leased telecommunications lines are available
from several alternative suppliers, there can be no assurance that the Company
could obtain substitute services from other providers at reasonable or
comparable prices or in a timely fashion. The Company is also subject to risks
relating to potential disruptions in such telecommunications services. No
assurance can be given that significant interruptions of telecommunications
services to the Company will not occur in the future. See "Business of
I-Link--I-Link's Contractual Obligations."
I-Link is also dependent on certain third party suppliers of
hardware components. Although I-Link currently attempts to maintain a minimum of
two vendors for each required product, certain components used by I-Link in
providing networking services are currently acquired from only one source.
I-Link may from time to time experience delays in the receipt of certain
hardware components. A failure by a supplier to deliver quality products on a
timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could materially adversely affect the
Company's ability to integrate, conduct and implement expansion of I-Link's
business.
Software and Service Development; Technological Change
The Company's success in I-Link's business is highly dependent upon
its ability to develop new software and services that meet changing customer
requirements. The market for I-Link's services is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new software and service introductions. There can be no assurance that
the Company can successfully identify new service opportunities and develop and
bring new software and services to the market in a timely manner, or that
software, services or technologies developed by others will not render I-Link's
software, services or technologies noncompetitive or obsolete in the future. The
Company's pursuit of technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
the services currently provided by I-Link to alternate access devices and
conduits.
Dependence on Network Infrastructure; Risk of System Failure; Security Risks
Key to the quality of I-Link services and the future success of the
Company is the capacity, reliability and security of its network infrastructure
to support the services. The Company must expand and adapt network
infrastructure as the number of users and the amount of information they wish to
transfer increases and to meet changing customer requirements. The expansion and
adaptation of the network infrastructure will require substantial financial,
operational and management resources. There can be no assurance, however, that
the Company will be able
10
<PAGE>
to expand or adapt the network infrastructure to meet additional demand or
subscribers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all, or that the Company will be able to deploy
successfully the contemplated network expansion. Any failure of the Company to
expand the network infrastructure, as needed, on a timely basis or to adapt to
changing subscriber requirements or evolving industry standards could have a
material adverse effect on the Company's overall business, financial condition
and results of operations in the future.
New and Uncertain Business
I-Link is a young business enterprise that is subject to all of the
risks that present themselves to early stage companies, including but not
limited to limited infrastructure, managerial resources, capitalization and
market share. There can be no assurance that I-Link will be able to successfully
compete with larger, more mature, better capitalized enterprises.
In order to realize subscriber growth, the Company must be able to
replace terminating subscribers and attract additional subscribers. However, the
sales and marketing expenses and subscriber acquisition costs associated with
attracting new subscribers are substantial. Accordingly, the Company's ability
to improve operating margins will depend in part on the ability to retain
subscribers. The Company plans to invest significant resources in the
telecommunications infrastructure, customer support resources, sales and
marketing expenses and subscriber acquisition costs. There can be no assurance
that the Company's future efforts in this area will improve subscriber
retention. Since the market for the Company's services is new and the utility of
available services is not well understood by new and potential subscribers, it
is not possible to predict future subscriber retention rates. See "Business of
I-Link."
Certain Related Party Transactions
During the first quarter of fiscal 1995, the Company received
advances totaling $218,000 from Mortgage Network International ("MNI"). Henry
Y.L. Toh, a director of the Company, has management control over MNI. Such
advances were previously payable upon demand. Subsequent to the extension of
such advances, the Board of Directors approved delivery of a promissory note
representing the aggregate amount of such advances, which promissory note
matured by its terms on October 1, 1995 and bears interest at one percent over
the prime rate of interest established by Southwest Bank of Texas, N.A.
Subsequently, the Company and MNI modified the Note such that the principal
amount due of $175,682 (as of December 31, 1996) was to be discharged as
follows: (i) a principal payment of $88,000 originally due December 31, 1996
will be paid in 21 equal monthly payments of approximately $4,600 beginning
March 10, 1997; and (ii) the remaining principal amount of $87,682 plus interest
at 10.5% per annum will be paid at the rate of $4,200 per month. The Company is
a party to a consulting agreement for the period beginning January 1, 1996 and
ending December 31, 1998 with Windy City, Inc. Joel Kanter, a director of the
Company until July 30, 1996, is the President and a director of Windy City, Inc.
Pursuant to such agreement, Windy City, Inc. was engaged to provide such
consulting services as the Company may request in exchange for compensation at
the rate of $6,250 per calendar quarter. I-Link was a party to a 12-month
consulting agreement with Benchmark, dated August 10, 1995 pursuant to which
I-Link was obligated to pay $6,000 per month to Benchmark for consulting
services rendered. Benchmark is also party to certain options to purchase shares
of Common Stock owned by Four M and to options to purchase shares of Common
Stock owned by R. Huston Babcock. Commonwealth and certain affiliates and
associates of Commonwealth purchased certain shares of Common Stock from an
affiliate of the Company, purchased shares of Class C Preferred Stock from the
Company and were granted certain options by Four M. T6-G Limited Partnership and
I-Link entered into a consulting agreement for two years commencing upon the
successful completion of at least $4,000,000 in funding. The agreement required
the payment of a total of $70,000 payable monthly over 24 months. In addition,
I-Link discharged its promissory note to T6-G Limited Partnership by the payment
of $300,000 from the proceeds of the Class C Offering, which sums were
designated by T6-G Limited Partnership for the purchase of Class C Preferred
Stock. In August 1996, John Edwards and William H. Flury loaned I-Link $125,000
and $100,000, respectively, which sums were repaid from the proceeds of the
Class C Offering together with original issue discounts of $6,250 and $5,000,
respectively. In addition, the Company agreed to issue warrants to purchase
25,000 and 5,000 shares to Mr. Edwards and to Mr. Flury exercisable at $4.87 and
$2.50 per share, respectively. In September 1996, the Company advanced the sum
of $685,000 to FTI to be used by FTI to
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acquire from Harris Corporation certain items of telecommunications switches
known as "Harris switches." Effective January 1, 1997, the Company acquired the
outstanding stock of FTI. The majority owner of FTI is Robert W. Edwards, Jr.,
brother of John Edwards, the Company's Chairman, President and CEO. In
connection with the execution of the Settlement Agreement, the Settlement
Warrant was purchased by a group of investors which includes David E. Hardy and
Karl S. Ryser, Jr., both of whom are officers of the Company (the "Hardy
Group"), in consideration for payment by the Hardy Group of six hundred thousand
dollars ($600,000) to JW Charles in satisfaction of the amounts owed to JW
Charles under the Settlement Agreement. As additional compensation for the Hardy
Group's commitment to purchase the Settlement Warrant, the Company, among other
things, issued to the Hardy Group new warrants to purchase an aggregate of
175,000 shares of Common Stock. See "The Company," "1996 Offerings" and "Certain
Relationships and Related Transactions."
Dependence on Telecommunications Service Providers
AT&T and MCI are currently the sole providers of the long-distance
telecommunications services that the Company resells to its customers. The
future business prospects of the Company are particularly dependent on the
continuous and reliable use of AT&T and MCI's networks. Changes in tariffs,
regulations, or policies by AT&T and MCI may adversely affect the Company's
ability to continue to offer long-distance service on what it considers to be
commercially reasonable or profitable terms. See "Business of I-Link."
Potential Adverse Effects of Rate Changes
I-Link bills its customers for the various long-distance
telecommunications services used by such customers. The total billing to each
customer is generally less than the telephone charges for the same long-distance
service that the customer would pay to a primary seller of such services, such
as AT&T or MCI. I-Link's ability to undersell such primary seller arises as a
result of the volume discount offered to I-Link in accordance with the terms of
its contract with AT&T and MCI. The Company believes I-Link's lower customer
bills is one of the most important factors in its ability to attract and retain
customers. Therefore, narrowing of the differential between the rates charged to
the Company's customers and the cost of the bulk-rate long-distance
telecommunications services purchased by I-Link for resale to such customers
would have a significant adverse effect on I-Link. To the extent this
differential decreases, the savings I-Link is able to obtain for its customers
would decrease and I-Link would lose customers and face increased difficulty in
attracting new customers, and the Company's operating results would also be
adversely affected. See "Business of I-Link."
Competition in the Switched Network Market
I-Link's competition in the switched network market is all other
long-distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom, and
local regional Bell companies. With these carriers controlling the majority of
the market share throughout the U.S., the majority of the potential customers to
which I-Link's products and services are marketed to are customers of one of
these carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources. There can be no assurance that I-Link
will be able to successfully compete with such carriers. See "Business of
I-Link."
Failure to Meet AT&T and MCI Minimum Purchase Requirements; Contingent
Liabilities
The Company has entered into contract tariffs with AT&T and MCI for
both outbound and inbound long-distance service. In July 1995, the Company
signed a five-year negotiated contract tariff with AT&T, effective September 1,
1995, for the supply of inbound and outbound telephone service with volume
discounts which obligated the Company for a minimum quarterly purchase
requirement of $1,500,000. Also included within the contract tariff is a
requirement that a specified minimum proportion of each quarter's usage relate
to "new business" (i.e., currently non-AT&T business). The contract provides
that failure to achieve the new minimum will require payment of the
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shortfall by the Company. Under the contract tariff, the Company is obligated to
make payments equal to its minimum purchase requirements for the outstanding
term of the agreement if there is an early termination of the plan. The Company
is currently negotiating a new contract tariff with AT&T under which new pricing
and new minimum purchase requirements are to be established. In February 1996,
the Company signed a four-year negotiated contract with MCI for the supply of
inbound and outbound telephone service with MCI with volume discounts in return
for minimum annual purchase requirements rising to $4,500,000 per quarter after
the first 15 months of service under the contract. Failure to achieve the
minimum will require shortfall payments by the Company. There is a dispute
between the Company and MCI as to whether the Company is currently satisfying
such commitments. There can be no assurance that the Company will be able to
achieve the required levels of sales.
Reliance on Independent Sales Agents
The Company markets its services through independent sales
representatives and independent marketing organizations. The independent
marketing organizations presently account for approximately 80% of the Company's
long-distance sales volume. Should the services of one or more of these
independent marketers be interrupted or become unavailable to the Company, and
in the event that the Company is unable to promptly replace such marketing
efforts, the financial results of the Company could be adversely affected. See
"Business--Marketing and Sales."
Technological Change and New Services
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The impact of such changes in service and standards on the Company
has been limited due to its selling only MCI long-distance services. The Company
believes that its future success will depend in part on its ability to
anticipate such changes and to offer on a timely basis market responsive
services that meet these evolving industry standards, especially if at some
future time the Company should cease selling MCI service. There can be no
assurance that the Company will have sufficient resources to introduce new
services that would satisfy an expanded range of customer needs.
Customer Attrition
The Company believes that a high level of customer attrition is
common in the direct dial, long-distance industry. Although the level of
attrition experienced by I-Link lies within the range anticipated in its
budgets, I-Link does not have a long history of operations and accordingly, the
level of customer attrition experienced to date may not be indicative of future
attrition levels. In addition, there can be no assurance that any steps taken by
I-Link to counter increased customer attrition will be successful.
Dependence Upon Third Party Transmission Facilities
The future profitability of the Company is based upon its ability to
transmit its customers' long distance telephone calls on a cost effective basis
over transmission facilities leased from facilities based long distance carriers
that compete with the Company. The Company owns only a limited portion of the
transmission facilities needed to complete all of its customers' long distance
telephone calls. Accordingly, the Company is vulnerable to changes in its lease
arrangements and the Company's direct dial long distance telephone business and
the profitability thereof is dependent upon its ability to enter into cost
effective lease arrangements, both long and short term, with facilities based
carriers for the transmission of calls. While the Company believes that it has
ample access to transmission facilities at attractive rates and expects to
continue to have such access, there can be no assurance that leased capacity
will continue to be available at cost-effective rates.
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Equipment Failures; Natural Disaster
Although the Company carries "commercial property/business interruption"
insurance, such insurance does not include coverage of certain natural
disasters. A major equipment failure or a natural disaster affecting any one of
the Company's switching facilities could have a material adverse effect on the
Company's operations.
Government Regulation
Certain of the Company's operations are subject to regulation by the
Federal Communications Commission ("FCC") under the Communications Act of 1934,
as amended (the "Communications Act"). In addition, certain of the Company's
businesses are subject to regulation by state public utility or public service
commissions. Changes in the regulation of, or the enactment or changes in
interpretation of legislation affecting, the Company's operations could have a
material adverse effect on the Company and the value of the Common Stock.
Recently, the Federal Government enacted the Telecommunications Act of 1996 (the
"Telecommunications Act"), which, among other things, allows the Regional Bell
Operating Companies ("RBOCs") and others to enter the long distance business.
Entry of the RBOCs or other entities, such as electric utilities and cable
television companies, into the long-distance business may have a negative impact
on the Company or its customers. The Company anticipates that certain of such
entrants will be strong competitors because, among other reasons, they may enjoy
one or more of the following advantages: they may (i) be well capitalized;
(ii) already have substantial end user customer bases; or (iii) enjoy cost
advantages relating to local loops and access charges. The introduction of
additional strong competitors into the switched long-distance business would
mean that the Company would face substantially increased competition. This could
have a material adverse effect on the Company and the value of the Common Stock.
In addition, the Telecommunications Act provides that state proceedings may in
certain instances determine access charges the Company is required to pay to the
local exchange carriers. No assurance can be given that such proceedings will
not result in increases in such rates. Such increases could have a material
adverse effect on the Company or its customers and on the value of the Common
Stock. See "Business of I-Link - Government Regulation."
FTI's activities are regulated by the public utility commissions of the
various states in which the Company operates. Also, decisions by the FCC with
respect to the permissible business activities or pricing practices may have an
adverse impact on FTI's operations. FTI could be subject to complaints seeking
damages and other relief filed by parties claiming to be harmed by FTI's failure
to file tariffs. Moreover, any significant change in regulations by state
governmental agencies could significantly increase FTI's costs or otherwise have
an adverse impact on FTI's activities and on its expansion efforts. The FCC has
recently taken or is currently considering action on various proposals,
including proposals relating to interstate access transport services, public
filing of rates, proprietary calling cards and billed party preference.
Additionally, legislation has recently been enacted in Congress further
liberalizing the telecommunications industry, specifically by permitting the
Bell Operating Companies (BOCs) to provide service in the long-distance market
and allowing the long-distance carriers such as AT&T, MCI and the Company into
the local markets. Although safeguards have been inserted into the legislation
to ensure fair competition, there can be no assurance that the entry of the BOCs
into the long-distance market will not have a material adverse effect on the
Company's business. See "Business of I-Link-Regulation."
Government Regulation of Internet-Related Business
I-Link's intranet services are not currently subject to direct
regulation by the FCC or any other agency, other than regulations applicable to
businesses generally. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on its or I-Link's
business.
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Government Regulation of Medical Business
Various aspects of the Company's current medical business are subject to
government regulations at the federal, state and local level. Failure to comply
with existing regulations or the enactment of restrictive laws or regulations
could impair the Company's operations. While the Company believes that its
operations comply with applicable regulations, the Company has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretations of such laws will not adversely affect the Company's operations.
The Company employs radiologic technologists in its operations, each of
whom must be licensed by the appropriate state authority. Many states have a
requirement known as a Certificate of Need ("CON") requirement that impedes a
company's ability to operate without governmental approval.
To the extent that medical facilities rely on Medicare and Medicaid
reimbursement for the services rendered by the Company to their patients,
changes in Medicare and Medicaid reimbursement regulations and policies affect
the Company. 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. Many prominent physicians, legislators, medical ethicists,
and others feel that ownership of imaging facilities can impair a physician's
judgment about the need for a diagnostic test. Studies have shown that
physicians who have ownership interests in imaging facilities tend to refer more
patients for diagnostic testing than physicians who have no ownership interest.
The above-described regulations and dynamics may adversely affect the revenue
per scan obtained by the Company as well as the number of scans performed.
On the federal level, a physician self-referral bill passed Congress and
was signed into law by President Clinton in 1993. The self-referral law bans
physicians from referring Medicare patients to imaging and almost any other type
of diagnostic or therapeutic outpatient medical facility in which they have
ownership or financial interests, effective January 1, 1995. Many states,
including Florida, Illinois, Minnesota, New York and New Jersey, have passed
laws regarding physician self referral. Some simply require disclosure of
ownership, while others restrict physicians from referring to facilities in
which they have any ownership interest.
The legislature of the State of Florida enacted the Patient Self-
Referral Act of 1992, effective April 8, 1992 (the "Florida SRA"). Such act
prohibits physician self-referral to health care entities in which such
physicians have financial interests, effective October 1, 1994. Management
believes these legislative and regulatory actions have had no material adverse
effect upon the Company's operations to date. However, the Florida SRA also
imposes a fee cap, effective July 1, 1992, limiting the technical and
professional fees of all providers of "clinical laboratory services, physical
therapy services, comprehensive rehabilitative services, diagnostic imaging
services, and radiation therapy services" to no more than 115% of the Medicare
limiting charge for non-participating physicians. The statute specifically
excludes hospitals and physician group practices from the fee cap provision and
does not apply to patients eligible for Medicaid or Medicare reimbursement.
Several lawsuits have been filed by various providers against the State
of Florida in both federal and state court alleging, among other things, that
the fee cap provision violates the Equal Protection Clause of the U.S.
Constitution and seeking to enjoin the State of Florida from enforcing the fee
cap provision. In July 1992, the United States District Court for Northern
District of Florida granted a permanent injunction in a case entitled Panama
City Medical Center, Ltd., et. al vs. Robert B. Williams, et. al (File No. 92-
40198-WS).
The ultrasound services provided by the Company are related specifically
to urology. Approximately 80% of the Company's patients are covered by Medicare.
Therefore, changes in Medicare reimbursement rules and regulations may have a
significant impact on the profitability of the Company's ultrasound operations.
Reimbursement rates for procedures are set annually. The 1996 reimbursement
rates for the procedures primarily performed by the Company were increased from
between 1.7% to 2.1% over 1995's reimbursement rates.
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Health Care Industry Competition
It is common for hospitals, physicians, physician groups, and others in
the health care field to form ventures to own and operate medical equipment. The
Company is in competition with such groups. There are many companies offering
general business consulting services. The companies that may compete with the
Company in the future and that currently offer consulting services may be larger
and have far greater financial resources than the Company. Also, if the cost of
a particular medical device is reduced and the utilization by physicians
increases, more hospitals will be able to afford to acquire their own equipment
rather than receive service on a shared basis. See "Business of the Medical
Imaging Division."
New Medical Technology and Obsolescence
The medical equipment field is generally characterized by rapidly
changing technology. Early obsolescence of expensive equipment or technological
change could have an adverse effect on the Company. Therefore, the cost of MRI
systems and other medical equipment may be significantly lower in the future,
allowing persons who purchase equipment in the future to charge less for similar
services and therefore compete on a favorable basis.
Exposure to Tort Liability in Medical Industry
The Company operates medical equipment used to perform procedures on or
diagnose disease in patients. The Company is exposed to tort liability in the
event of harm to patients due to the negligence of the Company, its agents, and
employees. The Company currently maintains professional liability insurance
coverage in the amount of $1,000,000. The Company also maintains an umbrella
policy covering, among other things, workers' compensation, general, and
automobile liability in an amount of $9,000,000 in coverage. Although the
Company has never had a liability claim filed against it, any claims could have
a material adverse effect on the Company. In addition, there is no assurance
that the Company will be able to continue to maintain such insurance coverage in
the future.
The Company acts as general partner of a limited partnership controlled
by the Company that directly owns, controls and operates the Company's medical
facilities. As such, the Company is exposed to general liability for torts
committed by such partnership and its agents and employees and for contracts
entered into by those partnerships. In addition, to the extent that the Company
is a general partner of limited partnerships that offer and sell limited partner
interests, the Company is exposed to liability under the Securities Act, the
Exchange Act and various state securities laws.
Dilution
Holders of Common Stock of the Company will suffer significant dilution
in the event that any of the Company's outstanding convertible securities,
including outstanding shares of Preferred Stock, warrants and options are
converted by the holders thereof. See "Description of Securities" and "Recent
Transactions." Additional dilution may result in the event of the exercise of
warrants and options, including options granted pursuant to the Company's stock
option and purchase plans and employment agreements.
Dividends
The Company has not paid any dividends on any of its outstanding
securities to date and, other than as set forth herein, does not anticipate
paying any dividends on its securities in the foreseeable future. As of June 30,
1997, accrued and unpaid dividends on all shares of Preferred Stock totaled
$885,522. The Company currently intends to retain all working capital and
earnings, if any, to finance the operations of its businesses and to expand its
businesses.
Dividends on the Class C Preferred Stock will be payable when, as and if
declared by the Board of Directors, to the extent permissible under the Florida
Business Corporation Act, to the holders of the Class C Preferred Stock in cash
or, at the option of the Company as determined by the Board of Directors, in
shares of Common Stock.
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Dividends may be paid in shares of Common Stock only if such shares have been
registered under the Securities Act. In connection with the Winter Harbor equity
investment in the Company, the Company will issue an aggregate of 4,400 shares
of a new series of preferred stock ("Series M Preferred Stock"). The Series M
Preferred Stock will be entitled to receive cumulative dividends in the amount
of 10% per annum. The Company's future cash flow and legal capital may be
insufficient to enable the Company to pay dividends. See "Description of
Securities-Preferred Stock" and "Recent Transactions--Transactions With Winter
Harbor, L.L.C.; Series M Preferred Stock."
Future Issuances of Stock by the Company; Potential Anti-Takeover Effect
The Company has authorized capital stock of 75,000,000 shares of Common
Stock, $.007 par value per share and 10,000,000 shares of preferred stock,
$10.00 par value per share (the "Preferred Stock"). As of September 30, 1997,
there were 12,180,165 shares of Common Stock and 7,500 shares of Class B
Preferred Stock issued and outstanding, 218,018 shares of Class C Preferred
Stock issued and outstanding and an additional 11,950 shares of Class C
Preferred Stock issuable upon the conversion of the Convertible Notes. One
thousand shares of Series D Preferred Stock were issued in connection with the
MiBridge Acquisition and 4,400 shares of Series M Preferred Stock were issued in
connection with the Winter Harbor Investment. In fiscal 1996, 200,000 shares of
Class A Preferred Stock were converted into 4,894,461 shares of Common Stock and
a portion of the principal of the 10% Notes was converted into 350,000 shares of
Common Stock. As of September 30, 1997, 21,982 shares of Class C Preferred Stock
have been converteded into 527,568 shares of Common Stock. Although, other than
as disclosed herein, there are no present plans, agreements or undertakings with
respect to the Company's issuance of any shares of stock or related convertible
securities, the issuance of any of such securities by the Company could have
anti-takeover effects insofar as such securities could be used as a method of
discouraging, delaying or preventing a change in control of the Company. Such
issuance could also dilute the public ownership of the Company. Inasmuch as the
Company may, in the future, issue authorized shares of Common Stock or Preferred
Stock without prior stockholder approval, there may be substantial dilution to
the interests of the Company's stockholders. However, given that the Company is
authorized to issue more stock, there can be no assurance that the Company will
not do so. In addition, a stockholder's pro rata ownership interest in the
Company may be reduced to the extent of the issuance and/or exercise of any
options or warrants relating to the Common Stock or Preferred Stock. The
issuance of additional shares of Common Stock may have the effect of rendering
more difficult or discouraging an acquisition or change in control of the
Company. See "Description of Securities." For information relating to Series M
Preferred Stock issued to Winter Harbor, see "Recent Transactions--Transactions
With Winter Harbor, L.L.C.; Series M Preferred Stock."
Future Sales of Stock by Stockholders
As of September 30, 1997, approximately 8,575,800 shares of Common
Stock, all of the shares of Class B Preferred Stock, and all of the shares of
Class C Preferred Stock issued and outstanding were "restricted securities" as
that term is defined under the Securities Act and in the future may only be sold
in compliance with Rule 144 promulgated under the Securities Act or pursuant to
an effective registration statement. Rule 144 provides, in essence, that a
person (including a group of persons whose shares are aggregated) who has
satisfied a one-year holding period for such restricted securities may sell
within any three-month period, under certain circumstances, an amount of
restricted securities which does not exceed the greater of 1% of that class of
the Company's outstanding securities or the average weekly trading volume of
that class of securities during the four calendar weeks prior to such sale. In
addition, pursuant to Rule 144, persons who are not affiliated with the Company
and who have held their restricted securities for at least two years are not
subject to the quantity limitations or the manner of sale restrictions of the
rule. As of the date hereof, substantially all of the Company's restricted
securities are available for resale pursuant to Rule 144 or have registration
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rights and are included in the Registration Statement of which this Prospectus
forms a part, which will allow such shares to be freely resold into the market.
In the event that the shares of Common Stock which are not currently
salable become salable by means of registration, eligibility for sale under
Rule 144 or otherwise and the holders of such securities elect to sell such
securities in the public market, there is likely to be a negative effect on the
market price of the Company's securities and on the ability of the Company to
obtain additional equity financing. In addition, to the extent that such
securities enter the market, the value of the Company's securities in the
over-the counter market may be reduced. No predictions can be made as to the
effect, if any, that sales of such securities (or the availability of such
securities for sale) will have on the market price of any of such securities
which may prevail from time to time. Nevertheless, the foregoing could adversely
affect such prevailing market prices.
Authorization of Preferred Stock
The Company's Amended and Restated Articles of Incorporation, as further
amended (the "Articles of Incorporation"), authorize the issuance of up to
10,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without stockholder approval, issue shares of Preferred Stock
with dividend, liquidation, conversion, voting or other rights which are senior
to the Shares or which could adversely affect the voting power or other rights
of the holders of outstanding shares of Preferred Stock or Common Stock. In
addition, the issuance of additional shares of Preferred Stock may have the
effect of rendering more difficult, or discouraging, an acquisition of the
Company or changes in control of the Company. Although, other than as set forth
herein, the Company does not currently intend to issue any additional shares of
Preferred Stock, there can be no assurance that the Company will not do so in
the future. See "Risk Factors--Future Issuances of Stock by the Company;
Potential Anti-Takeover Effect," "Risk Factors--Certain Provisions of Articles
of Incorporation and Bylaws" and "Description of Securities--Preferred
Stock."
On October 7, 1997 the Company's shareholders approved a proposal to
increase the authorized number of preferred shares from 500,000 to 10,000,000.
Immediately upon amendment of the Company's Articles of Incorporation and
designation of additional shares of Class C Preferred Stock, the Convertible
Notes automatically converted to 11,950 shares of Class C Preferred Stock.
Moreover, the Company has agreed to issue 1,000 shares of Series D Preferred
Stock to the former shareholders of MiBridge, Inc., and has accepted an equity
investment from Winter Harbor, L.L.C. in consideration of the issuance of Series
M Preferred Stock. See "Description of Securities" and "Recent Transactions."
The Company issued to Winter Harbor, L.L.C. 4,400 shares of Series M
Preferred Stock which in turn are convertible into 4,400,000 shares of Common
Stock. The Series M Preferred Stock provides for 10% cumulative preferred
dividends, has the right to veto the payment of dividends on any other class of
stock and is convertible into shares of Common Stock, in the case of
discretionary conversion by the holder, at $2.75 per share of Common Stock, or,
in the case of automatic conversion, at the lower of $2.75 per share of Common
Stock, subject to adjustment, or 50% of the average closing bid price of the
Common Stock in the ten trading days preceding the fifth anniversary of issuance
of the Series M Preferred Stock. In addition, the Series M Preferred Stock has
the right to elect two directors, the right to be redeemed at fair market value
in the event of a change of control of the Company (as those terms are defined
in the designation of preferences for the Series M Stock), preemptive rights to
purchase securities sold by the Company, and the right to preclude the Company
from engaging in a variety of practices, including without limitation: mergers,
acquisitions and disposition of corporate assets and businesses, the payment of
dividends, the formation of subsidiaries engaging in new businesses, hiring or
discharging key employees and auditors, transactions with affiliates,
commitments in excess of $500,000, the adoption or settlement of employee
benefit plans and filing for protection from creditors.
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Continued Nasdaq Listing
The Common Stock is traded on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol "ILNK." Prior to March 8, 1996, the Common
Stock was traded under the symbol "MDCR". While the Common Stock is currently
listed for quotation on Nasdaq, there can be no assurance given that the Company
will be able to continue to satisfy the requirements for maintaining quotation
on Nasdaq or that such quotation will otherwise continue. If, for any reason,
the Common Stock becomes ineligible for continued listing and quotation, holders
of the Company's securities may have difficulty selling their securities should
they desire to do so.
Under the rules of the National Association of Securities Dealers, Inc.
("NASD"), as amended in August 1997, in order to qualify for continued listing
on Nasdaq, a company must have, among other things: (1) net tangible assets of
at least $2,000,000 or market capitalization of at least $35,000,000 or net
income in two of the previous three years of at least $500,000; (2) 500,000 or
more publicly trading shares (not counting shares held by affiliates of the
Company); (3) market value of public float of at least $1,000,000; (4) minimum
bid price of $1.00; (5) not fewer than two marketmakers; and (6) not fewer than
300 shareholders. Although the Company was able initially to satisfy the
requirements for listing of its securities on Nasdaq, the Company may be unable
to continue to satisfy the requirements for maintaining quotation of its
securities thereon, and trading, if any, in the Company's securities would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets" of the National Quotation Bureau, Inc. or on the NASD OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of or to obtain accurate quotations as to the price of such
securities.
"Penny Stock" Regulations
The Commission has adopted regulations which define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, and information on the limited market in penny stocks. In addition,
the broker-dealer must obtain a written acknowledgement from the customer that
such disclosure information was provided and must retain such acknowledgement
for at least three years. Further, monthly statements must be sent to the
customer disclosing current price information for the penny stock held in the
account. While many Nasdaq-listed securities would otherwise be covered by the
definition of penny stock, transactions in a Nasdaq-listed security would be
exempt from all but the sole marketmaker provision for: (i) issuers who have
$2,000,000 in tangible assets ($6,000,000 if the issuer has not been in
continuous operation for three years); (ii) transactions in which the customer
is an institutional accredited investor; and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a Nasdaq-listed
security directly with a Nasdaq marketmaker for such securities would be subject
only to the disclosure with respect to commissions to be paid to the broker-
dealer and the registered representative. The foregoing rules may materially
adversely affect the liquidity for the market of the Company's securities. Such
rules may also affect the ability of broker-dealers to sell the Company's
securities and may impede the ability of holders of the Company's securities to
sell such securities in the secondary market.
Certain Provisions of Articles of Incorporation and Bylaws
As previously noted, pursuant to the Articles of Incorporation, the
Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock without action by the stockholders in one or more series having
such
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preferences, rights and other provisions as the Board of Directors may designate
in providing for the issuance of such series. The Articles of Incorporation and
Bylaws contain provisions which may discourage certain transactions which
involve an actual or threatened change in control of the Company. See
"Description of Securities--Anti-Takeover Measures."
Classification of the Board of Directors
The Board of Directors of the Company is classified into three
classes. Members of each class serve for staggered three year terms, with
members of one class coming up for election each year. The classification of the
Board of Directors may make it difficult for shareholders to effect a change in
management. See "Management."
Voting Control
Winter Harbor owns 4,400 shares of Series M Preferred Stock, convertible
at any time into 4,400,000 shares of Common Stock which upon conversion,
would represent 26.5% of the voting securities of the Company. Four M owns
2,329,155 shares of Common Stock or approximately 19.1% of the outstanding
voting securities of the Company. Four M has granted options to sell part
of its holding in the Company to affiliates of I-Link and associated persons
and/or customers of Commonwealth. Furthermore, I-Link, Ltd. owns an aggregate of
284,854 shares of Common Stock or approximately 2.3% of the outstanding voting
securities. GNet Enterprises, Inc. is the general partner of I-Link, Ltd. of
which Clay Wilkes, a director of the Company, is the sole shareholder. The
officers and directors of the Company may be deemed to beneficially own an
aggregate of 5,958,805 shares or approximately 39.6% of the outstanding voting
securities. Therefore, by virtue of their ownership of the Company's issued and
outstanding Common Stock, the officers and directors of the Company have the
ability to substantially influence the election of directors and, consequently,
influence the Company's business and affairs. See "Security Ownership of Certain
Beneficial Owners and Management."
Lack of Patent Protection
The Company does not currently hold any patents, although I-Link has
filed patent applications for its technology for fax and voice communications
over an internet environment. To the extent any technology included in such
products is patentable, if any, there can be no assurance that any patent will
in fact be issued or that such patents will be effective to protect the
Company's products from duplication by other developers. In addition, there can
be no assurance that the Company will be able to afford the expense of any
litigation that may be necessary to enforce its right under any patent.
New Products
New products are subject to substantial risks, including high costs of
introduction, market acceptance and duplication by other developers. See "Risk
Factors--I-Link Business Competition" and "Business of I-Link."
Contemplated Issuances of Stock and Options to FTI Shareholders, Employees and
Consultants
Pursuant to the FTI agreement, subject to satisfaction of certain
conditions, the Company has agreed to issue an aggregate of 400,000 shares of
Common Stock to the stockholders of FTI. In addition, the Company approved the
grant to Clay Wilkes, a Director of the Company, and Alex Radulovic, Senior
Engineer of I-Link, of options to purchase 1,500,000 and 500,000 shares,
respectively, the vesting of which would occur on June 30, 2001; provided that
the vesting shall accelerate in increments of 25% in the event that the average
closing bid price per share of
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Common Stock for five (5) consecutive trading days equals or exceeds $10, $15,
$20 and $25, respectively, upon the graduated achievement of Common Stock prices
of $10, $15, $20 and $25, and exercisable to the extent vested commencing
June 30, 1997 at a price of $7.00 per share. As of the date hereof, 25% of each
of such options has vested. The options lapse on June 30, 2002. Previously, the
Company agreed to issue options to purchase 1,000,000 shares of Common Stock at
an exercise price of $7.00 per share to John Edwards, Chairman of the Board and
President of the Company, and in consideration of Mr. Edwards' salary reduction
from $175,000 to $96,000, the Company has agreed to grant to Mr. Edwards
additional options to purchase 250,000 shares of Common Stock at an exercise
price equal to $4.875. On May 15, 1997 the Company issued 500,000 additional
options to John Edwards at an exercise price of $8.125 per share, 250,000 of
which shall vest in twelve equal quarterly installments and the remaining
250,000 of which shall vest upon conditions yet to be determined by the board of
directors. The Company has agreed to issue options to purchase 64,000 shares of
Common Stock at an exercise price of $5.25 to Joseph Cohen, Commonwealth's
designee as Director of the Company. Pursuant to the terms of their employment
agreements with I-Link, Karl S. Ryser, Jr., Treasurer of the Company, and
William H. Flury, Vice President, Sales and Marketing of I-Link, are each
entitled to receive options to purchase 250,000 shares of Common Stock. Further,
on May 15, 1997 the Company issued 250,000 options to each of Mr. Ryser and
David Hardy, Secretary of the Company, at an exercise price of $8.125 per share,
half of which shall vest in twelve equal quarterly installments and the
remaining half of which shall vest upon conditions yet to be determined by the
board of directors. The Company has also agreed to issue warrants to purchase
25,000 and 5,000 shares of Common Stock at an exercise price of $4.875 and
$2.50, respectively, to Mr. John Edwards and Mr. Flury, in connection with the
loan by such persons to I-Link of $125,000 and $100,000, respectively, in August
1996. On May 15, 1997 Mr. Flury was granted options to purchase 250,000 shares
of Common Stock and Mr. Robert Edwards, Vice President of Network Operations of
I-Link, was granted options to purchase 500,000 shares of Common Stock, each at
the exercise price of $8.125; such options vest in three annual installments.
Furthermore, directors of the Company approved the grant of options to purchase
10,000 shares of Common Stock to each director and an additional 5,000 options
per director per committee on which he or she serves for an aggregate of options
to purchase 95,000 shares. Finally, on May 15, 1997 the Company granted 300,000
options to each of Messrs. Ryser and Hardy at an exercise price of $8.125 per
share; such options are contingent upon the closing of the investment in the
Company by Winter Harbor and shall vest in full upon such closing. See
"Management," "Executive Compensation-Employment Agreements," "Certain
Transactions" and "Recent Transactions - Transactions With Winter Harbor L.L.C.;
Series M Preferred Stock."
Dilutive Impact of Outstanding Options, Warrants and Convertible Securities
The holders of outstanding options, warrants and convertible securities
have the opportunity to profit from a rise in the market price of the Common
Stock, if any, without assuming the risk of ownership, with a resulting dilution
in the interest of other shareholders. The Company may find it more difficult to
raise additional equity capital if it should be needed for the business of the
Company while such options and warrants are outstanding. At any time at which
the holders thereof might be expected to exercise them, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by such options and warrants. The holders of such options and
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warrants have the right to require registration under the Securities Act of the
shares of Common Stock that are issuable upon exercise of such options and
warrants and have certain demand and/or "piggy-back" registration rights. The
cost to the Company of effecting any such registration may be substantial.
Restrictions on Commonwealth Market-Making Activities
Commonwealth may be precluded in accordance with Regulation M under the
Exchange Act from engaging in market making activities for up to five (5) days
prior to and during the period in which it is engaged in the exercise of or sale
of the Commonwealth Warrants. As a result, Commonwealth may be unable to
continue to provide a market for the Company's Common Stock.
Current Prospectus Requirement; Blue Sky Restrictions on Exercise Options and
Warrants
The holder or holders of the Settlement Warrants and/or the Commonwealth
Warrants and/or the Cook Option and/or the E&M Warrants and/or the Mandarino
Warrants and/or the Hardy Group Warrants will have the right to sell or exercise
such warrants only if a current prospectus relating to such securities and/or
the shares underlying such securities is then in effect and only if such
securities are qualified for sale or exempt under applicable state securities or
"blue sky" laws of the states in which the holder or holders of such Warrants
reside. There can be no assurance that the Company will be able to keep this
Prospectus or any prospectus covering any such securities current, although the
Company will use its best efforts to do so. Also, certain exemptions in the blue
sky laws of certain states may permit the holders of such Warrants to transfer
such Warrants or holders thereof may move to states in which the shares
underlying such Warrants are not registered or qualified during the period such
Warrants are exercisable. The Company may decide not to seek or may be unable to
obtain qualification of the issuance of such Common Stock in all of the states
in which the ultimate holders of the Settlement Warrants, the Commonwealth
Warrants, the Cook Options, the E&M Warrants, the Mandarino Warrants or the
Hardy Group Warrants reside. In such event, the Settlement Warrants, the
Commonwealth Warrants, the Cook Option, the E&M Warrants, the Mandarino Warrants
and/or the Hardy Group Warrants may expire and have no value if they cannot be
exercised.
Forward-Looking Statements
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis" and "Business" are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct.
THE COMPANY
I-Link Incorporated (formerly known as Medcross, Inc. and previously
defined as the "Company") was incorporated in Florida on April 21, 1983. On
November 30, 1990, the Company closed on its limited partnership offering of
Medcross Imaging, Ltd. ("Medcross Imaging"). Medcross Imaging was formed for the
purpose of purchasing a Philips T-5 MRI mounted in a mobile van to provide
services to health care facilities on the southwest coast of Florida and
commenced operations in February 1991. During May and June 1992, in a series of
individual transactions, the Company acquired an additional 26.75% ownership
interest in Medcross Imaging. Prior to the acquisitions, the Company had
ownership interests in Medcross Imaging of 41.5%, 80.75%, and 81.75%,
respectively. In June 1993, the Company purchased Waters Edge Scanning
Associates, Ltd. renamed "Tampa MRI" after the acquisition. In October 1994, the
Company closed on an acquisition of a 75% ownership interest in Urological
Ultrasound Services of Tampa Bay (UUSTB) from Urology Ultrasound, Inc. Prior to
the acquisition, the Company owned the other 25% ownership interest in UUSTB.
The acquisition was accounted for under the purchase method of accounting. UUSTB
was organized on September 9, 1987 and is in the business of providing mobile
ultrasound services to urological patients in west central Florida. The Company
immediately transferred all assets and liabilities of the partnership to
Urological Ultrasound Services of Tampa Bay,
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Inc., a wholly owned subsidiary of the Company, formed for the purpose of this
acquisition. Prior to the acquisition, the Company recorded its share of income
and loss on its 25% ownership interest in UUSTB using the equity method. On
May 1, 1995, the Company transferred all of the assets and liabilities of
Urological Ultrasound Services of Tampa Bay, Inc. to Tampa MRI. On February 23,
1996, the Company closed its acquisition of all of the issued and outstanding
common stock of I-Link Worldwide Inc., a Utah corporation (subsequently renamed
I-Link Systems, Inc. and referred to herein as "I-Link") from I-Link, Ltd., a
Utah limited partnership, in exchange for the issuance of an aggregate of
4,000,000 shares of Common Stock of the Company. Prior to the acquisition, the
assets and liabilities of I-Link, Ltd. were transferred to I-Link (which had no
prior activity) at their historical cost. The acquisition was accounted for
under the purchase method of accounting.
Pursuant to the terms of the I-Link Purchase Agreement, 1,400,000 of the
4,000,000 shares of Common Stock of the Company issuable thereunder were issued
upon closing of the I-Link Acquisition and 2,600,000 of such shares of Common
Stock were issued and placed in escrow. Subsequently, 80,046 shares were
released from escrow. An additional 1,519,954 were to be and have been released
upon the receipt of the Company of at least $4 million in proceeds from a debt
or equity offering. As a result of the Class C Offering, such shares were
released and the Company recorded acquired in-process research and development
expense of $14.6 million in fiscal 1996, and an increase to paid-in capital of
$12.6 million in fiscal 1996. The final one million shares held in escrow were
released in August 1997 as a result of satisfaction of certain revenue targets,
resulting in an increase in intangible assets and paid-in capital of $8,875,000.
On January 13, 1997, pursuant to the terms of a Share Exchange Agreement
for the Acquisition of Family Telecommunications Incorporated by Medcross, Inc.
effective as of January 1, 1997 (the "Exchange Agreement"), the Company acquired
the outstanding stock of Family Telecommunications Incorporated, a Utah
corporation subsequently renamed I-Link Communications, Inc.(heretofore defined
as "FTI") from the stockholders of FTI, namely, Robert W. Edwards, Jr. and
Jerald L. Nelson. The consideration for the transaction consists of an aggregate
of 400,000 shares of the Company's Common Stock to be issued by the Company upon
approval by the Company's shareholders of an amendment to the Articles of
Incorporation authorizing an increase in the number shares of Common Stock from
20 million to 75 million. Such amendment was approved at the Company's Annual
Meeting of Shareholders on October 7, 1997. The purchase price was determined
based upon the negotiated value of the assets and operations of FTI. John W.
Edwards, Chairman of the Board, President and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the principal shareholder and one of the
two shareholders of FTI, are brothers.
On August 12, 1997 the Company entered into an agreement with MiBridge,
Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the principal
shareholder of MiBridge, pursuant to which the Company acquired all of the
issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
owner of patent-pending audio-conferencing technology and is a leader in
creating speech-encoding and compression algorithms designed to produce superior
audio quality and lower delay over low-band networks. The Company committed to
pay the stockholders of MiBridge (the "MiBridge Stockholders") consideration
consisting of (i) an aggregate $2,000,000 in cash, payable in quarterly
installments over two years, and (ii) an aggregate 1,000 shares of a series of
the Company's convertible preferred stock to be created (the "Series D Preferred
Stock"). The 1,000 shares of Series D Preferred Stock are convertible at the
option of the MiBridge Shareholders, at any time during the nine months
following the closing of the Acquisition, into such number of shares of Common
Stock as shall equal the sum of $6,250,000 divided by $9.25 (the "Conversion
Price"), which price was the closing bid price of the Company's Common Stock on
June 5, 1997 (the date that the first letter agreement relating to the
transaction was executed). On the nine-month anniversary of the closing of the
MiBridge Acquisition, any unconverted Series D Preferred Stock shall
automatically convert to Common Stock. In either case, the Series D Preferred
Stock shall be converted at the lower of the Conversion Price or the average
closing bid price for the five trading days immediately preceding the date the
Company receives notice of conversion or the automatic conversion date, as the
case may be. Certain MiBridge financial statements are contained in "Financial
Statements."
23
<PAGE>
Employees
As of September 30, 1997, the Company employed approximately 135 full-
time employees, including six persons in management and twelve administrative
personnel. The Company is not a party to any collective bargaining agreement and
the Company's employees are not represented by any labor union. The Company
considers its relationship with its employees to be good. The Company's success
depends in large part upon its ability to attract, develop, motivate and retain
highly skilled employees, of which there can be no assurance.
The Company's corporate offices are located at 13751 S. Wadsworth Park
Drive, Suite 200, Draper, Utah 84020; telephone: (801) 576-5000.
USE OF PROCEEDS
The Securities subject hereto have been previously issued to or are
issuable to the Selling Securityholders and are being offered for sale by the
Selling Securityholders. Consequently, the Company will not receive any of the
proceeds from the sales of the Settlement Shares, the Shares, the Conversion
Shares, the Commonwealth Shares, the Babcock Shares, the Cook Shares, the E&M
Shares, the Mandarino Shares or the Hardy Group Shares. The Company will receive
the proceeds, if any, from the exercise of the Settlement Warrants, the
Commonwealth Warrants, the Cook Options, the E&M Warrants, the Mandarino
Warrants and the Hardy Group Warrants, but will not receive any of the proceeds
from the exercise of the Four M Options or from the resale of the Commonwealth
Warrants, the E&M Warrants, the Mandarino Warrants, and/or the Hardy Group
Warrants or the sale by the holders of the Settlement Shares, the Commonwealth
Shares, the Cook Shares, the E&M Shares, the Mandarino Shares or the Hardy Group
Shares by Selling Securityholders. Proceeds, if any, from the exercise of the
Settlement Warrants, the Commonwealth Warrants, the Cook Option, the E&M
Warrants, the Mandarino Warrants and/or the Hardy Group Warrants will be used
for working capital purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997.
<TABLE>
<CAPTION>
June 30, 1997
June 30, 1997 Pro Forma
------------- -------------
<S> <C> <C>
Stockholders' Equity:
Class B Preferred Stock, $10.00 par value;
22,500 shares authorized; and
7,500 shares outstanding/(1)/................. $ 75,000 $ 75,000
Class C Preferred Stock, $10.00 par value;
240,000 shares authorized; and 240,000
shares outstanding/(1)/....................... 2,400,000 2,400,000
Common Stock, $.007 par value;
20,000,000 shares authorized; and
11,627,597 shares outstanding................. 74,393 74,393
Additional Paid-In Capital............................ 40,236,521 40,236,521
Common Stock to be Issued............................. 11,289,583 11,289,583
Series D Preferred Stock to be Issued (2)............. -- 6,250,000
Series M Preferred Stock to be issued (3)............. -- 12,100,000
Deferred Compensation from Stock Options (3).......... (4,200,000) (2,400,000)
Accumulated Deficit (2)(3)............................ (35,875,186) (47,015,186)
------------ ------------
Total Capitalization.......................... $ 14,000,311 $ 23,010,311
============ ============
</TABLE>
24
<PAGE>
- -------------------------------
(1) As of June 30, 1997, the liquidation value per share of Class B
Preferred Stock was $12.87 and the liquidation value per share of Class
C Preferred Stock was $60.00.
(2) Pro forma information has been prepared to include the anticipated
effect of the MiBridge Acquisition as if the acquisition had occurred on
June 30, 1997. Pro forma adjustments (comprised of $6,250,000 in Series
D Preferred Stock to be issued and $4,240,000 adjustment to accumulated
deficit for in-process research and development expense) are based upon
certain estimates that may change as additional information becomes
available.
(3) Pro forma adjustments include the anticipated effect of the Winter
Harbor equity investment of $12,100,000, which was finalized on October
10, 1997, as if the same had occurred on June 30, 1997. The pro forma
adjustments are comprised of $12,100,000 in Series M Preferred Stock to
be issued (of which $5,000,000 represents the exchange of notes payable
of $2,000,000 and $3,000,000 issued to Winter Harbor on June 5, 1997 and
August 18, 1997, respectively) and an adjustment to accumulated deficit
of $6,900,000 for (non-cash) expensing of debt issuance costs incurred
and deferred compensation for warrants issued in connection with the
Winter Harbor agreement.
DIVIDEND POLICY
Other than as set forth herein, the Company does not currently
anticipate paying any dividends on its securities in the foreseeable future. As
of June 30, 1997, accrued and unpaid dividends on all shares of Preferred Stock
totaled $885,522. The Company currently intends to retain all working capital
and earnings, if any, to finance the operations of its businesses and to expand
its businesses.
Dividends on the Class C Preferred Stock may be paid in shares of Common
Stock (the "Dividend Shares") at the option of the Company provided that the
Dividend Shares are the subject of a registration statement which has been
declared effective under the Securities Act. See "Description of
Securities--Class C Preferred Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained herein are not based on historical facts,
but are forward-looking statements that are based upon assumptions about future
conditions that may not occur. Among many factors that could cause actual
results to differ materially are the following: the Company's ability to manage
expected rapid growth; competition in the long distance telecommunications and
ancillary industries; the Company's ongoing relationship with its long distance
carriers and vendors; dependence upon key personnel; subscriber attrition;
federal and state governmental regulation of the long distance
telecommunications and internet industries; the Company's ability to maintain,
operate and upgrade its information systems and network; and the Company's
success in the offering of other enhanced service products.
Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements. The
Company's ability to consummate such transactions and achieve such results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance of
the Company's products and services, regulatory approvals and developments,
economic conditions, the impact of competition and pricing results of 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.
Forward-Looking Information
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When used
in this document, the words "anticipate," "believe," "estimate," "expect," and
"intended" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current view of the Company respecting future events and are subject
to certain risks, uncertainties noted. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
25
<PAGE>
FISCAL YEAR 1995 AND 1996
Results of Operation
The following table represents the net operating revenue and operating
profit of the Company for each category of service offered. The net operating
revenue and operating profits shown are net of inter-company transactions that
were eliminated in consolidation.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET OPERATING REVENUE
Diagnostic Imaging $ 1,967,384 $ 2,486,708
Sales and Services of Medical Equipment -- 337,889
Network Services 170,532 --
Management and Other 245,160 298,356
------------ ------------
$ 2,383,076 $ 3,122,953
============ ============
OPERATING PROFIT (LOSS)
Diagnostic Imaging $ 41,615 $ 322,314
Sales and Services of Medical Equipment (284,615) (171,083)
Communications Network (19,501,391) --
Management and Other (448,123) (644,986)
------------ ------------
$(20,192,514) $ (493,755)
============ ============
</TABLE>
Consolidated Operating Results
Operating results for 1996 are not comparable to 1995 due to the inclusion
of operating results of I-Link acquired on February 13, 1996. Accordingly,
operating results of 1996 include I-Link while operating results of 1995 did not
include I-Link.
Net operating revenue of the Company decreased 23.7% in 1996 as compared to
1995. This was a result of decreased revenue of diagnostic imaging services,
foreign operations, and management and other services, offset by the inclusion
of network services of I-Link. Salaries and benefits increased to $701,798 in
1996 as compared to 1995. Salaries and benefits of $945,030 are attributable to
the inclusion of I-Link in 1996, offset by decreases for diagnostic imaging,
foreign operations and management and other services of $26,590, $59,132 and
$157,510, respectively. Selling, general and administrative expenses increased
$1,664,444 in 1996 compared to 1995. This increase was due to the inclusion of
I-Link, offset by a decrease in expense from diagnostic imaging, foreign
operations and management and other services of $58,218, $146,012 and $104,075,
respectively. Cost of goods sold in 1995 was entirely related to the sale and
service of CT equipment in China. The increase in communications network expense
of $1,120,779 in 1996, related to the business of I-Link. These expenses include
communication lines, links, facility costs and hardware maintenance associated
with the operation of the I-Link network. Depreciation and amortization expense
increased $628,984 in 1996. The increase was primarily due to depreciation of I-
Link assets. Provision for inventory valuation of $260,033 relates to an
inventory valuation allowance for the Company's inventory located in China and
represents the Company's best estimate of the reserve necessary to reflect the
inventory at its net realizable value. The decrease in repairs and maintenance
expenses was mainly related to diagnostic imaging services. The provision for
doubtful accounts decreased $167,528. The decrease was primarily attributable to
$66,000 related to diagnostic imaging services and $127,000 for doubtful
accounts from foreign operation in 1995, which did not recur in 1996. Acquired
in-process research and development expenses of $14,577,942 in 1996 relate to
the acquisition of in-process research and development acquired when the Company
purchased I-Link. The acquired in-process research and development was expensed
as technological feasibility had not been established and the technology had no
alternative future use. Research and development expenses of $347,504 in 1996
related to the Company's continued research and development associated with the
acquired technology.
26
<PAGE>
The increase in interest expense of $2,031,206 was primarily
attributable to interest expense (non-cash) on convertible promissory notes and
warrants issued with other notes and is calculated as the difference between the
aggregate conversion price per common share per the promissory notes or warrants
as compared to the market price of the common stock on the date the promissory
notes or warrants were issued.
The increase in interest income of $136,605 was related to increased
cash balances related to proceeds from the sale of preferred stock by the
Company during 1996.
Litigation settlement expense of $821,000 recognized in 1996 was
associated with the Company's settlement of the JW Charles litigation. The
expense (non-cash) directly relates to the issuance of 175,000 warrants to
purchase common stock at an exercise price less than fair market value of the
common stock at the date of issuance. These will be issued in association with
the settlement of the JW Charles litigation.
Diagnostic Imaging. Net operating revenue from diagnostic imaging
services decreased $519,324 (20.9%) in 1996 compared to 1995. MRI revenue of
Tampa MRI (a subsidiary of the Company) accounted for $184,616 of the decrease.
This decrease is mainly related to a 20.8% decrease in the average revenue per
procedure offset by a minimal increase in the number of procedures performed in
1996 compared to 1995. 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 revenue per procedure; however, these decreases
have been partially offset by increases in the number of procedures performed.
In addition to the increased participation in managed health care contracts,
during the fourth quarter of 1996, Tampa MRI has contracted with several
companies that lease time from Tampa MRI, which has also decreased the revenue
per procedure. Currently, approximately 50% of the time of Tampa MRI is leased
by such companies. While the combination of these two factors (the increase in
managed care contracts and the increase in the amount of time that is leased to
third party companies) has decreased the revenue per procedure, the referral
base has significantly broadened. MRI revenue of Medcross Imaging, Ltd.
decreased $322,973 in 1996 compared to 1995. This decrease was caused by a
decrease in the average revenue per procedure of 28.1%. The decrease in the
average revenue per procedure of Medcross Imaging, Ltd. is due to the decrease
of the per procedure charges 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 was reduced, each hospital had specific monthly
minimum quotas. There was no material change in the number of procedures
performed in 1996 as compared to 1995. The contracts extended to February 28,
1997 were not renewed and the Company intends to pursue the retail MRI segment
of the market. There is no assurance that the Company will be able to do so.
The revenue of the ultrasound operations decreased 3.8% in 1996 as
compared to 1995. This decrease was caused by a decrease in the number of
procedures performed, offset by an increase in the average revenue per patient.
During the fourth quarter of 1996, the Company has been providing ultrasound
services to a local hospital during certain surgical procedures. The amount of
time needed to perform surgery is substantially longer than the amount of time
taken to perform the other ultrasound procedures; however, the rates at which
the Company is reimbursed is greater than the other ultrasound procedures. This
has caused the decrease in the number of procedures performed and an increase in
the average revenue per procedure. Management believes that participation in
surgical procedures will increase, therefore increasing the average revenue per
procedure.
The operating profit from diagnostic imaging services decreased
$280,699 in 1995 as compared to 1996. This decrease included a decline in
operating profit from MRI services of $296,008, slightly offset by the operating
profit from ultrasound services of $15,309. The decrease in operating profit was
caused by the decrease in net operating revenue described above, offset by the
decrease in total operating expenses for diagnostic imaging services of $238,625
in 1996 as compared to 1995. Operating expenses from Medcross Imaging, Ltd.,
Tampa MRI and ultrasound services decreased $72,180, $139,401, and $27,044,
respectively, in 1996 compared to 1995.
Foreign 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 its own office in Beijing and a joint venture
company, Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of
which it owns 51%. On May 31, 1995, the Beijing office was closed and the
27
<PAGE>
responsibilities for the parts depot and the remaining inventory have been
transferred to SMHME. The purchasers in China regarding maintenance of scanners,
parts depot, etc have raised various issues. The Company received $125,000 in
payments through December 31, 1995. However, the Company has elected to fully
reserve for all remaining amounts due to the Beijing office for the four
scanners installed. This resulted in an expense of $126,910 in 1995 and an
overall allowance for doubtful accounts of $315,753 as of December 31, 1996. In
1996, the Company has written down the CT scanner inventory of the Beijing
operations to what management believes is its fair market value. This resulted
in a valuation expense of $260,033 in 1996. The Company has held discussions
regarding the sale of the Beijing operations. No decision has been made.
Management and Other. Net operating revenue from management and
other activities decreased by $53,196 in 1996 as compared to 1995. A portion of
the decrease was related to the management contract with Bay Area Renal Stone
Center (BARSC). This contract accounted for $27,475 in management fees in 1995
and no management fees in 1996. In August 1995, the Company's management
contract with BARSC was terminated. The annual management fee revenue based upon
contracts currently in effect is $305,160. The net operating loss for management
and other activities decreased 30.5% in 1996 compared to 1995. This decreased
loss is related to the decrease in total operating expenses of 26.5% to $693,286
in 1996 from $943,342 in 1995. This decrease was offset by the reduced revenue
described above. Salaries and benefits decreased $157,510 in 1996 compared to
1995 and other operating expenses decreased $104,075 in 1996 as compared to
1995.
Communications Network and Related Services -- I-Link. The operating
revenue of network and related services from I-Link was $170,532 for 1996. The
net operating loss from network and related services was $19,501,391 for 1996,
primarily due to research and development costs of $14,925,446. Of this amount
$14,577,942 was related to acquired in-process research and development. Other
I-Link expenses are primarily related to the development and deployment of its
communication products. These expenses include software research and
development, network maintenance and expenses relating to sales and marketing,
finance and accounting, information systems, and administrative personnel.
Liquidity and Capital Resources
Cash and cash equivalents as of December 31,1996 were $4,500,227 as
compared to $79,316 as of December 31, 1995. This increase was primarily due to
a private placement of preferred stock in 1996. Cash flow used by operations
during 1996 was $4,840,285 compared to cash flow provided by operations in 1995
of $319,362. The working capital position of the Company was $2,400,501 at
December 31, 1996. The increased cash flow used by operations was primarily due
to expenses associated with the establishment of the I-Link communication
network.
Net cash used by investing activities in 1996 was $2,573,486 as
compared to net cash provided of $4,283 in 1995. The increase in cash used by
investing activities was primarily attributable to the purchase of property and
equipment associated with the establishment of the I-Link communications network
and purchase of restricted certificates of deposit required as deposit for
leases entered into by I-Link relating to its facilities and communication
network. Other investing activity expenditures during 1996 related to the
purchase of additional equipment for I-Link.
Financing activities provided net cash of $11,834,681 in 1996 as
compared to cash used by financing activities in 1995 of $603,252. The increase
in cash provided was due to the net proceeds of $12,290,000 from the issuance of
preferred stock and $356,000 from the exercise of warrants and options. In 1996
the Company had proceeds of $2,502,333 from the issuance of notes payable as
compared to $218,000 in 1995. The Company repaid $2,991,356 of notes payable and
long-term debt in 1996 as compared to $521,871 in 1995.
SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
1997 Operations
Prior to 1997 the Company's primary source of revenue was related to
health care services. The primary expenses of the Company prior to 1997 were
related to delivery of health care services and the development of a proprietary
data communications network. With the Company's acquisition of FTI (effective
January 1, 1997), a
28
<PAGE>
regional long-distance telecommunications carrier with nationwide delivery of
telecommunications services over traditional switched telecommunications
networks, the Company launched its marketing efforts and began to obtain
customers for these long distance telecommunications services. The Company
expanded its existing customer base through these marketing activities and plans
further expansion through the strategic acquisition of existing customer bases.
The Company believes that the multi-level marketing channel is an excellent
vehicle through which to acquire new customers. There are numerous revenue
sources derived from the sales through a multi-level marketing channel. These
revenues include the sale of long distance service, sales marketing materials
and business opportunity. The multi-level marketing channel did not begin
selling services and materials until June of 1997. Therefore, significant
revenues from this channel were not realized during the second quarter of 1997.
In addition, it should be noted that significant long distance usage over the
Company's network is not expected until the third quarter of 1997.
On August 12, 1997 the Company signed an agreement to acquire
MiBridge, Inc., a leading provider of telephone and conferencing software and
hardware. The closing of this acquisition occurred on September 2, 1997. This
acquisition facilitates the Company's ability to further expand its product
offerings as well as receive royalty revenue from existing MiBridge customers.
Financial Condition
Working Capital. The working capital position of the Company was a
deficit of $2,573,251 at June 30, 1997 and $1,579,501 at December 31, 1996. Cash
on hand at June 30, 1997 was $1,176,386 as compared to $4,500,227 as of December
31, 1996. The decrease in cash on hand was primarily attributable to cash used
by operating activities during the six months ended June 30, 1997. Cash used by
operating activities was $5,040,728 in the first six months of 1997 as compared
to cash used by operating activities of $866,315 for the same period in 1996.
Investing Activities. Effective January 1, 1997, the Company entered
into an agreement to acquire all of the outstanding shares of FTI in exchange
for 400,000 shares of the Company's common stock. FTI is an FCC-licensed
long-distance carrier and provider of telecommunication services and as such
provides the Company with an existing customer base and related revenues.
On August 12, 1997, the Company entered into an agreement with
MiBridge, Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the
principal shareholder of MiBridge, pursuant to which the Company acquired all of
the issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
owner of patent-pending audio-conferencing technology and is a leader in
creating speech-encoding and compression algorithms designed to produce superior
audio quality and lower delay over low-band networks. The Company will pay the
stockholders of MiBridge (the "MiBridge Stockholders") consideration consisting
of (i) an aggregate $2,000,000 in cash, payable in quarterly installments over
two years, and (ii) an aggregate 1,000 shares of a series of the Company's
convertible preferred stock to be created (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock are convertible at the option of
the MiBridge Stockholders, at any time during the nine months following the
closing of the MiBridge Acquisition, into such number of shares of Common Stock
as shall equal the sum of $6,250,000 divided by $9.25 (the "Conversion Price"),
which price was the closing bid price of the Company's Common Stock on June 5,
1997 (the date that the first letter agreement relating to the transaction
was executed). On the nine-month anniversary of the closing of the MiBridge
Acquisition, any unconverted Series D Preferred Stock shall automatically
convert to Common Stock. In either case, the Series D Preferred Stock shall be
converted at the lower of the Conversion Price or the average closing bid price
for the five trading days immediately preceding the date the Company receives
notice of conversion or the automatic conversion date, as the case may be.
The Company has entered into an employment contract with Mr. Nahumi
providing terms, conditions and benefits similar to those provided in employment
contracts with existing members of the Company's senior management, including
standard confidentiality, non-competition and assignment of invention
provisions. Mr. Nahumi's annual salary shall be at least $100,000, and Mr.
Nahumi will devote his full time to managing the operations of MiBridge under
the direction of the Company.
29
<PAGE>
Investing activities during the first six months of 1997 resulted in
a net cash outflow of $48,680, including cash acquired in the amount of $435,312
from the acquisition of FTI. The Company expended $483,992 for acquisition of
property and equipment during the first six months of 1997.
Financing Activities. In the first six months of 1997, the Company
reduced its notes payable, long-term debt and capital lease obligations by
$256,932. These reductions include payments in the amount of $60,378 on
indebtedness acquired in the acquisition of FTI. The inclusion of FTI in 1997
increased notes payable by $693,333, and notes payable to others of $104,575.
On June 5, 1997, the Company entered into a term loan agreement
("Loan Agreement") and promissory note ("Note") with Winter Harbor, L.L.C.
("Winter Harbor") pursuant to which Winter Harbor agreed to loan to the Company
the principal sum of $2,000,000 (the "Loan") for capital expenditures and
working capital purposes. As further consideration for Winter Harbor's
commitment to make the Loan, the Company granted to Winter Harbor a warrant
("Loan Warrant") to purchase up to five hundred thousand shares of Common Stock
at a purchase price of $4.97 per share, subject to adjustment, pursuant to the
terms of a Warrant Agreement between the parties. The Loan Warrant expires on
March 11, 2002, and contains demand and piggyback registration rights and
customary anti-dilution terms. The maturity date of the Note is October 15,
1998.
On August 18, 1997 the Company amended the existing Note, allowing
for additional borrowing of up to $3,000,000. The incremental borrowings under
this amendment have a maturity date of February 15, 1998. For every $1,000,000
drawn down on this extension, the Company will issue 100,000 warrants at current
market price. All other provisions of this extension are the same as the Note
discussed above. As of the date hereof the total principal amount borrowed from
Winter Harbor is $5,000,000.
The Company and Winter Harbor executed a Securities Purchase
Agreement, dated as of September 30, 1997 and closed on October 10, 1997,
pursuant to which Winter Harbor invested $12,100,000 in a new series of the
Company's convertible preferred stock (the "Series M Preferred Stock"). Winter
Harbor purchased approximately 2,545 shares of Series M Preferred Stock
(convertible into 2,545,000 shares of Common Stock) for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provided for purchase of
approximately 1,855 additional shares of Series M Preferred Stock (convertible
into 1,855,000 shares of Common Stock). Such additional shares of Series M
Preferred Stock were paid for by exchanging $5,000,000 outstanding principal
balance plus approximately $100,000 accrued interest due under the Note. As
additional consideration for its equity financing commitments, Winter Harbor was
issued additional warrants by the Company to acquire (a) 2,500,000 shares of
Common Stock at an exercise price of $2.75 per share (the "Series A Warrants"),
(b) 2,500,000 shares of Common Stock at an exercise price of $4.00 per share
(the "Series B Warrants") and (c) 5,000,000 shares of Common Stock at an
exercise price of $4.69 per share (the "Series C Warrants"). The respective
exercise prices for the Series A Warrants, the Series B Warrants and the Series
C Warrants (collectively, the "Investment Warrants") shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) have demand registration rights and
anti-dilution rights and (ii) contain cashless exercise provisions.
The Series M Preferred Stock is entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred or
common stock receives any dividends. Thereafter, the Series M Preferred Stock
will participate with the Common Stock in the issuance of any dividends on a per
share basis. Moreover, the Series M Preferred Stock will have the right to veto
the payment of dividends on any other class of stock. The Series M Preferred
Stock shall be convertible at any time prior to the fifth anniversary of its
issuance, at the sole option of Winter Harbor, into shares of Common Stock on a
one thousand-for-one basis; provided, however, that the Series M Preferred Stock
shall be automatically converted to Common Stock on the fifth anniversary of its
issuance at no cost to Winter Harbor. The conversion price shall be, in the case
of discretionary conversion, $2.75 per share of Common Stock, or, in the case of
automatic conversion, the lower of $2.75 per share or 50% of the average closing
bid price of the Common Stock for the ten trading days immediately preceding the
fifth anniversary of issuance. The basis for discretionary conversion, or the
conversion price for automatic conversion, shall be adjusted upon the occurrence
of certain events, including without limitation, issuance of stock dividends,
recapitalization of the Company, or the issuance of stock by the Company at less
than the fair market value thereof.
30
<PAGE>
The Company requires the equity financing ($12,100,000) by Winter
Harbor (see above), or financing from other sources of equity, third-party debt
or similar financing, in order to successfully operate the business as planned.
The ability of the Company to meet the demands for growth and expansion will be
dependent upon the success the Company achieves in meeting its forecasted sales
objectives and anticipated expenses. The availability of capital remains a
significant element to the Company's success. There can be no assurance that
such financing will be completed or that the Company will not be required to
issue significant debt or equity securities in order to obtain the necessary
funding.
See "Recent Transactions - Transactions With Winter Harbor, L.L.C."
for further information regarding the transactions with Winter Harbor, including
a discussion of debt issuance costs relating thereto.
Results of Operations
Comparison of Second Quarter 1997 to Second Quarter 1996
Telecommunications Service Revenue. Telecommunications service
revenue in the second quarter of 1997 was $2,266,492. There was no such revenue
in the second quarter of 1996 as this service began with the acquisition of FTI
in January 1997.
Health Care Service Revenue. Health care service revenue was
$582,298 in the second quarter of 1997 as compared to $582,490 in the same
quarter of 1996. Although the revenue was comparable, the number of procedures
decreased in 1997 while the revenue per procedure increased. The decrease in
procedures and increase in revenue per procedure was expected as one of the
Company's diagnostic imaging facilities now pursues the retail segment of the
MRI market rather than providing services to hospitals through contracts as in
1996.
Marketing Services Revenue. Marketing services revenue, which
includes revenues recognized from independent representatives for training,
promotional and presentation materials, and ongoing administrative support was
$720,490 in the second quarter of 1997 as compared to $0 in the same quarter of
1996. This channel of distribution of telecommunication services was begun late
in the second quarter of 1997 and thus had no comparable revenue in 1996.
Other Revenue. Other revenue decreased $55,338 in the second quarter
of 1997 to $0 as compared to $55,338 in the same quarter of 1996. The decrease
is primarily due to internet service provider revenues in 1996 that did not
recur in 1997.
Telecommunications Network Expenses. Telecommunications expenses
increased $3,950,406 in the second quarter of 1997 to $4,174,708 as compared to
$224,302 for the same quarter of 1996. These expenses include the costs related
to the continuing development and deployment of the Company's communication
network and expenses related to the telecommunication service revenue which
began in 1997 with the acquisition of FTI.
Marketing Services Expenses. Marketing services expense was $640,739
in the second quarter of 1997 as compared to $0 for the same quarter of 1996.
The expenses directly relate to the Company's marketing service revenue which
began late in the second quarter of 1997. Marketing service expenses include
commissions and the costs of providing training, promotional and presentation
materials and ongoing administrative support.
Selling, General and Administrative. Selling, general and
administrative expense increased $1,343,208 to $2,378,890 in the second quarter
of 1997 as compared to $1,035,682 in the second quarter of 1996. The increase
was primarily due to increased administrative expense associated with the launch
of the multi-level marketing channel and general increase in overhead and
personnel expenses associated with growing the Company's telecommunication
business.
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Provision for Doubtful Accounts. Provision for doubtful accounts
increased $318,654 to $368,273 in the second quarter of 1997 as compared to
$49,619 in the same quarter of 1996. This increase is primarily related to the
Company's growth in telecommunication service revenue.
Depreciation and Amortization. Depreciation and amortization
increased $422,625 to $618,443 in the second quarter of 1997 as compared to
$195,818 in the second quarter of 1996. The increase is primarily due to
increased amortization of intangible assets acquired in the acquisition of FTI
in 1997. Depreciation expense also increased due to the acquisition of
telecommunication equipment in late 1996 and 1997.
Research and Development. Research and development was $234,246 in
the second quarter of 1997 as compared to $0 in 1996. The increase is associated
with the Company's continuing telecommunication network research and development
efforts.
Interest Expense. Interest expense decreased $1,009 to $74,118 in
the second quarter of 1997 as compared to $75,127 in the same quarter of 1996.
The decrease is primarily due to a decrease in the average balance of loans
outstanding during the second quarter of 1997 as compared to the same quarter of
1996.
Interest and Other Income (Expense). Interest and other income
(expense) increased $59,964 to $57,199 in the second quarter of 1997 as compared
to $(2,765) in the second quarter of 1996. The increase was primarily due to an
increase in interest income in 1997 due to an increase in the average balance of
cash on hand as a result of proceeds from the Company's sale of Class C
Preferred Stock in the third quarter of 1996.
Minority Interest in Net Loss of Consolidated Subsidiaries. Minority
interest in net loss of consolidated subsidiaries increased $18,033 to $20,039
in the second quarter of 1997 as compared to $2,006 in the same quarter of 1996.
The increase is related to increased losses in the Company's subsidiary as it
transitioned from contracts with hospitals to the retail segment of the MRI
market.
Comparison of Six Months Ending June 1997 to Six Months Ending June
1996
Telecommunications Service Revenue. Telecommunications service
revenue for the six months ending June 30, 1997 was $4,414,825. There was no
such revenue for the same period ending June 30, 1996 as this service began with
the acquisition of FTI in January 1997.
Health Care Service Revenue. Health care service revenue increased
$4,885 in the six months ending June 30, 1997 to $1,179,555 as compared to
$1,174,670 in the same period ending June 30, 1996. Although the revenue was
comparable, the number of procedures decreased in 1997 while the revenue per
procedure increased. The decrease in procedures and increase in revenue per
procedure was expected as one of the Company's diagnostic imagining facilities
now pursues the retail segment of the MRI market rather than providing services
to hospitals through contracts as in 1996.
Marketing Services Revenue. Marketing services revenue was $720,490
in the six months ending June 30, 1997 as compared to $0 in the same period
ending June 30, 1996. This channel of distribution of telecommunication services
was begun late in the second quarter of 1997 and thus had no comparable revenue
in 1996.
Other Revenue. Other revenue decreased $72,364 in the six months
ending June 30, 1997 to $0 as compared to $72,364 in the same period ending June
30, 1996. The decrease is primarily due to internet service provider revenues in
1996 that did not recur in 1997.
Telecommunications Network Expenses. Telecommunications expenses
increased $6,743,255 in the six months ending June 30, 1997 to $7,065,790 as
compared to $322,535 for the same period ending June 30, 1996. These expenses
include the costs related to the continuing development and deployment of the
Company's communication network and expenses related to the telecommunication
service revenue which began in 1997 with the acquisition of FTI.
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Marketing Services Expenses. Marketing services expense was $640,739
in the first six months of 1997 as compared to $0 for the same period of 1996.
The expenses directly relate to the company's marketing service revenue which
began late in the second quarter of 1997. Marketing service expenses include
commissions and the costs of providing training, promotional and presentation
materials and ongoing administrative support.
Selling, General and Administrative. Selling, general and
administrative expense increased $2,995,749 to $5,026,034 in the six months
ending June 30, 1997 as compared to $2,030,285 in the same period ending June
30, 1996. The increase was primarily due to increased administrative expense
associated with the launch of the multi-level marketing channel and general
increase in overhead and personnel expenses associated with growing the
Company's telecommunication business.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased $412,635 to $503,498 in the six months ending June 30, 1997 as
compared to $90,863 in the same period ending June 30, 1996. This increase is
primarily related to the Company's growth in telecommunication service revenue.
Depreciation and Amortization. Depreciation and amortization
increased $494,747 to $1,019,938 in the six months ending June 30, 1997 as
compared to $525,191 in the same period ending June 30, 1996. The increase is
primarily due to increased amortization of intangible assets acquired in the
acquisition of FTI in 1997. Depreciation expense also increased due to the
acquisition of telecommunication equipment in late 1996 and 1997.
Provision for Asset Valuation. The provision for asset valuation
occurred in the first quarter of 1997 (none in 1996) and includes a valuation
allowance for inventory of $55,341 and a write off of tenant improvements
abandoned when I-Link moved corporate headquarters in January 1997 in the amount
of $158,603.
Acquired In-Process Research and Development. Acquired in-process
research and development in the six months ending June 30, 1996 was $4,777,943
which was related to the acquisition of I-Link in February 1996. There were no
similar costs in the six months ended June 30, 1997.
Research and Development. Research and development was $345,334 in
the six months ending June 30, 1997 as compared to $0 in the same period ending
June 30, 1996. The increase is associated with the Company's continuing
telecommunication network research and development efforts.
Interest Expense. Interest expense decreased $647,291 to $420,475 in
the six months ending June 30, 1997 as compared to $1,067,766 in the same period
ending June 30, 1996. The decrease is primarily due to a decrease in imputed
interest expense (non-cash) of $625,000 to $320,000 in the six months ending
June 30, 1997 as compared to $945,000 in the same period of 1996. The imputed
interest was related to certain convertible promissory notes issued in 1996.
Interest and Other Income. Interest and other income increased
$129,352 to $142,114 in the six months ending June 30, 1997 as compared to
$12,762 in the same period ending June 30, 1996. The increase was primarily due
to an increase in interest income in the first six months of 1997 as compared to
the same period in 1996 due to an increased average balance of cash on hand
primarily as a result of proceeds from the Company's sale of Class C Preferred
Stock in the third quarter of 1996.
Minority Interest in Net Loss of Consolidated Subsidiaries. Minority
interest in net loss of consolidated subsidiaries increased $29,065 to $29,128
in the six months ending June 30, 1997 as compared to $63 in the same period
ending June 30, 1996. The increase is related to increased losses in the
Company's subsidiary as it transitions from contracts with hospitals to the
retail segment of the market.
Other Items
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices in general.
However, the Company's revenues will continue to be affected by competitive
forces in the market place.
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In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS and
makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
The Company has reviewed all other recently issued, but not yet
adopted, accounting standards in order to determine their effects, if any, on
the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
As the Company is developing its own accounting systems for
reporting and operations and is addressing year 2000 issues as part of that
development, no significant incremental costs are anticipated in order to be
year 2000 compliant.
BUSINESS OF I-LINK
Overview
The primary business of the Company as carried on through its
wholly-owned subsidiaries I-Link Systems, Inc. (formerly named I-Link Worldwide,
Inc.), I-Link Communications, Inc. (formerly named Family Telecommunications
Incorporated) and I-Link Worldwide, L.L.C. (collectively referred to as "I-
Link"), is the sale and delivery of communications capabilities to residential,
business and wholesale customers via both a proprietary data communication
network established by I-Link that operates in the same manner as the Internet
(the "I-Link Intranet") and existing switched telecommunications networks. I-
Link seeks to provide more effective communications solutions and enhanced
capabilities to users of traditional telecommunications services through
utilization of the I-Link Intranet and other existing data communications
networks, as well as through volume purchasing of capacity on traditional
switched telecommunications networks. I-Link has developed patent-pending
technology and has deployed a national network infrastructure of communications
equipment and dedicated lines that will enable it to route traditional
telecommunications services over the I-Link Intranet in a manner that is
transparent to the user, employing the user's existing telecommunications
equipment.
With its acquisition of Family Telecommunications Incorporated (now
renamed I-Link Communications, Inc.), a regional long-distance
telecommunications carrier with nationwide delivery of telecommunications
services over traditional switched telecommunications networks, the Company in
January 1997 launched its marketing efforts and began to obtain customers for
its long-distance telecommunications services through I-Link. In June 1997 I-
Link launched its multi-level marketing program, I-Link Worldwide, L.L.C., to
market its products and services to the residential and small business markets.
Through its marketing activities and through strategic acquisitions of existing
customer bases, I-Link will aggressively seek to enlarge its overall customer
base. The I-Link services will initially be delivered across existing switched
telecommunications networks; then, as I-Link's Intranet technology becomes fully
deployable and reaches targeted customer-base size in given geographic areas,
customer traffic in those areas will be moved from the traditional switched
telecommunications networks to the network of dedicated lines I-Link has
established and over which its proprietary technology is deployed (the "I-Link
Intranet"). The move from the traditional switched telecommunications network to
the I-Link Intranet is transparent to the customer and will result in a
significant reduction in the cost of delivering the services, both increasing
profitability and permitting I-Link to offer increased savings to its customers,
as well as differentiating I-Link and its services in a highly commoditized
market. I-Link believes this strategy of building customer bases in geographic
areas on traditional switched networks and transitioning the traffic to the
I-Link Intranet as the size of the customer base increases will result in the
most cost effective nationwide deployment of the I-Link Intranet.
Currently, I-Link's communications products and services (the
"I-Link Services") are primarily delivered over the traditional switched
telephone network at discounted pricing levels based upon existing contracts
with national
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carriers. Within certain geographic areas in the Intermountain West where the
number of I-Link customers is greatest, the I-Link Services are now delivered
over the I-Link Intranet. As the customer bases in other geographic areas
increase, the I-Link Intranet will be expanded to include those areas, and the
delivery of the I-Link Services in those areas will be diverted from the
traditional switched telephone network to the I-Link Intranet. The following is
a description of how the I-Link Services are delivered using the I-Link
Intranet and technology.
The I-Link Intranet and technology enable the user to employ its
existing telephone and fax machine to call or send a fax long-distance to its
ultimate destination with a significant savings on long-distance telephone
charges. Transmission takes place primarily via flat rate-based data lines which
comprise the I-Link Intranet such as those found on the Internet. No special
telephone or fax equipment is required for the user. The person who receives the
call or fax does not need to be a subscriber to the I-Link Services and does not
need any equipment other than a conventional telephone or fax machine to receive
the call or fax. The call and fax arrive in the same amount of time, and the fax
in the same form, as with a conventional telephone/fax transmission.
I-Link pursues a multi-tiered infrastructure strategy. In some
cases, I-Link has and will continue to establish its own local sites. In others,
I-Link will partner with nationally recognized telephone service resellers and
Internet Service Providers ("ISPs"), incenting those organizations to provide
the needed local site consistent with I-Link's service requirements. I-Link will
continue to establish its own local sites incrementally as growing customer
base and business needs dictate. Installation of the local sites is a relatively
simple process involving pre-configured Communication Engines (consisting of
computer and networking hardware and proprietary software) and communications
lines.
I-Link will use I-Link Intranet Operations Centers ("NOCs") to
monitor and maintain the I-Link Intranet. Successful management of the I-Link
Intranet is critical to providing the highest level of support.
The Communication Engine(TM) represents I-Link's patent pending
technology. This technology provides the method which enables a conventional
telephone or fax machine to communicate with another conventional telephone or
fax machine via I-Link's proprietary Intranet (a data communication network
similar to the Internet), that uses the TCP/IP communications protocol.
TCP/IP is the communications protocol that allows a computer to access and
communicate over data communication networks such as the I-Link Intranet as well
as the Internet. Communication Engines are located at I-Link local sites which
cover strategic local dialing areas and provide the service infrastructure.
Thus, cost for the transmission is the user's cost of a local call plus access
to the I-Link Intranet, similar to current computer access to the Internet.
By way of illustration, a subscriber in Los Angeles wishing to call
or send a fax from Los Angeles to Dallas simply dials the desired number in
Dallas. The call or fax is immediately and transparently routed to a local
Communication Engine located at I-Link's Los Angeles site. The Los Angeles
Communication Engine receives the call or fax, then routes it for delivery by
area code and local exchange prefix to the appropriate Communication Engine in
Dallas via the I-Link Intranet. A local phone call to the recipient telephone or
fax machine is placed by the Dallas Communication Engine, and the call or fax is
delivered. A report of the transaction, including notification of receipt and/or
any error handling, is sent to the Los Angeles subscriber.
The Methodology. The I-Link Services are founded on patent pending
technology that allows conventional telephones and fax machines to communicate
via TCP/IP driven networks. This means that devices such as telephones or fax
machines can be used as they currently are used, but users will no longer need
to access communications lines that charge distance-based rates. A subscriber
can call or transmit faxes via the I-Link Intranet outside local dialing areas
for the cost of a local call. This technology is housed in an I-Link
Communication Engine at an I-Link local site. In addition to connecting devices,
the engine provides self-diagnostic software designed to prevent service
failure. And, it stores data and statistics on account information and system
usage, allowing I-Link to immediately monitor capacity and enhance
functionality.
The I-Link Network receives traffic from the public switched
telephone network ("PSTN") as a TDM stream (time division multiplexing) and
converts it to IP (internet/intranet protocol) data packets. The data is
converted from the PCM (pulse code modulation) format standard to traditional
telephony to an I-Link proprietary coding. The I-Link proprietary coding can
distinguish among and handles voice, fax and modem communications differently.
Voice is
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compressed using a voice coder or codec, fax and modem traffic are
demodulated/modulated. The data can then be stored (such as recording a
message), altered (as in changing a fax call from 14400 BPS to 9600 BPS) or
redistributed to multiple recipients (as in the case of conferencing).
Market Opportunities
Virtually every home and business in the United States today uses
long-distance telephone services. Even though competition between the various
providers of long-distance telephone services is intense, I-Link believes the
significant cost savings that can be achieved through the deployment and
implementation of the I-Link Network and technology, together with additional
enhanced services that can be offered to the customer by virtue of the I-Link
Intranet and technology, will make I-Link highly competitive in this
marketplace. I-Link targets residential and small-business customers for its
"I-Link" branded services through I-Link Worldwide, L.L.C., a nationwide,
multi-level marketing and sales program. Marketing and sales of the "I-Link"
branded products to larger business users will be carried out by traditional
sales agents. I-Link wholesales its services on a non-branded basis to various
distributors, aggregators, resellers and member organizations that then resell
the products to both residential and business end-users. I-Link will also lease
excess capacity on its network to long-distance carriers.
Opportunity to Provide Substantial Savings to Users. Utilization of
the I-Link Services will afford the opportunity to substantially reduce the
long-distance telephone and data transmission charges presently borne by the
current user of long-distance telephone and fax services. Charges for the use of
land-line networks traditionally used in long-distance telecommunications
are generally based on time and distance, often resulting in substantial
long-distance charges. In contrast, the charges associated with the new data
communications networks (such as I-Link's Intranet and the Internet) are
generally fixed.
Integration of Distinct Networks. There are currently a number of
distinct information-transmission networks. Telephone, cable, wireless, and
private and public networks are primary examples. Technologies supporting these
networks will continue to integrate and evolve, allowing for previously
unavailable opportunities for information distribution and access. The current
business infrastructure presents impediments to the easy use of those networks.
For example, in the fax industry there is a proliferation of fax or fax-like
communication technologies, including fax machines, fax servers, fax software
and e-mail. But these technologies are not well integrated; a party wishing to
send information to others may have to format and send the data several
different ways depending on the messaging equipment and systems available to the
recipients.
Opportunity to Deliver Enhanced Capabilities. The TCP/IP networking
protocol and new transmission media such as are often associated with a data
communications network such as I-Link's Intranet or the Internet ("Data
Communications Network") offer the possibility of substantially reduced cost and
improved data communication. However, as highlighted above, telephones and fax
machines are not TCP/IP-enabled. In the past, in order to take full advantage of
the TCP/IP protocol and the Data Communications Network, users first must own or
have access to a computer, and then obtain access to the Data Communications
Network. Therefore, telephones and fax machines have used traditional land-line
telecommunications networks to transmit their voice and data. Charges for the
use of those traditional networks are generally based on time and distance,
often resulting in high long-distance charges. In contrast, the charges
associated with the new Data Communications Networks are generally fixed.
Market Response. Many of the responses seen in the marketplace to
the opportunities discussed above are problematic in that they are often
computer-oriented. Solutions typically require that a user (i) own a personal
computer; (ii) have access to a Data Communications Network; and (iii) have
software compatible with software other users own. This significantly limits the
market for the solution. Moreover, the responses often follow a product approach
rather than a service approach. The product approach, usually modeled after the
same approach followed by computer software vendors, imposes further
requirements on the user. The approach requires version management, with users
required to ensure that their software is current; it requires training, and
re-training as procedures change; and gives a customer an interface-driven
product that often has more capacity than a user needs. I-Link's strategic
response to the market is to provide, above all, a true service-based approach,
providing customers access to a Data Communications Network via their existing
telephones and fax machines and offering an array of enhanced services.
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The Residential Market
I-Link, through I-Link Worldwide, L.L.C., has targeted all
residential users, initially throughout North America, through the establishment
and implementation of a multi-level marketing and sales program, providing
individuals the opportunity to earn commissions on the sale of the I-Link
Services to their neighbors and acquaintances. A large amount of interest in
I-Link has been generated throughout the multi-level, network marketing
industry, and I-Link believes a significant market opportunity exists through
the exploitation of this marketing and sales channel to reach a large number of
potential residential customers. I-Link formally launched its multi-level sales
operation and began marketing in this channel in June 1997.
The Business Market
Management of I-Link categorizes its domestic and international
target user markets as follows: (i) small and medium sized businesses (less than
500 employees); (ii) large businesses (500 or more employees); and (iii)
vertical markets. I-Link's primary target market consists of small and medium
sized businesses. Small and medium-sized businesses often have a difficult time
obtaining and using technology. Typically, they lack the resources and/or
expertise needed to obtain strategic advantage from state-of-the-art technology.
Although I-Link defines small and medium-sized businesses as businesses with
less than 500 employees, it is also important to note that departments or
offices within larger businesses may also be placed in this category. Larger
businesses can dedicate resources and/or funds to technology customization or
even technology development. Smaller businesses often must accept off-the-shelf
solutions designed for general use. I-Link believes that its services are of
significant strategic advantage to small businesses. Without having to adopt new
technology or procedures, small and medium-sized businesses can immediately save
money crucial to their bottom line. Large businesses and high-end national
accounts (Fortune 2000) have significant long-distance telephone and fax
traffic. Management believes those businesses could realize substantial savings
from I-Link's services.
Distribution Plan
I-Link will target the following distribution methods:
(i) multi-level marketing and sales program; (ii) direct sales using independent
sales agents; (iii) selling through independent telephone company, or "Telco",
resellers; (iv) acquisition of smaller carriers with established customer bases;
(v) selling through Internet service providers ("ISPs"); (vi) selling through
cable/broadcasting companies; (vii) selling through direct sales organizations;
(viii) direct sales to top national accounts and vertical market resellers
("VMRs"); (ix) established channels of distribution in the retail
computer/technology markets; (x) leveraging OEM channels; and
(xi) telemarketing/telesales.
Multi-Level Marketing and Sales Program. I-Link, through I-Link
Worldwide, L.L.C., has targeted all residential and small-business users,
initially throughout North America, through the establishment and implementation
of a multi-level marketing and sales program, providing individuals the
opportunity to earn commissions on the sale of the products to their neighbors
and acquaintances. A large amount of interest in I-Link has been generated
throughout the multi-level, network marketing industry, and I-Link believes a
significant market opportunity exists through the exploitation of this marketing
and sales channel to reach a large number of potential residential customers.
I-Link formally launched its multi-level sales operation and commenced marketing
in this channel in June 1997.
Direct Sales. I-Link intends to use independent sales agents for
direct sales of I-Link's products on a commission basis.
Reselling. It is I-Link's intention to offer telephone service
resellers, cable and broadcast companies, ISPs and direct sales organizations
significant partnering opportunities. In January 1997 I-Link entered into a
reseller agreement with WealthNet Corporation ("WealthNet") (a co-op member
organization) under the terms of which I-Link sells its products and services to
WealthNet, and WealthNet markets and resells these products and services to its
members and potential WealthNet members. Other reseller agreements are currently
in negotiation. By adding I-Link services to their current list of services,
these potential partners enhance their competitive position in highly
competitive and increasingly fragmented markets.
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Acquisition of Smaller Carriers. In January 1997, the Company
acquired Family Telecommunications Incorporated (now renamed I-Link
Communications, Inc.), a regional long-distance carrier with an established
customer base in excess of 17,000. This acquisition brought to I-Link an
existing customer base, useful facilities and established industry
relationships, and afforded FTI the means to differentiate and enhance the
products and services it could offer to existing and potential customers in a
highly competitive marketplace. I-Link believes that there exist numerous other
local and regional carriers with established customer bases and facilities that
could be acquired in the same manner. I-Link intends to continue to seek out
these opportunities provided it is able to negotiate terms that are in the
Company's best interest.
Retail Channels. Suppliers of telecommunications equipment, such as
office equipment stores, computer dealers, and office supply superstores
represent a direct interface to many targeted I-Link customers. For example,
over 20% of fax machines are purchased from office equipment dealers or supply
superstores. This represents a significant, well-established channel for I-Link.
I-Link can also create a fax driver that allows a customer to both subscribe to
I-Link's service and interface with existing fax software. This gives I-Link a
"fax service in a box" capability and a shelf presence.
OEM Channels. Market building with OEMs (original equipment
manufacturers) also represents significant opportunity to I-Link. Sales
incentives will motivate OEMs to provide a highly targeted marketing channel for
I-Link campaigns.
Telemarketing. I-Link will use the telemarketing and telesales
channel employed by many service providers. As in the example of current
business communications providers, I-Link will directly contact customers in
strategic markets, stressing the significant cost benefits associated with
I-Link services while fielding sales inquiries derived from advertising.
Technology Issues
I-Link has established Communication Engines at strategic locations
in the United States to allow subscribers to access I-Link's network locally,
and intends to continue to establish Communication Engines in other strategic
locations both in North America and worldwide as the customer base warrants. The
I-Link Intranet is a high-speed interconnected network of Communication Engines.
I-Link has created this network by leasing high-speed data lines and/or
partnering with existing communications and Internet service entities that
currently provide access to such lines.
Capacity. Capacity, or lack thereof, is a frequently discussed topic
with regard to data transmission via Data Communications Networks such as the
Internet. "Slow service" resulting from inadequate capacity is one of the common
complaints among Internet users. Capacity is a function of "bandwidth" on the
network or the ability of the infrastructure to carry potentially large amounts
of data to and from large numbers of users.
The I-Link Intranet is leased from large IXCs with rigorous
performance standards and managed by I-Link. In some cases, parts of the network
may be contractually provided by other entities in the future. Management
believes I-Link has the ability to monitor and manage all of its network
capacity. I-Link Communication Engines monitor and store statistical
capacity-related data. Transmission locations, transmission size, and
transmission times are easily stored and accessed by the I-Link Intranet. An NOC
monitors data and can immediately detect when utilization levels are high.
I-Link can then add capacity as needed. Because I-Link data is associated with
specific capabilities (e.g., faxes) and is transmitted between (and encoded and
decoded by) I-Link Communication Engines, the type and purpose of the data is
well understood and "overhead" bandwidth needs are better addressed. Data
segmentation gives the Communication Engines additional ability to maximize
capacity. As a result I-Link uses bandwidth up to four times as efficiently as
traditional telephony and fax systems do over the same medium.
Security. Security is a major concern associated with data
transmission across Data Communications Networks. I-Link controls the routing of
data from one Communication Engine to another. Management believes that I-Link's
system provides a measure of security that actually makes phone and fax
transmission more secure than using traditional facsimile methods.
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Competition
The market for business communications services is extremely
competitive. I-Link believes that its ability to compete in I-Link's business
successfully will depend upon a number of factors, including the pricing
policies of competitors and suppliers; the capacity, reliability, availability
and security of the I-Link Intranet infrastructure; market presence and channel
development; the timing of introductions of new products and services into the
industry; ease of access to and navigation of the Internet or other such Data
Communication Networks; I-Link's ability in the future to support existing and
emerging industry standards; I-Link's ability to balance network demand with the
fixed expenses associated with network capacity; and industry and general
economic trends.
While I-Link believes there is currently no competitor in the North
American market providing the same capabilities in the same manner as I-Link
will offer using the I-Link Intranet, there are many companies that offer
business communications services, and therefore compete with I-Link at some
level. These range from large telecommunications companies and carriers such as
AT&T, MCI, Sprint and LDDS/WorldCom, to smaller, regional resellers of telephone
line access. These companies, as well as others, including manufacturers of
hardware and software used in the business communications industry, could in
the future develop products and services that compete with those of I-Link on a
more direct basis. These entities are far better capitalized than I-Link and
control significant market share in their respective industry segments. In
addition, there may be other businesses that are attempting to introduce
products similar to I-Link's for the transmission of business information over
the Internet. There is no assurance that I-Link will be able to successfully
compete with these market participants.
Government Regulation
General. Traditionally, the Federal Communications Commission (the
"FCC") has sought to encourage the development of enhanced services as well as
Internet-based services by keeping such activities free of unnecessary
regulation and government influence. Specifically in the area of
telecommunications policy and the use of the Internet, the FCC has refused to
regulate most online information services under the rules that apply to
telephone companies. This approach is consistent with the passage of the
Telecommunications Act of 1996 ("1996 Act") which expresses a Congressional
intent "to preserve the vibrant and competitive free market that presently
exists for the Internet and other interactive computer services, unfettered by
Federal or State regulation."
Federal. The FCC does not regulate value-added networks ("VANs"),
software or computer equipment that offer customers the ability to transport
data or voice messages over telecommunications facilities. By definition, VAN
operators purchase transmission facilities from "facilities-based" carriers and
resell them packaged with packet transmission and protocol conversion services.
Under current rules, such operators are excluded from regulation that applies to
"telecommunications carriers" under Title II of the Communications Act.
In the wake of the 1996 Act, however, the FCC is revisiting many of
its past decisions and could impose common carrier regulation on the transport
and resold telecommunications facilities used to provide telecommunications
services as a part of an enhanced or information service package. The FCC also
may conclude that I-Link's protocol conversions, computer processing and
interaction with customer-supplied information are insufficient to afford the
Company the benefits of the "enhanced service" classification, and thereby may
seek to regulate the Company as a common carrier/telecommunications service
provider. While there are no present indications that the FCC plans to make
either of these determinations, such decisions are within the agency's statutory
discretion and could affect the manner in which the Company conducts its
business.
To the extent I-Link customers move their services off the
facilities of existing long distance carriers, and increase their reliance on
the Internet for transmission, I-Link will continue to enjoy minimal federal
regulation under current rules. Historically, the FCC has not regulated
companies that provide the software and hardware for Internet telephony, or
other Internet data functions, as common carriers or telecommunications service
providers. Moreover, the FCC recently concluded that information and enhanced
service providers are not required to contribute to federal universal service
funding mechanisms.
Notwithstanding the current state of the rules, the FCC's
theoretical jurisdiction over the Internet is broad because the Internet relies
on wire and radio communications facilities and services over which the FCC has
long-
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standing authority. The FCC's existing framework for "enhanced services"
confirms that the FCC has authority to regulate these services, but provides
that carrier-type regulation would not serve the public interest. Only recently
has this general approach been questioned within the industry.
In March 1996, for instance, America's Carriers Telecommunications
Association ("ACTA"), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking that
the FCC regulate Internet telephony. ACTA argued that providers of software that
enable real-time voice communications over the Internet should be treated as
common carriers and subject to the regulatory requirements of Title II of the
Communications Act. The FCC sought comment on the request and has not yet
issued its decision.
Any FCC determination that Internet-based service providers should
be subject to some level of Title II regulation could affect the manner in which
I-Link operates, to the extent it uses the Internet to provide facsimile or
voice capabilities, as well as the costs of complying with federal common
carrier requirements. With the passage of the 1996 Act, the precise dividing
line or overlap between "telecommunications" and "information" services as
applied to Internet-based service providers is uncertain. Consequently, I-Link's
activities may be subject to evolving rules as the FCC addresses novel
questions presented by the increased use of the Internet to offer services that
appear functionally similar to traditionally-regulated telecommunications
services. At this time, it is impossible to determine what effect, if any, such
regulations may have on the future operation of the Company.
State. While states generally have declined to regulate enhanced
services, their ability to regulate the provision of intrastate enhanced
services remains uncertain. The FCC originally intended to preempt state
regulation of enhanced service providers, but intervening case law has cast
doubt on the earlier decision. Moreover, some states have continued to regulate
particular aspects of enhanced services in limited circumstances, e.g., to the
extent they are provided by incumbent local exchange carriers.
Whether the states within which I-Link makes its Intranet services
capabilities available will seek to regulate I-Link's activities as a
telecommunications carrier will depend largely on whether the states determine
that there is a need for or other public benefits of such regulation. The staff
of the Nebraska Public Service Commission, for example, recently informally
concluded that an Internet telephony gateway service operated by a Nebraska
Internet Service Provider was required to obtain state authority to operate as a
telecommunications carrier. The FCC has authority to preempt state regulation
that impedes competition; it has not, however, had occasion to consider this or
similar decisions. Under certain circumstances, the FCC may have occasion to
preempt state regulation. This issue has not yet been squarely placed before the
FCC for resolution.
Delivery of Services Over Existing Switched Telecommunications Networks
Approximately half of I-Link's communications services are currently
delivered over existing switched telecommunications networks through I-Link
Communications, Inc. (formerly named Family Telecommunications Incorporated, and
for clarity and ease of reference referred to herein as "FTI"). FTI is a
long-distance telecommunications carrier that provides long-distance service to
most states of the United States. In January 1997 FTI was acquired by the
Company in a share exchange transaction. Through this acquisition FTI provided
the Company with an existing customer base in excess of 17,000 and, through
FTI's contractual agreements with MCI Telecommunications Corporation ("MCI") and
telephone facilities and equipment owned and operated by FTI, access to the
switched telephone network at favorable rates. Access to the switched telephone
network is a necessary component of the I-Link Intranet in order for phone and
fax transmissions to be routed to destinations in lesser populated geographic
areas that are not serviced by one of I-Link's Communication Engines, which the
Company estimates encompasses approximately 15% to 20% of users nationwide. In
addition, the access to the switched telephone network at favorable pricing that
FTI affords to I-Link permits I-Link to rapidly develop and expand its customer
bases in given geographic areas across the switched telephone network until such
time as management determines the size of the customer base and the capacity and
timing of the deployment of the I-Link Intranet in the area can support the
transfer of the customers from the switched telephone network to the I-Link
Intranet.
FTI was incorporated under the laws of the state of Utah in 1996,
and maintains its principal place of business in Phoenix, Arizona. FTI also
maintains facilities in Salt Lake City, Utah. Through its Carrier Agreement with
MCI,
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FTI provides 1-plus long-distance service, 800/888 service, worldwide calling
card service, worldwide prepaid phone card service, long-distance cellular phone
service, data line service and T-span service. By accessing the MCI network,
services are available to telephone users in the 48 continental states. FTI is
now in the process of obtaining state approval to offer its services in Alaska
and Hawaii. Customers using Bell South, Bell Atlantic, Ameritech, GTE Corp.,
NYNEX Corp., Pacific Telesis Group, US West, Southwestern Bell, Sprint United
LTD, SNET, ALLTEL Corp., Rochester Telephone Corp., Cincinnati Bell Telephone,
and Citizens as their local telephone company are being offered the FTI long-
distance programs. This represents approximately 97% of all telephone lines in
the United States; however, there can be no assurance FTI will be successful in
attracting new customers or increasing its market share.
FTI currently maintains switch facilities in twelve states. This
equipment allows FTI to offer additional services in the geographic areas in
its home state and surrounding states, and to offer specialized services,
including a variety of customized 800/888 services, voice mail, voice inter-
active services, debit cards, travel cards and other customized services to its
entire customer base.
Approximately 89% of FTI's revenues for 1996 consisted of sales to
one marketing group. The agreement between FTI and the marketing group was
modified effective January 1, 1997 and terminates on December 31, 1997 with
additional one-year terms unless either party gives the other party written
notice of its intent not to renew. The terms of the agreement call for variable
pricing based on volume, while the marketing group retains risks associated with
collection from the consumer. Though the agreement with the marketing group is a
significant portion of FTI's 1996 revenues, this agreement is expected to be of
decreasing significance to the consolidated operations of the Company in the
future.
Telephony Industry Description & History
The telecommunications industry today is an interconnected network
consisting of four corporations (AT&T, MCI, Sprint and LDDS/WorldCom) that
together control a significant majority of the interexchange market, and
hundreds of smaller companies. In recent years, the industry has changed
dramatically due to divestiture, deregulation, and technological innovation.
For most of this century, the industry was divided between the Bell
System, companies owned by or affiliated with AT&T, and the 1,600 or so local
telephone independents, companies not affiliated with AT&T, but often components
of large non-Bell holding companies. Although the independents served more
geographic areas, the Bell System accounted for more than 80% of the telephones
and provided most of the intermediate long-distance toll lines. In the 1970's,
the picture began to change when several smaller companies began to offer
long-distance services to customers in direct competition with AT&T, usually at
lower prices. Due to this competition, the projected growth of the markets, and
rapid technological changes, among other factors, the Department of Justice in
1974 filed an antitrust suit against AT&T alleging monopolistic practices. The
settlement of the suit that occurred in January 1982 mandated that AT&T spin-off
the local telephone companies into seven regional independent operating
companies (the "Baby Bells") that would remain monopolies in their respective
territories, but would be prohibited from selling long-distance services that
crossed geographic boundaries, and permitted AT&T to keep its manufacturing,
research and development, and interexchange assets. Beginning in 1984, the Baby
Bells were required under the settlement to provide access to all long-distance
carriers "equal in type, quality and price" to that provided to AT&T.
The AT&T spin-off and the equal access regulation has enabled the
long-distance telephone industry to experience significant growth. The telephone
system that has been developed is referred to as a "switched network." In a
switched network the phone call first goes from the terminal (the telephone,
computer or printer) over local lines to a local switch (the local exchange).
The telephone number dialed tells the switch whether the destination is inside
or outside the exchange. If the call is directed to a phone within the exchange,
the switch will send an electronic signal to the number being called. Once the
phone is picked up, the connection is made. If the called number is outside the
exchange, the switch will send the call signal over a trunk line to the switch
in the correct exchange and that switch will signal the phone at the destination
in order to make the connection. The central office is owned by the local phone
company and contains switching equipment that is hardwired to every telephone in
its area. In addition, it has trunk cables that connect the central office to
other central offices. In a seven-digit telephone exchange number, the first
three digits of every phone number designates the local area served by the
central office. Several central offices, and, therefore, several exchange
numbers, are grouped together to form calling areas serviced by the local phone
company.
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Often the telephone call is a destination number that crosses a
boundary between groups of central offices, known as the Local Access and
Transport Area (LATA). There are well over a hundred LATAs in the U.S. The area
code dialed signals the local switch that an interexchange or inter-LATA or toll
or long-distance call is to be terminated. The local switch then sends the call
to a toll switch, which directs the call over toll, long-distance, or
interexchange network lines to the toll switch at the destination city. That
switch, in turn, directs the call to the proper local exchange switch which
signals the phone at the number dialed. At present, most transmission on the
local level is by means of copper wires, coaxial cable or fiber optics, but
long-distance communication also takes place by means of wire cable, terrestrial
or satellite radio, or by a combination of transmission media. The trend is to
replace these other media with fiber optics for more flexible services.
The most common method of making long-distance calls is to first
dial a "1" plus the number to be called. The number includes an area code
destination comprised of three digits, followed by the three digit telephone
exchange and then the four digit location. The call goes first to the local
phone company central office and then it is handed off to the long-distance
carrier chosen by the customer. At the terminating end of the call, it is passed
back to the local phone company in the terminating area code for completion.
Both local telephone companies collect access charges from the long-distance
carrier for these services. Whenever an interstate call is preceded by a "1" and
an area code, the local phone company hands the call off to a long-distance
carrier, who will complete the call. The local telephone company knows that a
long-distance call must be handed off when the number dialed has ten digits.
Although the telecommunications industry was originally developed to
send electronic analog signals representing the speech pattern of the person
talking, the industry is evolving from the analog pattern to a digital network.
Digital lines provide higher quality service and, because of the computer
technology, make it possible for switches and lines to handle many times more
calls at one time than they could previously. The only significant part of the
telephone system that is still analog today is from the phone to the central
telephone office.
While a monumental step, the AT&T breakup and the creation of the
independent Regional Bell Operating Companies ("RBOCs") originally did nothing
more than reshape the existing ownership. Initially, the breakup left AT&T with
a near monopoly on long-distance service. It was the requirement of "equal
access" that led to the birth of a competitive long-distance market in the U.S.
As part of the settlement, the Department of Justice required that the Bell
Operating Companies (BOCs) offer their customers access to all long-distance or
interexchange carriers ("IXCs"), not just AT&T. Under "equal access," the phone
subscribers were given the opportunity to preselect the "long line" carrier of
their choice and, thereafter, to obtain from their BOC automatic access to that
preselected IXC.
With deregulation and its concomitant "equal access" requirement,
the number of independent long-distance carriers in the United States has grown
from the handful existing ten years ago to over 600 IXCs today, which control
close to one-half the market share in terms of long-distance or interexchange
minutes. The bulk of the market capture was accomplished by MCI, Sprint and
LDDS/WorldCom through extensive and mass advertising campaigns and the ability
to offer service throughout the entire U.S. These three carriers have priced
their product at approximately the same price or just below that of AT&T. The
smaller carriers have captured only a small portion of this new market.
Management believes this is largely due to two factors. The first is the
inability to offer service throughout the U.S. Instead, most small carriers can
only offer service to a small geographic location and thus have a limited number
of customers from which to draw. The second reason is the lack of resources to
commit to large advertising campaigns. The smaller carriers have captured market
share basically by offering prices that are substantially below those of the
largest four carriers.
The FCC has extensive authority to regulate long-distance carriers
and has the power to review requests for interstate rate changes and other
aspects of a carrier's operations. It has generally not exercised this power to
review changes in the domestic charges of the smaller carriers that compete with
the big four. The FCC has generally allowed competition to be the determinant of
the prices these small competitors charge. Moreover, except in certain
circumstances, the FCC increasingly has sought to reduce the level of regulation
on all interstate service providers, including AT&T.
In recent years, the European Commission has opened Europe's
nationalized telecommunications industry to free market competition. Much like
the AT&T breakup, the operation of basic local telephone services has been left
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to each country's current national carrier, with "deregulation" focused on the
more lucrative long-distance and value-added (e.g. data transmission) markets.
Competition in the Switched Network Market
FTI's competition in the switched network market is all other
long-distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom and local
regional Bell companies. With these carriers controlling the vast majority of
the market share throughout the U.S., the majority of the potential customers to
which FTI's products and services are marketed to are customers of one of these
carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources.
Federal Regulation
FTI competes in an industry that, to a large degree, continues to be
regulated by federal and state governmental agencies. At approximately the same
time as the required divestiture of the BOCs from AT&T in 1984, the FCC
announced rules that were created to foster a self-regulating interstate
telecommunications industry, relying upon competitive forces to keep rates and
services in check.
The FCC has regulatory jurisdiction over interstate and
international telecommunications common carriers, including FTI. Since 1981, the
FCC has sought to deregulate substantially the interstate activities of
non-dominant interexchange carriers such as FTI. For instance, in addition to
subjecting non-dominant carriers to streamlined regulation, on numerous
occasions the FCC has attempted to exempt non-dominant carriers from federal
tariffing requirements altogether. Most recently, the FCC sought to forebear
from imposing tariffing requirements on the domestic telecommunications
offerings of non-dominant carriers pursuant to Section 10 of the 1996 Act. The
FCC's order taking this action, however, was stayed by the United States Court
of Appeals for the District of Columbia Circuit on February 13, 1997. FCC rules,
therefore, continue to require interstate service providers to tariff their
service offerings at the FCC.
In addition to various annual filing requirements, interstate common
carriers also are required by federal law to ensure that their rates are
reasonable and do not discriminate unreasonably among and between
similarly-situated customers. Moreover, facilities-based interstate carriers are
subjected to additional reporting requirements not imposed on interstate service
resellers.
Interstate Access Transport Proceeding
In an effort to encourage competition in the provision of interstate
access services, the FCC granted increased pricing flexibility to its local
exchange carriers for "access transport" services. Access transport refers to
the connection provided by local exchange carriers between long distance
carriers' long distance facilities and the customer's telephone. These rate
structures previously were designed such that local telephone companies assessed
an equal charge per unit of access to all long distance carriers, regardless of
the volume of local access that these long distance carriers independently
generated. Under the new FCC pricing plan, adopted in the fall of 1993, local
telephone companies were allowed to offer more cost effective access to those
long distance carriers with very high access volumes in a particular local
market. Accordingly, long distance carriers with lesser access requirements,
such as FTI, could experience increases in their overall average access cost
relative to larger competitors.
The FCC pricing plan implemented in the fall of 1993 was set to
expire in November 1995. In principle, the plan has been extended pending
implementation of the 1996 Act. Consideration of these issues has been delayed
as the FCC has sought to meet tight statutory deadlines imposed by the 1996 Act
on other matters. The FCC, however, is in the process of reconsidering the
federal access charge regime in a pending rulemaking proceeding. The Company is
unable to predict the course and effect of the FCC's actions on this issue at
this time.
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Recent Legislation
In February 1996, the Telecommunications Act of 1996 (the "1996
Act") was signed into law. The purpose of the 1996 Act is to promote competition
in all aspects of telecommunications. The 1996 Act requires telecommunications
carriers to interconnect with other carriers and to provide for resale, number
portability, dialing parity, access to rights-of-way and compensation for
reciprocal traffic. Additionally, incumbent local exchange companies ("ILECs")
are required to provide nondiscriminatory unbundled access, resale at wholesale
rates and notice of changes that would affect interoperability of facilities and
networks.
In August 1996, the FCC adopted a national regulatory framework for
implementing the local competition provisions of the 1996 Act, including
adoption of rules delineating interconnection obligations of ILECs, unbundling
requirements for ILEC network elements, requirements for access to local rights
of way, dialing parity and telephone numbering and requirements for resale of
and nondiscriminatory access to ILEC services. In many instances, the FCC left
the task of implementing the FCC's regulatory standards to the individual
states. Numerous states and ILECs have appealed the FCC's decisions and a
judicial determination of the legality of the FCC's interconnections rules is
pending at the United States Court of Appeals of the Eighth Circuit and there is
currently a stay in place on many of the FCC's interconnection rules promulgated
under the 1996 Act. A reversal of the legality of the FCC's decisions could
affect the development of local competition in the markets in which FTI
operates, as well as the pricing of services of interest to FTI. It also could
affect FTI's future plans to expand into new markets to the extent efficient
interconnection to local facilities is required for competitive market entry.
Pursuant to Section 254 of the 1996 Act, the FCC also recently
initiated a rulemaking to establish a new federal universal service mechanism,
and state authorities are revisiting the method by which universal service is
funded. The proceeding will determine the extent to which interstate carriers
will be required to contribute to federal universal service funds, as well as
their ability to draw universal service support. Resolution of the issues raised
in this proceeding will affect the cost of providing interstate service and the
way FTI conducts its business.
The 1996 Act also provides that RBOCs may provide long distance
service upon enactment that is out-of-region or incidental to: (1) audio/video
programming; (2) Internet for schools; (3) mobile services; (4) information or
alarm services; and (5) telecommunications signaling. In order for a BOC to
provide in-region long distance service, the 1996 Act requires the BOC to comply
with a comprehensive competitive checklist and expands the role of the U.S.
Department of Justice in the FCC's determination of whether the entry of a BOC
into the competitive long distance market is in the public interest.
Additionally, there must be a real facilities-based competitor for residential
and business local telephone service (or the failure of the potential providers
to request access) prior to a BOC providing in-region long distance service.
BOCs must provide long distance services through a separate subsidiary of at
least three years. Until the BOCs are allowed into long distance or three years
have passed, long distance carriers with more than five (5) percent of the
nation's access lines may not jointly market BOC resold local telephone service,
and states may not require the BOCs to provide intraLATA dialing parity.
Telecommunications companies also may provide video programming and
cable operators may provide telephone service in the same service area. The 1996
Act prohibits telecommunications carriers and cable operators from acquiring
more than ten percent of each other, except in rural and other specified areas.
The impact of the 1996 Act on FTI is unknown because a number of
important implementation issues (such as the nature and extent of continued
subsidiaries for local rates) still need to be decided by state or federal
regulators. However, the 1996 Act offers opportunities as well as risks. The new
competitive environment should lead to a reduction in local access fees, the
largest single cost in providing long distance service today. For instance, as
discussed above, the FCC has initiated a rulemaking to reform its system of
interstate access charges to make the pricing of interstate access more
compatible with the pricing principles of the 1996 Act and with federal and
state actions to open local networks to competition. The FCC proceeding will
affect the current pricing relationships between interstate carriers, such as
FTI, and ILECs. Specifically, it will determine what is paid to the ILECs for
access to their facilities and how it will be paid. While it is generally
expected that access charges will decrease under the new rules, it is impossible
to predict how the proposals may affect existing pricing relationships.
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Moreover, the removal of the long distance restrictions on the BOCs
is not anticipated to have an immediate significant impact on FTI because of the
substantial preconditions that must be met before the BOCs can provide most
in-region long distance services. Nevertheless, the entry of these local
telephone companies into long distance telecommunications services could result
in new competition and there is a possibility that the local telephone companies
will be able to use local access to gain a competitive advantage over other long
distance providers such as FTI.
State Regulation
In those states prohibiting intrastate resale, FTI may not engage in
intrastate operations and in those states where intrastate resale is permitted
(at least on an interLATA basis), FTI may be required to obtain state regulatory
certification prior to commencing operations. As of December 31, 1996, FTI had
received authorization to provide telecommunications services to its customers
in approximately 34 states and is applying for authorization to provide
telecommunications services to customers in other states. In addition, FTI is
required to maintain on file at the state regulatory commissions in those states
a tariff or schedule of its intrastate rates and charges. As FTI expands the
geographic scope of its direct dial long distance business, it may be required
to obtain additional state regulatory approvals to provide intrastate long
distance services.
Various state legislatures and public utility commissions are
considering a variety of regulatory policy questions which could adversely
affect FTI. At this time, however, it is impossible to determine what effect, if
any, such regulations, including the cost of compliance with such regulations,
may have on the operations of the Company.
BUSINESS OF THE MEDICAL IMAGING DIVISION
Radiological Diagnostic Services
The majority of the Company's revenue in 1996 and 1995 was derived
from owning and operating outpatient diagnostic imaging facilities in Florida.
This revenue was primarily generated from two subsidiaries operating magnetic
resonance imaging ("MRI") facilities. The Company is considering the sale of
such business in light of the Company's focus on the business of I-Link;
however, no final decision has been made with respect to any such sale and there
can be no assurance that such business will be sold.
On November 30, 1990, the Company closed on its limited partnership
offering of Medcross Imaging, Ltd. ("Partnership"). The Partnership was formed
for the purpose of purchasing a Philips T-5 MRI mounted in a mobile van to
provide services to health care facilities on the southwest coast of Florida.
The Partnership commenced operations in February 1991. During May and June 1992,
in a series of individual transactions, the Company acquired an additional
26.75% ownership interest in the Partnership. Prior to the acquisitions, the
Company had a 41.5% ownership interest. The Company increased its ownership of
the Partnership to 80.75% on October 1, 1993 and 81.75% on October 1, 1994. The
Partnership significantly upgraded the MRI to state-of-the-art performance in
August 1993 at a cost of over $250,000. The upgraded machine can now produce
better images in less time, thereby increasing the profit potential of the
mobile unit.
In June 1993, the Company purchased Waters Edge Scanning Associates,
Ltd., renamed "Tampa MRI" after the acquisition. Serving the Tampa, Florida
market, the acquisition of this facility was consistent with the Company's
"cluster approach" of operating multiple MRIs in a single market or adjacent
markets. After the acquisition was complete, this MRI was upgraded for higher
efficiency and better images and the facility was remodeled.
In October 1994, the Company closed on the acquisition of a 75%
ownership interest in Urological Ultrasound Services of Tampa Bay ("UUSTB") from
Urology Ultrasound, Inc. Prior to the acquisition, the Company owned the other
25% ownership interest in UUSTB. The total consideration given for the 75%
partnership interest was $168,162. The purchase price was determined by arms
length negotiation and was paid in cash at the closing. The acquisition was
accounted for under the purchase method of accounting. UUSTB was organized on
September 9, 1987 and is in the business of providing mobile ultrasound services
to urologic patients in west central Florida. When the Company acquired the 75%
partnership interest in UUSTB from Urology Ultrasound, Inc., the partnership
cased to exist, and the Company immediately transferred all assets and
liabilities of the partnership, except cash of $115,603, to Urological
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Ultrasound Services of Tampa Bay, Inc., a wholly owned subsidiary of the
Company, formed for the purpose of this acquisition. Prior to the acquisition,
the Company recorded its share of income and loss on its 25% ownership interest
in UUSTB using the equity method. On May 1, 1995, the Company transferred all of
the assets and certain liabilities of Urological Ultrasound Services of Tampa
Bay, Inc. to Tampa MRI.
Regulatory and Legislative Developments
The Company's medical diagnostic businesses are subject to federal
law and various federal and state regulations. While the Company believes that
its operations comply with applicable regulations, the Company has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretation of laws will not adversely affect the Company's operations.
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. Many prominent physicians, legislators, medical ethicists,
and others feel that ownership of imaging facilities can impair a physician's
judgment about the need for a diagnostic test. Studies have shown that
physicians who have an ownership interest in imaging facilities tend to refer
more patients for diagnostic testing than physicians who have no ownership
interest.
On the federal level, a physician self-referral bill was signed by
President Clinton in 1993. The bill bans physicians from referring Medicare
patients to imaging and almost any other type of diagnostic or therapeutic
outpatient medical facility in which they have an ownership or financial
interest, effective January 1, 1995. Many states, including Florida, Illinois,
Minnesota, New York, and New Jersey, have passed laws regarding physician self-
referral. Some simply require disclosure of ownership, while others restrict
physicians from referring to facilities in which they have an ownership
interest.
The Florida legislature enacted the Patient Self-Referral Act of
1992, effective April 8, 1992. This Act prohibits physician self-referral to
health care entities in which such physicians have a financial interest,
effective October 1, 1994. Management believes these legislative and regulatory
actions should have no material adverse effect upon the Company's existing
operations. However, the Self-Referral Act also imposed a fee cap, effective
July 1, 1992, limiting the technical and professional fees of all providers of
"clinical laboratory services, physical therapy services, comprehensive
rehabilitative services, diagnostic imaging services, and radiation therapy
services" to no more than 115% of the Medicare limiting charge for
non-participating physicians. The statute specifically excludes hospitals and
physician group practices from the fee cap provision and does not apply to
patients eligible for Medicaid or Medicare reimbursement.
Several lawsuits have been filed by various providers against the
State of Florida in both federal and state court alleging, among other things,
that the fee cap provision violates the Equal Protection Clause of the U.S.
Constitution and seeking to enjoin the state from enforcing the fee cap
provision. In July 1992, the United States District Court for the Northern
District of Florida granted a permanent injunction in a case entitled Panama
City Medical Center, Ltd., et al. vs. Robert B. Williams, et al. The State of
Florida appealed the decision granting the injunction and, on February 15, 1994,
the U.S. Court of Appeals for the Eleventh Circuit reversed the decision of the
lower court, finding that the fee cap provision did not violate the Equal
Protection Clause and ruling that the entry of the injunction was in error. A
motion for rehearing filed in the action has been denied and a petition has been
filed seeking appeal to the U.S. Supreme Court. On June 30, 1992, the Florida
Circuit Court, Second Judicial Circuit, enjoined the State of Florida from
enforcing the fee cap provision. The Company intervened as a party plaintiff in
the state court action. An injunction has been obtained preventing the State of
Florida from enforcing the fee cap. The State of Florida appealed the issuance
of that injunction. However, the Florida Supreme Court has dismissed the appeal
and the Circuit Court action has been dismissed.
The ultrasound services provided by the Company are related
specifically to urology. Approximately 80% of the Company's patients are covered
by Medicare. Therefore, changes in Medicare reimbursement rules and regulations
may have a significant impact on the profitability of the Company's ultrasound
operations. Reimbursement rates for procedures are set annually. The 1996
reimbursement rates for the procedures primarily performed by the Company were
increased from between 1.7% to 2.1% over 1995's reimbursement rates.
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On March 20, 1995, the Florida Medicare Part B carrier issued a
Final Local Medical Review Policy regarding procedures that can be billed by
independent physiological laboratories ("IPL"), the classification of the
Company's ultrasound operations. These changes do not allow the IPLs to receive
reimbursement from Medicare for the procedures performed by the Company after
April 30, 1995. On May 1, 1995, the Company transferred its ultrasound
operations to Tampa MRI.
Health Care Industry Competition
It is common for hospitals, physicians, physician groups, and others
in the health care field to form ventures to own and operate medical equipment.
The Company is in competition with such groups. There are many companies
offering general business consulting services. The companies that may compete
with the Company in the future and that currently offer consulting services may
be larger and have far greater financial resources than the Company. Also, if
the cost of a particular medical device is reduced and the utilization by
physicians increases, more hospitals will be able to afford to acquire their own
equipment rather than receive service on a shared basis.
Magnetic Resonance Imaging
MRI is a multi-billion dollar industry that has rapidly gained
acceptance by physicians throughout the nation. MRI is the imaging modality of
choice for soft tissue in the head, neck and spine. Over 3,000 MRI units have
been installed in hospitals, outpatient diagnostic imaging centers, physicians'
offices, and in mobile vehicles. At an estimated average of $900 per procedure,
the MRI market in the United States generates over $6 billion annually. New uses
for MRI are continually being developed. MRI is being used to a greater degree
than ever before to scan shoulders, knees, ankles, elbows, breasts, and even the
cardiac system.
The revenue from MRI services accounted for 70% of total revenue of
the Company in 1996 and 1995. Contracts with two hospitals that accounted for
41% and 40% of the revenue from MRI services in 1996 and 1995, respectively,
were due to expire on February 28, 1996. On December 5, 1995, the Company
renewed the contracts with the two hospitals effective October 1, 1995. The
agreements are substantially similar to the prior arrangements except with
respect to a change in the minimum arrangement and a reduction in per patient
charges. These contracts expired on February 28, 1997 and the Company intends to
pursue the retail MRI segment of the market although there can be no assurance
the Company will be able to do so.
Many of the MRI systems placed into operation in the market area of
the Company's existing MRI centers were purchased and operated by physicians.
For some physicians, it was the only way to gain access to this expensive
technology. For others, it was an opportunity to invest in a technology that
they use to help diagnose their patients' medical problems. The Company competes
for patient referrals from physicians with the other MRI centers located in its
immediate market area. Because physicians can no longer refer to entities in
which they have an ownership interest, the physicians have no financial
predisposition to refer to a given center. The Company's ability to obtain
referrals will be based upon the quality of its service and its ability to
obtain contracts to treat managed care patients. Three new MRI centers have
recently begun operations in the market area of Medcross Imaging, Ltd., which
will have a significant effect on the Company's ability to pursue the retail MRI
segment of the market. Tampa MRI has obtained over 40 managed care contracts
during 1996. While this has reduced the average per-patient charges, it has
increased the number of patients treated.
Ultrasound
On May 1, 1995, the Company transferred all of its ultrasound
operations to Tampa MRI. The ultrasound services are provided at each
physician's office under the physician's direction. The Company is not looking
to expand its operations outside of the current market area. There are two main
competitors in the Company's market area. Management believes that it will
maintain its referrals with the physicians offices and may even gain additional
physician referrals through its marketing efforts.
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Therapeutic Services
In the late 1980s, the Company was one of the industry leaders,
providing mobile kidney lithotripsy service throughout the southeastern United
States. Kidney lithotripsy is a non-invasive technique using shock waves to
disintegrate kidney stones. Other forms of kidney stone treatment include
surgical removal, drug treatment, endoscopic treatment, laser lithotripsy and
percutaneous treatment. The advantage of lithotripsy over surgery is that it can
be performed on an outpatient basis in about one hour at less than the cost of
the typical surgical procedure. In addition, lithotripsy has fewer complications
or side effects, less pain, and a substantially shorter recovery period.
The Company put the world's first mobile kidney lithotripter into
operation in 1986. During the next two years, the Company developed four
additional mobile kidney lithotripsy networks. In 1986, the Company coordinated
the development of one of the leading outpatient lithotripsy centers in the
nation which the Company managed under a management agreement. In 1992, 65% of
the ownership in the facility was sold to CORAM, a publicly held corporation. In
1994, the Company's responsibilities under the management agreement were reduced
to providing financial services. The annual revenue from this management
contract was also reduced from an average of approximately $180,000 to $47,100
per year. In 1995, the remaining 35% of the ownership in the facility was sold
to CORAM. In August 1995, the management agreement was terminated. The Company
has management agreements with three other owners of mobile kidney lithotripters
that operate in seven different states. The Company provides turn-key
operations, management, and financial services under its agreements with the
owning entities. The Company also provides the trained technicians who operate
the lithotripters and, when requested, the drivers who transport the equipment
between the using facilities. The Company does not expect any expansion or new
development efforts in the lithotripsy area.
The Company had a 70% ownership interest in International Prostate
Partners, formed in 1992. International Prostate Center - Cayman, Ltd., a wholly
owned Cayman Island subsidiary of International Prostate Partners, provided
transurethral microwave therapy ("TUMT") services in Georgetown, Grand Cayman,
for patients with benign prostate hyperplasia ("BPH"). The Company contracted to
provide a full range of management services, beginning in 1993, to International
Prostate Partners and International Prostate Center - Cayman, Ltd. Operations
began in January 1994. The patient case load was insufficient to support
operating expenditures. Therefore, the operations were closed down and the
equipment put in storage pending FDA approval. In August 1, 1995, the Company
sold its interest in the partnership and its Management Agreement was
terminated. In May 1996, the manufacturer received FDA approval. The Company has
proposed this technology to its existing lithotripsy clients; however, any
decisions to be made are pending Medicare reimbursement approval. No assurance
can be given by the Company as to when, or if Medicare reimbursement approval
will be received.
Foreign Sales and Service of Diagnostic Imaging Equipment
In January 1993, the Company formed Medcross Asia, Ltd., a wholly
owned subsidiary headquartered in Hong Kong. This subsidiary was formed to
identify opportunities for the Company to enter the medical field in the Far
East.
On January 7, 1994, the Company entered into a joint venture
agreement with China National Medical Equipment and Supplies Import & Export
Shenyang Corporation ("CNMC"). The joint venture company, Shenyang Medcross
Huamei Medical Equipment Company, Ltd. ("SMHME") is located in the People's
Republic of China. SMHME is 51% owned by the Company and 49% owned by CNMC.
SMHME imports used and refurbished CT scanners for resale to hospitals in the
province of Shenyang. SMHME also provides warranty service, including parts and
labor, for the machines it sells and intends to provide warranty service for
other machines already existing in the province. The Company's responsibilities
include locating, purchasing, refurbishing, and shipping used medical equipment
to SMHME. CNMC was required to contribute $380,000 in cash to SMHME of which
$260,417 has been contributed. The Company contributed CT scanner equipment and
parts with an agreed upon value of $390,000 and a cost basis of $251,972 to
SMHME. The Company opened an office in Beijing to sell and service used CT
scanning equipment in the People's Republic of China outside the province of
Shenyang. In May 1995, the Company closed its Beijing office and is actively
pursuing the sale of such operations.
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DESCRIPTION OF PROPERTY
In September 1996, I-Link entered into a lease for 14,000 square
feet of space for its offices and other facilities in Draper, Utah pursuant to a
commercial lease dated September 11, 1996. The term of the lease is seven years
commencing November 5, 1996, subject to the right to extend for an additional
five years. The initial base rent is approximately $11,650 per month. I-Link has
delivered $215,000 in certificates of deposit to the landlord as a security
deposit under the lease. I-Link also leases several other spaces to house its
Communication Engines throughout the United States. Such spaces vary in size and
are rented on a month-to-month basis.
The Company currently occupies approximately 3,400 square feet for
its offices located in St. Petersburg, Florida on a month-to-month basis. The
Company leases approximately 2,400 square feet for its outpatient MRI center
located in Tampa, Florida. The lease for the medical facility expires May 31,
1998. The Company has the option to extend the medical facility lease an
additional two years.
FTI currently leases and occupies approximately 3,600 square feet of
office space in Phoenix, Arizona, pursuant to a commercial lease dated March 18,
1996. The lease term is four years and two months commencing March 18, 1996
beginning with a base rent of $3,598 per month and escalating to $4,498 per
month at the end of the lease. FTI also currently leases and occupies
approximately 5,100 square feet of office space in Salt Lake City, Utah,
pursuant to a commercial lease dated July 1, 1996. The lease term is five years
commencing July 1, 1996 beginning with a base rent of $5,313 per month and
escalating to $5,843 per month at the end of the lease.
MiBridge rents 1,800 square feet of office space in Eatontown, New
Jersey under a one-year lease effective May 1, 1997 at a cost of $2,000 per
month. After the initial term of the lease, MiBridge may continue occupancy of
its space on a month-to-month basis. MiBridge may cancel such lease without
penalty upon 30 days notice to the lessor.
LEGAL PROCEEDINGS
A Complaint was filed on April 12, 1996, by JW Charles Financial
Services, Inc. ("JW Charles") against the Company in Palm Beach County Florida
Circuit Court, JW Charles Financial Services, Inc. v. Medcross, Inc., Case No:
CL96-3218. JW Charles previously was issued a Common Stock Purchase Warrant
("Settlement Warrant") on or about November 3, 1994 by the Company. The
Settlement Warrant granted JW Charles the right to purchase from the Company
250,000 shares (331,126 as adjusted) of the Company's Common Stock (the
"Settlement Shares") subject to adjustment. On or about February 12, 1996, JW
Charles made written demand to the Company to invoke its rights to have the
Settlement Shares registered pursuant to the terms of the Settlement Warrant.
The Complaint alleged that the Company breached the terms of the Settlement
Warrant by failing to prepare and file with the Securities and Exchange
Commission, a registration statement covering such shares. JW Charles alleged a
breach of contract and requested specific performance, i.e., registering the
shares with the Securities and Exchange Commission, against the Company. JW
Charles also demanded damages in the amount of $2,728,478 plus interest,
reasonable attorneys fees, and forum costs.
On April 29, 1997, the Company executed a settlement agreement
relating to the settlement of the JW Charles lawsuit. The lawsuit was dismissed
upon payment of $600,000 to JW Charles in consideration for the purchase of the
Settlement Warrant. The Settlement Warrant was purchased by an investor group
(the Hardy Group) led by the Company's general counsel and its treasurer and
chief financial officer. The Company's funds were not used in the JW Charles
Settlement. In connection with the purchase of the Settlement Warrant, the
Company granted certain additional consideration to the Hardy Group, including
new warrants to purchase 175,000 shares of common stock at an exercise price
equal to or in excess of the conversion price of the Class C Preferred Stock
(i.e., $2.50 per share). Such warrants have registration rights and
anti-dilution provisions and are included in the Registration Statement of which
this Prospectus forms a part.
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1996 OFFERINGS
10% Notes Offering
Simultaneous with the closing of the I-Link Acquisition in February
1996, the Company completed a private placement of $1,000,000 in aggregate
principal amount of convertible promissory notes (the "10% Notes"). The 10%
Notes were 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 bore interest payable semi-annually at the rate
of 10%. Up to $1,250 of each $50,000 in principal amount of the 10% Note was
convertible at any time at the option of the holder, into an aggregate of
350,000 shares of Common Stock at the rate of approximately $.0714 per share,
subject to certain anti-dilution adjustments; and such principal amount was
converted in August 1996.
The proceeds of the 10% Notes Offering were used to pay outstanding
accounts payable and other debts of I-Link. Commonwealth served as placement
agent for the 10% Notes and received a placement agent fee equal to 10% of the
purchase price of the 10% Notes Offering sold ($100,000) and a $20,000 expense
reimbursement to cover legal fees.
Class C Offering
On September 6, 1996, the Company closed a private placement of
240,000 shares of Class C Preferred Stock, $10 par value per share, at $60 per
share. Each share of Class C Preferred Stock entitles the holder to receive a
quarterly dividend of $1.20 (8% per annum) payable in cash or, at the option of
the Company, in shares of Common Stock of the Company. Unless previously
redeemed, the Class C Preferred Stock is convertible into shares of the
Company's Common Stock (the "Conversion Shares"), at the option of the holder,
commencing November 21, 1996, into such number of shares of the Company's Common
Stock as shall equal $60 divided by the lower of (i) $2.50 or (ii) the closing
bid price for any five consecutive trading days during the period commencing on
September 6, 1996 and ending eighteen months thereafter (the "Conversion
Price"). Unless previously redeemed, the shares of the Class C Preferred Stock
are automatically converted into the Conversion Shares on September 6, 2002 at a
Conversion Price equal to the lower of the then current Conversion Price or 50%
of the average closing bid price of the Company's Common Stock for the 10
trading days immediately preceding September 6, 2002.
In addition, the Company issued $717,000 of principal amount of
Convertible Promissory Notes payable on April 1, 1997 (the "Maturity Date") and
bearing interest at 8% per annum (previously defined as the "Convertible
Notes"). The Convertible Notes provide for the accrual of interest at the simple
annual rate of 8%, payable quarterly (18% following the Event of Default which
remains uncured). The unpaid principal balance of the Convertible Notes may be
prepaid by the Company without penalty upon 30 days' notice to the holder;
provided, however, that certain conditions be met. The unpaid principal amount
of a Convertible Note will be automatically converted into shares of Class C
Preferred Stock at any time prior to the close of business on the Maturity Date
at the rate of $60 per share of Class C Preferred Stock upon certain conditions
being met. See "Description of Securities--Convertible Promissory Notes."
The Company received net proceeds of approximately $12.3 million
from the Class C Offering, after commissions and other expenses related to the
offering.
As a result of the closing of the private placement, 1.6 million
shares of the Company's restricted Common Stock held in escrow for the benefit
of the former shareholders of I-Link have been released from escrow, in
accordance with the terms of the Stock Purchase Agreement between I-Link and the
Company. Upon such release, the Company recorded acquired in-process research
and development expense of $14.6 million in fiscal 1996, and an increase to
paid-in capital of $12.6 million in fiscal 1996. The final one million shares
held in escrow were released in August 1997 as a result of satisfaction of
certain revenue targets, resulting in an increase in intangible assets and
paid-in capital of $8,875,000.
Commonwealth Associates (previously defined and hereinafter referred
to as "Commonwealth"), acted as the placement agent for the Class C Offering.
Commonwealth received a commission equal to seven percent (7%) of the
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aggregate purchase price of the shares of Class C Preferred Stock and
Convertible Notes sold, a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds from the sale of the Class C Preferred Stock
and Convertible Notes and certain other specified offering-related costs.
In addition, the Company granted Commonwealth a right of first
refusal to underwrite or place any future public or private sale of debt or
equity securities or any such sale by certain principal shareholders of the
Company, its subsidiaries and successors, for a period of five years after the
closing of the Class C Offering.
The Company issued to Commonwealth Warrants to purchase up to
250,000 shares of the Company's Common Stock and Consultant's Warrants to
purchase up to 500,000 shares of Common Stock (together previously defined as
the "Commonwealth Warrants"). The Commonwealth Warrants will be exercisable for
five (5) years commencing March 1997 at an exercise price of $2.50 per share,
subject to adjustment. See "Description of Securities--Commonwealth Warrants."
The Company also entered into a Consulting Agreement with
Commonwealth, pursuant to which: (i) the Company shall employ Commonwealth as
its investment banker and financial consultant for a period of twelve (12)
months; (ii) the Company paid Commonwealth a fee of $200,000, plus 2% of the
gross proceeds of the Class C Offering in excess of $10,000,000, for such twelve
(12) month period; and (iii) the Company agreed to pay Commonwealth a fee of
five percent (5%) of the first $5,000,000 and two and one-half percent (2-1/2%)
of the amount over $5,000,000 of the consideration paid or received by the
Company (or by any affiliated entity of the Company) in any transaction
(including mergers, acquisitions, joint ventures and other business
transactions) consummated by the Company or any subsidiary or affiliate of the
Company introduced to the Company by Commonwealth.
Commonwealth designated Joseph Cohen for election to the Board of
Directors of the Company, and designated Michael Falk as a non-voting advisor to
the Board of Directors. In addition, Commonwealth was granted the right to
approve the Company's selection of a second outside director to be nominated for
election at the next annual or special meeting of stockholders. To date no
individual has been named by Commonwealth to be its second designated member of
the Board of Directors. See "Management."
Commonwealth also arranged bridge financings for the Company in the
amount of $375,000 and was paid $37,500 in commissions from the proceeds of the
Class C Offering.
See "Certain Relationships and Related Transactions," "Description
of Securities" and "Selling Securityholders" for a description of the
acquisition of certain securities by Commonwealth and associates and affiliates
of Commonwealth.
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MANAGEMENT
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Title
- --------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
John W. Edwards.................. 42 Chairman of the Board, President and Chief Executive Officer of the
Company and Chief Executive Officer of I-Link
Karl S. Ryser, Jr................ 42 Treasurer and Chief Financial Officer of the Company and Chief Financial
Officer of I-Link
William H. Flury................. 43 Vice President, Sales and Marketing of I-Link
David E. Hardy................... 44 Secretary of the Company
Henry Y.L. Toh................... 40 Director and Assistant Secretary of the Company
Clay Wilkes...................... 37 Director of the Company
R. Huston Babcock, M.D........... 68 Director of the Company
Joseph A. Cohen.................. 50 Director of the Company
Robert W. Edwards................ 47 Vice President of Network Operations of I-Link
</TABLE>
The Company's Articles of Incorporation provide that the number of
directors of the Company shall not be less than five or more than nine.
Currently, the Board of Directors has five members. The Company's Articles of
Incorporation provide that the Board of Directors is divided into three classes
and that each director shall serve a term of three years. Messrs. Joel S. Kanter
(who resigned in July 1996 for personal reasons) and Henry Y.L. Toh, Class II
Directors, stood for re-election at the annual meeting of shareholders in 1995.
The terms of office of Mr. Toh and Joseph A. Cohen, who was appointed a Class II
Director in September 1996 as the designee of Commonwealth, will expire at the
1999 annual meeting of shareholders. Dr. R. Huston Babcock and John W. Edwards,
Class III Directors, were re-elected at the October 1997 annual meeting of
shareholders. The term of office of Clay Wilkes, a Class I Director, expires at
the next annual meeting of shareholders. Commonwealth has also designated
Michael Falk, President of Commonwealth, to be a non-voting advisor to the
Board. In addition, Commonwealth has the right to approve the Company's
selection of a second outside director in accordance with the terms of the Sales
Agency Agreement between the Company and Commonwealth entered into in July 1996
in connection with the Company's private placement of Class C Preferred Stock. A
second outside director has not been selected as of the date hereof. See "1996
Offerings."
Biographical information with respect to the present executive
officers, directors, and key employees of the Company are set forth below. There
are no family relationships between any present executive officers and directors
except that John W. Edwards and Robert W. Edwards are brothers.
John W. Edwards, Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Edwards was selected to fill a vacancy on
the Board of Directors as a Class III director in June 1996. He was elected
Chairman of the Board in August 1997. Mr. Edwards serves as the Chief Executive
Officer of I-Link and, as of September 30, 1996, serves as the President and
Chief Executive Officer of the Company. Mr. Edwards served as Acting Chief
Financial Officer of the Company from September 1996 to January 1997. Mr.
Edwards served as President and a director of Coresoft, Inc., a software company
developing object-oriented computer solutions for small businesses from
September 1995 to April 1996. During the period August 1988 through July 1995,
Mr. Edwards served in a number of executive positions with Novell, Inc., a
software company providing networking software, including Executive Vice
President of Strategic Marketing, Executive Vice President of the Appware and
Desktop Systems Groups and Vice President of Marketing of the NetWare Systems
Group. Mr. Edwards was involved in the
52
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development of the NetWare 386 product line. Until May 1996, he was a visiting
faculty member at the Marriott School of Management at Brigham Young University.
Mr. Edwards received a B.S. degree in Computer Science from Brigham Young
University and has taken graduate courses in Computer Science at Brigham Young
University. Mr. Edwards was re-elected to the Board of Directors as a Class III
Director at the 1997 Annual Meeting.
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the
Company and of I-Link. Mr. Ryser was elected Treasurer of the Company and
Treasurer and Chief Financial Officer of I-Link in September 1996, and Chief
Financial Officer of the Company in January 1997. Mr. Ryser was self-employed as
a corporate financial consultant from May 1995 until September 1996, when he
joined I-Link as its Treasurer. From July 1993 through April 1995, Mr. Ryser
served as Vice President of Finance and Treasurer of Megahertz Corporation, a
publicly-held manufacturer of data communication products, in which position he
served until Megahertz was acquired by U.S. Robotics Corporation. After earning
his MBA, Mr. Ryser's work experience was concentrated in the investment banking
field, working first with the Capital Markets Division of First Security
Corporation and later with Dain Bosworth, Inc. Mr. Ryser holds a B.S. degree in
Finance from the University of Utah in 1979, and an MBA from the University of
San Diego in 1982.
William H. Flury, Vice President, Sales and Marketing of I-Link
since May 1996. Mr. Flury has over 17 years of sales and marketing management
experience. From November 1994 to March 1996, Mr. Flury held the Vice President
of Worldwide Sales position at Zebra Technologies, VTI. From June 1988 to
September 1989, Mr. Flury was employed by Novell, Inc., where he was the Senior
Director of National Accounts and Industry Markets. From November 1989 to July
1992, he worked for Adobe Systems as Director of Market Development. From August
1992 to October 1994, he was employed by NetLabs as Vice President of Worldwide
Sales and Customer Support. From October 1994 to March 1996, he was employed by
Vertical Technologies. Mr. Flury has established domestic and international
programs in direct sales, multi-tiered channel sales, and OEM sales. Mr. Flury
holds Business and Sociology degrees from the University of Utah, and is a
graduate of the Stanford Executive Program.
David E. Hardy, Secretary of the Company. Mr. Hardy was appointed
Secretary of the Company in December 1996. He is a founding partner of the law
firm of Hardy & Allen, in Salt Lake City. From February 1993 to April 1995, Mr.
Hardy served as Senior Vice President and General Counsel of Megahertz
Corporation, a publicly-held manufacturer of data communication products. Prior
to his association with Megahertz Corporation, Mr. Hardy was a senior partner of
the law firm of Allen, Hardy, Rasmussen & Christensen which was founded in 1982.
Mr. Hardy holds a Bachelor of Arts degree from the University of Utah and a
Juris Doctor degree from the University of Utah School of Law.
Henry Y.L. Toh, Director of the Company. Mr. Toh was elected by the
Board of Directors as a Class II Director and as Vice Chairman of the Board of
Directors in March 1992. Mr. Toh was elected President of the Company in May
1993, Acting Chief Financial Officer in September 1995 and Chairman of the Board
in May 1996, and served as such through September 1996. He was appointed
Assistant Secretary of the Company in May 1997. Mr. Toh is a Director of Four M.
Mr. Toh served as a senior tax manager in international taxation and mergers and
acquisitions with KPMG Peat Marwick from March 1980 to February 17, 1992. He is
a graduate of Rice University.
Clay Wilkes, Director of the Company. Mr. Wilkes served as Chairman
of the Board of the Company from September 1996 to August 1997. Mr. Wilkes was
elected by the Board of Directors of the Company as a Class I Director in April
1996. Mr. Wilkes served as President and Chief Executive Officer of I-Link from
inception to April 1996, Chief Technology Officer of I-Link until January 1997
and is a director of I-Link. Mr. Wilkes has served as President of GNet
Enterprises, Inc., the general partner of I-Link, Ltd., since its inception.
From February 1993 through June 1994, Mr. Wilkes has served as a consultant to
IBM in Austin, Texas on the PowerPC project. From August 1990 through September
1992, he was responsible for UNIX product development at Novell, Inc. in Provo,
Utah, where he managed the networking server and client development groups. Mr.
Wilkes has spent many years in the management and development of computer
communications software. Mr. Wilkes attended the University of Oregon and
Brigham Young University and course work in Computer Science at Utah State
University.
R. Huston Babcock, M.D., Neurosurgeon and Director of the Company
since April 1983. Dr. Babcock served as Chairman of the Board of Directors of
the Company from its inception in April 1983 until March 1992. He was
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President of the Company from inception until November 1987. He was Medical
Director of the Company from November 1987 to February 1993. Dr. Babcock is a
neurosurgeon and has been engaged in the full-time private practice of medicine
on the West Coast of Florida since 1960. Dr. Babcock was re-elected to the Board
of Directors as a Class III director at the 1997 Annual Meeting.
Joseph A. Cohen, President of an investment firm and Director of the
Company. Mr. Cohen was appointed a Class II Director of the Company in September
1996 as the designee of Commonwealth. He has been the Chairman, Chief Executive
Officer and Director of New Frontier Entertainment, Inc. ("New Frontier") since
its formation in May 1995 and held the same positions since January 1993 in New
Frontier's predecessor company, The Frondelle Company, Inc. He is also President
of Leslie Group, Inc., a diversified company with holdings primarily in the
music, film, home video and other entertainment-oriented businesses. The Leslie
Group is a limited partner of Commonwealth Associates Management Corp., a
limited partnership which is the parent of Commonwealth. He is also a Founder
and President of Leslie/Linton Entertainment Inc., a merchant banking company
that provides investment funds and assists in raising capital and debt for
companies. Mr. Cohen also serves as President of Pickwick Communications, Inc.,
an independent music publishing company. From 1977 to 1986, Mr. Cohen served as
Executive Vice President of the National Association of Recording Merchandisers,
Inc. and Founder and Executive Vice President of Video Software Dealers
Association, Inc., trade associations representing all segments of the recorded
music and home video industries, respectively.
Robert W. Edwards, Jr., Vice President of Network Operations of
I-Link. Mr. Edwards was appointed Vice President of Network Operations of I-Link
in January 1997. From its inception in March 1996 to January 1997 Mr. Edwards
served as President and a Director of FTI, a long-distance telecommunications
carrier. Prior to incorporating FTI, Mr. Edwards worked from September 1995 to
March 1996 on preliminary regulatory, tariff, equipment lease, employment and
other organizational matters for FTI. Mr. Edwards was President of FTI
Publishing, Inc., a publisher of travel-related advertising brochures (not
associated or affiliated with FTI) from 1993 to 1995. From 1984 through 1993,
Mr. Edwards was a partner in ONE-2-ONE Communications, Inc., a
telecommunications reseller for the southwest region of the United States. He
received his B.S. Degree in Computer Science from the University of Utah in
1976.
Each officer of the Company is chosen by the Board of Directors and
holds his or her office until his or her successor shall have been duly chosen
and qualified or until his or her death or until he or she shall resign or be
removed as provided by the By-Laws.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company or any of its subsidiaries.
Committees of the Board of Directors
Audit Committee. The Company's audit committee (the "Audit
Committee") is responsible for making recommendations to the Board of Directors
concerning the selection and engagement of the Company's independent certified
public accountants and for reviewing the scope of the annual audit, audit fees,
and results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Henry Y.L. Toh, Chairman of the Audit Committee, Clay Wilkes and
Joseph A. Cohen are members of the Audit Committee. The Audit Committee held one
meeting during the last fiscal year.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Dr. R. Huston Babcock, Chairman of the Compensation Committee, John
W. Edwards, and Joseph A. Cohen are members of the Compensation Committee. The
Compensation Committee held one meeting during the last fiscal year.
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<PAGE>
Finance Committee. The Company's finance committee (the "Finance
Committee") is responsible for reviewing and evaluating financing, strategic
business development and acquisition opportunities. Joseph A. Cohen, Chairman of
the Finance Committee, Clay Wilkes and John W. Edwards are members of the
Finance Committee. The Finance Committee held one meeting during the last fiscal
year.
The Company has no nominating committee or any committee serving a
similar function.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid
for services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's three most highly compensated executive officers serving as such at
the end of the year ended December 31, 1996, whose compensation was in excess of
$100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------- ----------------------- ----------
Securities
Other Restricted Underlying All Other
Name and Annual Stock Options/ LTIP Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARs(#) Payouts($) ($)
- ------------------------ ---- --------- -------- --------------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry Y.L. Toh/1/ 1996 55,802 0 837/2/ 0/3/ 173,501 0 N/A
President and CEO 1995 58,051 0 225/2/ 0 11,167 0 N/A
1994 54,362 0 815/2/ 0 1,167 0 N/A
John W. Edwards/4/ 1996 101,663/4/ 0 0 0 1,250,000/5/ 0 N/A
President and CEO 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Karl S. Ryser, Jr./6/ 1996 41,665/6/ 0 0 0 250,000 0 N/A
Treasurer and CFO 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
William H. Flury/7/
Vice President, Sales 1996 91,667/7/ 0 0 0 250,000/8/ 0 N/A
and Marketing of I-Link 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
</TABLE>
- ------------------
1 Mr. Toh began his employment with the Company in April 1992 and was
appointed President and CEO in May 1993 and served as such through
September 30, 1996.
2 Represents Company contributions to 401(k) plan on behalf of Mr. Toh.
3 None of Mr. Toh, Mr. Edwards, Mr. Ryser or Mr. Flury had restricted stock
holdings at the end of the last year.
4 Mr. Edwards began his employment with I-Link in April 1996 and was
appointed President and CEO as of September 30, 1996; his annual salary was
$175,000 from April to August 21, 1996 and was $96,000 for the balance of
the fiscal year. See "--Employment Agreements."
5 Excludes warrants to purchase 25,000 shares of Common Stock at an exercise
price of $4.875 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
6 Mr. Ryser began his employment with I-Link in September 1996; his annual
salary during the 1996 fiscal year was $125,000. See "--Employment
Agreements."
7 Mr. Flury began his employment with I-Link in May 1996; his annual salary
during 1996 was $137,500 per year. See "--Employment Agreements."
8 Excludes warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.50 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
55
<PAGE>
Option/SAR Grants in Last Fiscal Year (1996)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1996, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Percent of Total Exercise
Number of Securities Underlying Options/SARs Granted to or Base
Name Options/SARs Granted (#) Employees in Fiscal Year Price ($/Sh) Expiration Date
- ----------------------- ------------------------------- ------------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Henry Y.L. Toh 150,000 3.5% $1.125 2/3/2006
10,000 *% 1.000 1/1/2006
John W. Edwards/1/ 1,000,000 23.1% 7.000 4/8/2006
250,000 5.8% 4.875 8/21/2006
Karl S. Ryser, Jr. 250,000 5.8% 4.410 10/15/2006
William H. Flury/2/ 250,000 5.8% 4.410 10/15/2006
- ----------------------------
</TABLE>
* Less than 1%.
1 Does not include warrants to purchase 25,000 shares of Common Stock at an
exercise price of $4.875 issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
2 Does not include warrants to purchase 5,000 shares of Common Stock at an
exercise price of $2.50 in connection with a bridge loan. See "Certain
Relationships and Related Transactions."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to options
exercised during 1996 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of 1996.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired On Value Underlying Unexercised Money Options/SARs at
Name Exercise (#) Realized ($) Options/SARs at FY-End (#) FY-End ($)/1/
- ---------------- --------------- -------------- ------------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Henry Y.L. Toh 0 0 173,501 0 581,919 0
John W. Edwards 0 0 416,666 833,334 N/A N/A
Karl S. Ryser, Jr. 0 0 25,000 225,000 N/A N/A
William H. Flury 0 0 0 250,000 N/A N/A
- ---------------------
</TABLE>
1 The calculations of the value of unexercised options are based on the
difference between the closing bid price on Nasdaq of the Common Stock on
December 31, 1996, and the exercise price of each option, multiplied by the
number of shares covered by the option.
Director Compensation
During 1996, Directors of the Company then serving received options to
purchase 10,000 shares of Common Stock on the first business day of January at
an exercise price equal to the fair market value of the Common Stock on the date
of grant. Mr. Cohen received options to purchase 64,000 shares of Common Stock
upon his appointment to the Board. Effective February 6, 1997 and the first
business day of January of each year thereafter, each Director then serving will
receive options, to purchase 10,000 shares of Common Stock and, for each
committee on which the Director serves, options to purchase 5,000 shares of
Common Stock. The exercise price of such options shall be equal to the fair
market value of the Common Stock on the date of grant. The Directors are also
eligible to receive options under the Company's stock option plans at the
discretion of the Board of Directors.
56
<PAGE>
Employment Agreements
In February 1996, the Company entered into two-year employment
agreements with Henry Y.L. Toh, then President and Chief Executive Officer;
Dorothy Michon, Vice President, Operations; and Stephanie Giallourakis,
Controller and then Secretary. The Employment Agreements are each for an initial
period ending on December 31, 1997 and are automatically renewable for
successive one-year periods unless written notice to the contrary is given by
the Company not less than 120 days prior to expiration of the term. Pursuant to
the terms of the employment agreements, each such officer is required to devote
such of his or her time to the business and affairs of the Company as is
required to fulfill the duties and responsibilities of his or her office. Mr.
Toh is entitled under his employment agreement to receive compensation at the
rate of $54,000 per year. Ms. Michon is entitled to compensation at the rate of
$63,000, and Ms. Giallourakis is entitled to compensation at the rate of $53,000
per year. Each such officer is entitled to an annual bonus at the discretion of
the Board of Directors and may participate in fringe benefits, deferred
compensation, stock benefits and option plans of the Company. In the event of
termination of his employment by the Company other than for "cause" (as defined
in the agreement) or by Mr. Toh upon "good reason" (as defined in the
agreement), the Company is required to pay Mr. Toh, as liquidated damages or
severance pay, monthly termination payments equal to the base salary in effect
for a period of six months after such termination and, with respect to Ms.
Michon and Ms. Giallourakis, each such officer is entitled to monthly
termination payments equal to the base salary for periods of three months after
any such termination. Each of the employment agreements contains confidentiality
and non-solicitation provisions.
I-Link entered into three-year employment agreements on February 21,
1996 with each of Clay Wilkes and Alex Radulovic, Senior Engineer of I-Link.
Under his employment agreement, Mr. Wilkes is employed at a salary of $95,000
per annum, subject to adjustment upon satisfaction of performance criteria.
Under his employment agreement, Mr. Radulovic is employed at a salary of $90,000
per annum, subject to adjustment upon satisfaction of performance criteria. In
the event of termination by the Company not involving Just Cause (as defined in
the agreement), or upon a material breach by the Company which is unremedied for
30 days after written notice, each of Mr. Wilkes and Mr. Radulovic is entitled
to receive, as liquidated damages or severance pay, an amount equal to the
Monthly Compensation (as defined in the agreement) for the remaining term of the
Agreement and, in addition, all options shall vest. Each of the agreements
contain non-competition and confidentiality provisions. On July 1, 1996, the
Company approved the grant of options to purchase 1,500,000 and 500,000 shares
of Common Stock at $7.00 per share for five years, to Messrs. Wilkes and
Radulovic, respectively. To the extent vested, the options may be exercised
commencing June 30, 1997. The options vest on June 30, 2001; provided however,
that vesting will accelerate in 25% increments at such time as the average
closing bid price of a share of Common Stock equals or exceeds $10, $15, $20 and
$25, respectively.
On April 8, 1996, I-Link entered into a three-year employment
agreement with John W. Edwards, President, Chief Executive Officer and Director
of the Company. Pursuant to the terms of the employment agreement, Mr. Edwards
is employed as the Chief Executive Officer and a Director of I-Link, and is
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 one million shares of Common Stock of the Company at an exercise price
of $7.00 per share. Of such options, 83,333 vested immediately and 83,333 vest
and become exercisable on the first calendar day of each quarter after April 8,
1996. In the event of termination by I-Link or in the event of a violation of a
material provision of the agreement by I-Link which is unremedied for thirty
(30) days and after written notice or in the event of a "change in control" (as
defined in the agreement), Mr. Edwards is entitled to receive, as liquidated
damages or severance pay, an amount equal to the Monthly Compensation (as
defined in the agreement) for the remaining term of the agreement. The agreement
contains non-competition and confidentiality provisions. Mr. Edwards agreed to
amend his contract, effective August 21, 1996, to reduce his annual salary from
$175,000 to $96,000; and in consideration of the salary reduction, the Company
has agreed to grant him options to purchase 250,000 shares of Common Stock at an
exercise price of $4.875 per share.
57
<PAGE>
In October 1996, I-Link entered into three-year employment
agreements with Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the
Company, and with William H. Flury, I-Link's Vice President, Sales and
Marketing. Pursuant to the terms of the employment agreements, each such officer
is required to devote all of his time to the business and affairs of the Company
except for vacations, illness or incapacity. Mr. Ryser is entitled under his
employment agreement to receive compensation at the rate of $125,000 per year
and a bonus in the sole discretion of the Chief Executive Officer and Mr. Flury
is entitled to compensation at the rate of $137,500 per year and a bonus
commensurate with his performance and that of I-Link. Each such employee may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. In addition, each of Mr. Ryser and Mr. Flury is entitled
to options to purchase 250,000 shares of Common Stock exercisable at an exercise
price equal to the closing bid price on the date of the employment agreement.
Options issuable to Mr. Ryser to purchase 25,000 shares vest immediately and the
remaining options will vest in quarterly increments of 20,455 commencing January
1, 1997. Options issuable to Mr. Flury to purchase 41,666 shares vest six months
from the date of the employment agreement and the remaining options will vest in
quarterly increments of 20,833. In the event of a change of control or upon
termination of the employment agreement by the Company without cause all options
shall thereupon be fully vested and immediately exercisable. In the event of
termination by the Company other than for "cause" (as defined in the agreement),
the Company is required to pay Mr. Ryser or Mr. Flury, as the case may be, a
lump sum severance payment equal to one year's then current salary. Each of the
employment agreements contains confidentiality and non-competition provisions.
In September 1997 the Company entered into a two-year employment
agreement with Dror Nahumi as Vice President of Emerging Technologies of the
Company and to manage the operations of MiBridge, Inc. Pursuant to the terms of
the employment agreement, Mr. Nahumi is required to devote all of his time to
the business and affairs of MiBridge, Inc. and is entitled to receive
compensation at the rate of $100,000 per year, and a bonus to the extent bonuses
are declared by the Company's Board of Directors. Mr. Nahumi may participate in
fringe benefits, deferred compensation, stock benefits and option plans of the
Company. Mr. Nahumi's employment agreement contains non-competition and
confidentiality provisions, and provides for the assignment by Mr. Nahumi to the
Company of all of his rights, title, interest and intellectual property in and
to his employment inventions (as such terms are defined in the employment
agreement).
Consulting Agreements
The Company is a party to a consulting agreement for the period
beginning January 1, 1996 and ending December 31, 1998 with Windy City, Inc.
Joel Kanter, a director of the Company until July 30, 1996, is the President and
a director of Windy City, Inc. Pursuant to such agreement, Windy City, Inc. was
engaged to provide such consulting services as the Company may request in
exchange for compensation at the rate of $6,250 per calendar quarter.
The Company entered into a consulting agreement for the three-month
period ended October 23, 1995 with Bijan Taghavi, formerly an officer and
director of the Company. Pursuant to such agreement, Mr. Taghavi was engaged to
provide such consulting services as requested by the Company in exchange for
compensation at the rate of $5,208 per month. Mr. Taghavi's consulting agreement
contains certain mutual release, non-competition and confidentiality provisions.
The Company entered into a consulting agreement with Timothy R.
Barnes, formerly an officer of the Company (the "Barnes Agreement"), which
agreement expired February 6, 1996. The Barnes Agreement provided for the
issuance to Mr. Barnes of warrants to purchase 36,858 shares of Common Stock
exercisable at a purchase price equal to the fair market value of the Common
Stock at the date of grant. The shares of Common Stock were included in a
registration statement on Form S-8. The Barnes Agreement also contained standard
non-competition and confidentiality provisions.
The Company entered into a Consulting Agreement with David E. Hardy
effective February 6, 1997 and for a term of 36 months thereafter. Pursuant to
the Agreement, Mr. Hardy shall provide legal services to the Company in exchange
for compensation at the rate of $10,417 per month for the term of the Agreement.
In addition, in the event the Company increases the salary of its senior-level
vice presidents, the consulting fee shall be equally increased and in the event
the Company shall pay any company performance-based bonuses to its senior level
vice presidents, the Company shall pay an equal amount to Mr. Hardy. In
addition, Mr. Hardy was granted options to purchase 250,000 shares of the
Company's Common Stock at an exercise price equal to the closing price of the
Company's publicly traded shares as of the effective date of the Agreement
($5.375 per share). The options vest as to 47,500 shares upon the execution of
the Agreement and options relating to 20,250 shares shall vest at the
commencement of each calendar quarter for ten quarters, with the first quarterly
vesting to occur on April 1, 1997 and the final quarterly vesting to occur July
1, 1999. In the event of the termination of the Agreement prior to the
expiration of the full term for any reason other than as a result of a material,
unremedied breach by Mr. Hardy which remains uncured following 30 days written
notice, Mr. Hardy is entitled to a lump sum payment equal to the lesser of the
monthly consulting fee payable
58
<PAGE>
through the end of the term of the Agreement or the monthly consulting fee
payable over 12 months and all unvested options shall accelerate and immediately
become fully vested and exercisable.
Director Stock Option Plan
The Company's Director Stock Option Plan (the "DSOP") authorizes the
grant of stock options to directors of the Company. Options granted under the
DSOP are non-qualified stock options exercisable at a price equal to the fair
market value per share of Common Stock on the date of any such grant. Options
granted under the DSOP are exercisable not less than six (6) months nor more
than ten (10) years after the date of grant.
As of December 31, 1996, options for the purchase of 8,169 shares of
Common Stock at prices ranging from $.875 to $3.875 per share were outstanding.
As of December 31, 1996, options to purchase 15,228 shares of Common Stock have
been exercised. In connection with adoption of the 1995 Director Plans (as
hereinafter defined) the Board of Directors authorized the termination of future
grants of options under the DSOP; however, outstanding options granted under the
DSOP will continue to be governed by the terms thereof until exercise or
expiration of such options.
Stock Purchase Plan
In accordance with the Employee Qualified Stock Purchase Plan (the
"Purchase Plan"), employees may contribute up to ten percent of their base wages
toward the purchase of Common Stock. The exercise price of options granted under
the Purchase Plan is the lesser of 85% of the market value on the first business
day of the payment period (September 1) or the last business day of the payment
period (August 31). As of December 31, 1996, the Company had 35,146 shares of
Common Stock reserved for issuance on exercise of the purchase rights granted
under the Purchase Plan.
1995 Director Stock Option Plan
In October 1995, the stockholders of the Company approved adoption
of the Company's 1995 Director Stock Option and Appreciation Rights Plan, which
plan provides for the issuance of incentive options, non-qualified options and
stock appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary
grants of stock options which qualify as incentive stock options (the "Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), as well as options which do not so qualify (the "Non-Qualified
Options") to be issued to directors. In addition, stock appreciation rights (the
"SARs") may be granted in conjunction with the grant of Incentive Options and
Non-Qualified Options. No SARs have been granted to date.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 250,000 shares of Common Stock
(subject to adjustment in the event of stock dividends, stock splits and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of Common Stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employees.
The shares of Common Stock subject to the 1995 Director Plan may be made
available from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified
Options on a non-discretionary basis pursuant to the following formula: each
member of the Board of Directors then serving shall receive a Non-Qualified
Option to purchase 10,000 shares of Common Stock at an exercise price equal to
the fair market value per share of the Common Stock on that date. Pursuant to
such formula, directors received options to purchase 10,000 shares of Common
Stock as of October 17, 1995, options to purchase 10,000 shares of Common Stock
on January 2, 1996, and will receive options to purchase 10,000 shares of Common
Stock on the first business day of each January. Each option is immediately
exercisable for a period of ten years from the date of grant. The Company has
250,000 shares
59
<PAGE>
of Common Stock reserved for issuance under the 1995 Director Plan. As of
December 31, 1996, options exercisable to purchase 190,000 shares of Common
Stock at prices ranging from $1.00 to $1.25 per share are outstanding under the
1995 Director Plan. As of December 31, 1996, options to purchase 40,000 shares
have been exercised under the 1995 Director Plan.
1995 Employee Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of
the Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options, Non-
Qualified Options and SARs.
Directors of the Company are not eligible to participate in the 1995
Employee Plan. The 1995 Employee Plan provides for the grant of stock options
which qualify as Incentive Stock Options under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as
Non-Qualified Options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of Incentive Options
and Non-Qualified Options. No SARs have been granted to date.
The 1995 Employee Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs of up to 400,000 shares of Common Stock (subject
to adjustment in the event of stock dividends, stock splits and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of Common Stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of Common Stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1996, options to purchase 400,000 shares of Common
Stock with exercise prices of $1.125 to $6.75 per share have been granted under
the 1995 Employee Plan. As of December 31, 1996, no options have been exercised
under the 1995 Employee Plan.
1997 Recruitment Stock Option Plan
In October 1997, the stockholders of the Company approved adoption
of the Company's 1997 Recruitment Stock Option and Appreciation Rights Plan,
which plan provides for the issuance of incentive options, non-qualified options
and stock appreciation rights (the "1997 Plan").
The 1997 Plan provides for automatic and discretionary grants of
stock options which qualify as incentive stock options (the "Incentive Options")
under Section 422 of the Code, as well as options which do not so qualify (the
"Non-Qualified Options") to be issued to directors. In addition, stock
appreciation rights (the "SARs") may be granted in conjunction with the grant of
Incentive Options and Non-Qualified Options. No SARs have been granted to date.
The 1997 Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 4,400,000 shares of Common
Stock (subject to adjustment in the event of stock dividends, stock splits and
other similar events). To the extent that an Incentive Option or Non-Qualified
Option is not exercised within the period of exercisability specified therein,
it will expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1997 Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1997 Plan for the grant
of additional options or rights to any eligible employees. The shares of Common
Stock subject to the 1997 Plan may be made available from either authorized but
unissued shares, treasury shares, or both. As of December 31, 1996, there were
no options outstanding under the 1997 Plan.
60
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first quarter of fiscal year 1995, the Company received
advances totaling $218,000 from Mortgage Network International ("MNI"). Henry
Y.L. Toh, a Director of the Company, has management control over MNI. Such
advances were previously payable upon demand. Subsequent to the extension of
such advances, the Board of Directors approved delivery of a promissory note
representing the aggregate amount of such advances, which promissory note
matured by its terms on October 1, 1995 and bears interest at one percent over
the prime rate of interest established by Southwest Bank of Texas, N.A.
Subsequently, the Company and MNI modified the note such that: (i) interest
thereon is payable monthly at the rate of 10.5%; and (ii) the remaining
principal amount of $218,000 (including a principal payment previously due on
December 31, 1996) with interest thereon at the rate of 10.5% will be paid in 21
equal monthly payments of approximately $4,600.
I-Link was a party to a 12-month consulting agreement with Benchmark
dated August 10, 1995 pursuant to which I-Link was obligated to pay $6,000 per
month to Benchmark for consulting services rendered. Those payments accrued and
were deferred pending the Company's attaining stockholder's equity of at least
$2.5 million. The sums due were paid and the agreement has not been renewed.
I-Link entered into a consulting agreement with T6-G Limited
Partnership ("T6-G") for two years commencing upon the successful completion of
at least $4 million in funding. The agreement required the payment of a total of
$70,000 payable monthly over 24 months. I-Link discharged the entirety of the
sums due in September 1996 and T6-G designated such sums to be allocated to its
purchase of Class C Preferred Stock. See "Selling Securityholders."
I-Link was indebted to T6-G in the amount of $300,000, which sums
were repaid in full from the proceeds of the Class C Offering. T6-G owns a 9.5%
interest in I-Link, Ltd. See "1996 Offerings" and "Selling Securityholders."
The Company also entered into two consulting agreements with Jason
H. Pollak, the initial term of one of which expired on January 31, 1996 and the
second of such agreements commenced thereafter. The term of the second agreement
was for a period of three years, subject to earlier termination by the Company.
Pursuant to the terms of the first of such agreements (collectively, the "Pollak
Agreements"), Mr. Pollak received 50,000 shares of Common Stock. The second of
the Pollak Agreements provided Mr. Pollak with an option to purchase up to
50,000 shares of Common Stock each year at prices of $1.50, $2.50 and $3.50,
respectively. The second of the Pollak Agreements was terminated by the Company
on March 5, 1996 (upon thirty days' advance notice which renders such
termination effective April 4, 1996). The shares of Common Stock subject to the
Pollak Agreement have been included in a registration statement on Form S-8.
In January 1996, certain associates and affiliates of Commonwealth
purchased an aggregate of 878,891 shares of Common Stock upon conversion of
Class A Preferred Stock held by Walnut Capital Corp. ("WCC"), Windy City, Inc.
("WCI") and Canadian Imperial Bank of Commerce Trust Company (Bahamas) Limited
at a cost per share of approximately $0.49. Joel Kanter, a director of the
Company at the time of the transaction, is affiliated with WCC and WCI. See
"Description of Securities--Kanter Shares."
On February 21, 1996, Four M International, Ltd. ("Four M"), a
principal shareholder of the Company, granted certain options to purchase shares
of the Company owned by Four M exercisable commencing July 1, 1996 (subject to
the satisfaction of certain conditions) to purchase 3,915,570 shares of Common
Stock. Henry Y.L. Toh, a director of the Company, is one of the two directors of
Four M. The exercise price of $1.79 per share represents the lesser of 200% of
the average of the closing bid and ask price per share of Common Stock for the
ten (10) business days preceding July 1, 1996 or $1.79 per share. Commonwealth
and affiliates or associates thereof received the right to purchase 545,285
shares of Common Stock prior to December 31, 1996 and 537,500 shares of Common
Stock prior to December 31, 1997. Benchmark received the right to purchase
545,285 shares of Common Stock prior to December 31, 1996 and 537,500 shares
prior to December 1997. Certain members of management of I-Link (at that time),
namely, Clay Wilkes, Floyd Wilkes and Alex Radulovic, have the right to purchase
an aggregate of 825,000 shares of at that time Common Stock prior to December
31, 1996 and 825,000 shares prior to December 31, 1997. Scott Cook received the
right to purchase 100,000 shares prior to December 31, 1996. On February 21,
1996, I-Link
61
<PAGE>
agreed to pay an aggregate of $1,275 to Four M by Mr. Cook on or before July 1,
1996. On April 24, 1996, the Four M Options issued to Mr. Cook were cancelled
and options were issued as of that date by Four M to Mr. Cook (50,000 shares),
S.C. Culbreth (25,000 shares) and John Beardmore (25,000 shares).
In August 1996, the Four M Options were amended to provide that in
the event that $200,000 in principal amount (i.e., exercise proceeds) of the
Four M Options have been exercised prior to December 31, 1996, the exercise
period of the remaining Four M Options exercisable during 1996 (the "1996 Four M
Options") will be extended to September 6, 1997 and the exercise price would be
increased by four percent (4%) of the then current exercise price for each 30
day period or portion thereof commencing January 1, 1997 in which the remainder
of the 1996 Four M Options are not exercised. In December 1996, Four M Options
to purchase the following shares were exercised by the following persons: 25,000
shares by Scott Cook, 12,500 shares by John Beardmore, 12,500 shares by S.C.
Culbreth, 30,726 shares by Benchmark, 46,509 shares by Commonwealth and 15,503
shares by William Baquet. Inasmuch as the aggregate amount exercised exceeded
$200,000 in principal amount, the exercise period of the remaining 1996 Four M
Options was extended. See "Description of Securities--Four M Options."
On February 21, 1996, R. Huston Babcock, M.D., a director of the
Company, granted certain options to Benchmark exercisable commencing July 1,
1996 (subject to the satisfaction of certain conditions) to purchase 183,542
shares of Common Stock issuable upon conversion of outstanding Class B
Convertible Preferred Stock. The exercise price is equal to the lesser of 200%
of the average of the closing bid and ask price per share of Common Stock for
the ten (10) business days preceding July 1, 1996 or $1.79 per share. Benchmark
received the right to purchase 91,771 shares of Common Stock prior to December
31, 1996, which options have expired, and the right to purchase 91,771 shares
prior to December 1997. See "Description of Securities--Babcock Shares."
In August 1996, William H. Flury, Vice President, 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 Company recorded
additional interest expense of $11,875 in connection with the transaction. The
funds from the loan were used for general working capital purposes of I-Link.
The loan was repaid in September 1996 and the sums directed by Mr. Flury to
purchase 1,666 shares of Class C Preferred Stock.
In August 1996, John W. Edwards, President and Chief Executive
Officer of I-Link, loaned I-Link the sum of $131,250 (including a $6,250
original issue discount) 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. The loan was repaid in September 1996.
In September 1996, the Company advanced the sum of $685,000 to FTI
to be used by FTI to acquire from Harris Corporation certain items of
telecommunications switches known as "Harris switches." FTI is an authorized
Harris reseller and was able to obtain favorable pricing for these switches.
These Harris switches are included in the equipment covered by the IBM operating
lease, and IBM will pay FTI for the switches as a vendor, and lease them to
I-Link. As of December 31, 1996, the remaining portion of the advance was
$120,000. The majority owner of FTI
62
<PAGE>
is Robert W. Edwards, Jr., brother of John W. Edwards, the Company's President
and Chief Executive Officer. Effective January 1, 1997, the Company acquired all
of the outstanding stock of FTI. See "The Company."
On April 29, 1997 the Company entered into a Settlement Agreement
("Settlement Agreement") with JW Charles, pursuant to which the Company and JW
Charles settled certain litigation between them. Pursuant to the Settlement
Agreement, the Company agreed (a) to pay or cause JW Charles to be paid the sum
of six hundred thousand dollars ($600,000); and (b) to terminate a financial
consulting agreement between the parties (the "1994 Consulting Agreement");
concurrently JW Charles agreed (c) to transfer to the Company or its designees
and/or assignees all of its right, title and interest to a warrant (the
"Settlement Warrant") representing the right to purchase shares of Common Stock,
which warrant had been issued pursuant to the 1994 Consulting Agreement, (d) to
deliver to the Company the Settlement Warrant with an executed assignment of the
Settlement Warrant with the name of the assignee left in blank to be filled in
by the Company, and (e) to terminate the 1994 Consulting Agreement. Both parties
executed general releases in full settlement of all claims and disputes between
them. The Settlement Warrant, as adjusted through the date of its surrender to
the Company, represents the right to purchase 331,126 shares of Common Stock at
$1.51 per share until November 3, 1999. In connection with the execution of the
Settlement Agreement the Settlement Warrant was purchased by a group of
investors (the "Hardy Group") which includes David E. Hardy and Karl S. Ryser,
Jr., both of whom are officers of the Company, in consideration for payment by
the Hardy Group of six hundred thousand dollars ($600,000) to JW Charles in
satisfaction of the amounts owed to JW Charles under the Settlement Agreement.
As additional compensation for the Hardy Group's commitment to purchase the
Settlement Warrant, the Company also (i) will amend the Settlement Warrant to
provide for adjustment of its exercise price in the event that the conversion
rate of the Class C Preferred Stock is adjusted; (ii) will issue to the Hardy
Group new warrants to purchase an aggregate of 175,000 shares of Common Stock at
an exercise price of $2.50 per share (adjustable in relation to any adjustments
in the Class C Preferred Stock conversion rate) for a term of five years,
pursuant to which the members of the Hardy Group shall have piggy-back
registration rights; and (iii) will amend options previously issued to each of
Messrs. Hardy and Ryser to provide that, as to the unvested portion of such
options, 100,000 options would vest immediately and the balance would vest in
four equal installments over twelve months. See "Legal Proceedings."
Clay Wilkes, the sole shareholder of GNet Enterprises, Inc.
("GNet"), the general partner of I-Link, Ltd., pledged all of the issued and
outstanding shares of GNet to secure the Company's guarantee of $100,000 of the
principal amount of a loan on October 19, 1995 from Scott Cook to I-Link. The
loan was repaid in September 1996 from the proceeds of the Class C
Offering.
See "Executive Compensation--Employment Agreements" and "Executive
Compensation--Consulting Agreements" for descriptions of the terms of employment
and consulting agreements between the Company or I-Link and certain officers,
directors and other related parties.
See "1996 Offerings" for a description of offerings of securities of
the Company conducted in 1996 and of certain payments to and agreements with
Commonwealth.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Other than the Series M Preferred Stock issued on October 10, 1997,
the Common Stock constitutes the only voting securities of the Company. Each
share of Class B Preferred Stock is convertible, at the option of the holder
thereof, into approximately 24.47 shares of Common Stock, subject to adjustment
upon the occurrence of certain events. Each share of Class C Preferred Stock is
convertible, at the option of the holder thereof, into such number of shares of
the Company's Common Stock as shall equal $60 divided
63
<PAGE>
by the lower of (i) $2.50 or (ii) the closing bid price for any five consecutive
trading days during the period commencing on September 6, 1996 and ending on
March 5, 1998. The table below sets forth information, to the best of the
Company's knowledge, with respect to the total number of shares of the Company's
Common Stock, Class B Preferred Stock and Class C Preferred Stock beneficially
owned by each director, the Named Executive Officers, each beneficial owner of
more than five percent of the Common Stock, and all directors and executive
officers as a group, as of September 30, 1997. On that date, there were
12,180,165 shares of the Company's Common Stock issued and outstanding, no
shares of the Company's 12% Preferred Stock or Class A Preferred Stock issued or
outstanding, 7,500 shares of the Company's Class B Preferred Stock issued and
outstanding, and 218,018 shares of the Company's Class C Preferred Stock issued
and outstanding.
<TABLE>
<CAPTION>
% of Outstanding
Name and Address Number of Shares Shares of Common Stock
of Beneficial Owner /(1)/ Title of Class Beneficially Owned Beneficially Owned/(2)/
- ------------------------------------- -------------------- ----------------------- --------------------------
<S> <C> <C> <C>
Four M International, Ltd./(3)/ Common Stock 2,329,155/(4)/ 19.1%
1980 Post Oak Boulevard
Houston, TX 77056
I-Link, Ltd./(5)/ Common Stock 284,854 2.3%
c/o Clay Wilkes
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Clay Wilkes/(6)/ Common Stock 3,005,008/(7)/ 23.9%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
R. Huston Babcock, M.D. Common Stock 682,173/(11)/ 5.5%
741 12th Street North Class B Preferred 7,500
St. Petersburg, FL 33705 Stock
Henry Y.L. Toh/(3)/ Common Stock 188,501/(12)/ 1.5%
3227 Bennet Street North
St. Petersburg, FL 33713
John W. Edwards Common Stock 861,664/(13)/ 6.6%
13751 S. Wadsworth Park Drive
Draper, UT 84020
T6-G Limited Partnership Common Stock 771,192/(9)/ 6.2%
185 South State Street Class C Preferred 7,133
Salt Lake City, UT 84111 Stock
William A. Baquet Common Stock 640,284/(14)/ 5.3%
33 Libby Avenue
Hicksville, NY 11801
Commonwealth Associates Common Stock 1,864,240/(15)/ 14.3%
733 Third Avenue Class C Preferred 3,750
Suite 700 Stock
New York, NY 10017
Alex Radulovic Common Stock 894,824/(17)/ 7.3%
13751 S. Wadsworth Park Drive
Draper, UT 84020
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
% of Outstanding
Name and Address Number of Shares Shares of Common Stock
of Beneficial Owner /(1)/ Title of Class Beneficially Owned Beneficially Owned/(2)/
- ------------------------------------- -------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
Joseph A. Cohen Common Stock 141,000/(18)/ 1.1%
1370 Avenue of the Americas Class C Preferred Stock 3,000
New York, NY 10019
Karl S. Ryser, Jr. Common Stock 249,944/(19)/ 2.0%
13751 S. Wadsworth Park Drive
Draper, UT 84020
William H. Flury Common Stock 126,483/(20)/ 1.0%
13751 S. Wadsworth Park Drive Class C Preferred 2,666
Draper, UT 84020 Stock
David E. Hardy Common Stock 424,033/(21)/ 3.4%
60 East South Temple
Salt Lake City, UT 84111
Robert Edwards Common Stock 280,000/(8)/ 2.2%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Winter Harbor, L.L.C. Common Stock 4,400,000/(16)/ 26.5%
c/o First Media, L.P. Seris M Preffered 4,400
11400 Skipwith Lane Stock
Potomac, MD 20854
Dror Nahumi Common Stock 641,892/(22)/ 5.3%
1 Main Street, Suite 310 Series D Preferred 950
Eatontown, NJ 07724 Stock
All Executive Officers and Common Stock 5,958,805/(23)/ 39.6%
Directors as a Group (9 Persons) Class C Preferred 5,666
Stock
- ------------------------------
</TABLE>
(1) Unless noted, all of such shares are owned of record by each person or
entity named as beneficial owner and such person or entity has sole voting
and dispositive power with respect to the shares of Common Stock owned by
each of them.
(2) As to each person or entity named as beneficial owners, such person or
entity's percentage of ownership is determined by assuming that any options
or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the date hereof have been
exercised or converted, as the case may be.
(3) Mr. Toh, a director of the Company and one of two directors of Four M, has
disclaimed beneficial ownership of the shares of the Common Stock owned by
Four M.
(4) Represents the number of shares of Common Stock owned by the noted
shareholder. As set forth hereinbelow, Four M has granted certain options
exercisable through December 31, 1997 to purchase 1,957,675 of its shares
of Common Stock. Commonwealth and affiliates or associates thereof have the
right to purchase 270,696 shares of Common Stock; Benchmark Equity Group,
Inc. ("Benchmark") has the right to purchase 356,392 shares, and certain
employees and members of management of I-Link and/or the Company have the
right to purchase 824,891 shares prior to December 31, 1997.
(5) GNet Enterprises, Inc. ("GNet") is the General Partner of I-Link, Ltd. and
Clay Wilkes, a director of the Company, is the sole shareholder of GNet.
(6) I-Link, Ltd., a limited partnership, owns an aggregate 284,854 shares of
Common Stock. The Company has been informed that Mr. Wilkes, a director of
the Company, may be deemed to indirectly beneficially own the 284,854
shares owned by I-Link, Ltd.
(7) Includes 284,854 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. Also includes 389,891 shares of Common Stock
purchasable upon exercise of an option exercisable commencing on July 1,
1996 granted by Four M, 289,000 shares of Common Stock previously purchased
by exercise of Four M Options and options to purchase 20,000 shares of
Common Stock issuable by the Company. Also includes 375,000 shares of
Common Stock which represents the exercisable portion of an option granted
by the Company on July 1, 1996 to purchase 1,500,000 shares of Common Stock
at an exercise price of $7.00 per share, vesting in 25% increments in the
event that the average closing bid price of a share of the Company's Common
Stock for five consecutive trading days exceeds $10, $15, $20 and $25,
respectively. Such option vests in its entirety on June 30, 2001 and lapses
on June 30, 2002. Of the shares owned, 60,000 have been pledged to secure
the repayment of loans in the principal amount of $150,000 made in March
and April 1997 and other contractual commitments. The loans bear interest
at the rate of 8% per annum and are due and payable on or before September
30, 1997, at the discretion of the payee in cash or the shares of Common
Stock.
(8) Represents that portions of shares to be issued to the named stockholder as
consideration for the FTI Acquisition.
(9) Includes 548,891 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. Also includes 171,192 shares of Common Stock
which are issuable upon conversion of 7,133 shares of Class C Preferred
Stock.
(10) Includes 92,692 shares of Common Stock issued and 91,771 shares of Common
Stock issuable upon conversion of 3,750 shares of Class B Preferred Stock
subject of an option exercisable commencing July 1, 1996 granted by R.
Huston Babcock to the noted shareholder and an additional 356,392 shares of
Common Stock which may be purchased pursuant to Four M Options. Also
includes 18,048 shares of Common Stock issuable
65
<PAGE>
upon conversion of 752 shares of Class C Preferred Stock, which are
beneficially owned by Trident I, LLC, of which the noted shareholder is the
manager with the power to exercise investment, dispositive and voting
control.
(11) Includes: (a) 183,542 shares of Common Stock into which the 7,500 shares of
Class B Preferred Stock owned by the noted stockholder are convertible; and
(b) 18,501 shares of Common Stock issuable pursuant to options exercisable
within 60 days of the date hereof. 91,771 of the shares of Common Stock
issuable upon conversion of such shares of the Class B Preferred Stock are
subject to an option granted by the noted stockholder to Benchmark.
(12) Represents shares issuable pursuant to options exercisable within 60 days
of the date hereof.
(13) Includes 499,998 shares of Common Stock subject to the vested portion of
Mr. Edwards' option to purchase 1,000,000 shares of Common Stock and 41,666
shares subject to the vested portion of an option to purchase 250,000
shares of Common Stock. Also includes 295,000 shares of Common Stock
subject to options held by Mr. Edwards, and 25,000 shares of Common Stock
subject to a warrant held by Mr. Edwards. See "Executive Compensation--
Employment Agreements" and "Certain Relationships and Related
Transactions."
(14) Includes 15,503 shares of Common Stock issued and 380,890 shares issuable
pursuant to options exercisable commencing July 1, 1996 granted by Four M
and 243,891 Kanter Shares.
(15) Includes 223,544 shares issued and an additional 270,696 shares of Common
Stock issuable pursuant to Four M Options and 530,000 shares of Common
Stock owned by certain affiliates and control persons of the named
shareholder. Also includes 750,000 shares of Common Stock subject to
warrants held by the named stockholder and 90,000 shares of Common Stock
issuable upon conversion of 3,750 shares of Class C Preferred Stock which
are held by certain affiliates of the named stockholder. Does not include
shares of Common Stock which may be held by Commonwealth from time to time
in its trading account in connection with ordinary market-making
activities.
(16) Represents shares of Common Stock issuable upon conversion of Series M
Preffered Stock.
(17) Includes 134,912 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. Also includes 500,000 shares of Common Stock
issuable pursuant to options exercisable commencing July 1, 1996 granted by
Four M and 125,000 shares of Common Stock which represent the exercisable
portion of an option granted by the Company on July 1, 1996 to purchase
500,000 shares of Common Stock at an exercise price of $7.00 per share,
vesting in 25% increments in the event that the average closing bid price
of a share of the Company's Common Stock for five consecutive trading days
exceeds $10, $15, $20 and $25, respectively. Such option vests in its
entirety on June 30, 2001 and lapses June 30, 2002.
(18) The Company has agreed to issue options to purchase 64,000 shares of Common
Stock to Mr. Cohen, to be exercisable at the fair market value thereof on
September 30, 1996. Of such options, 24,000 shall vest and become
exercisable immediately upon grant, 20,000 shall vest and become
exercisable on the first anniversary of the grant, and 20,000 shall vest
and become exercisable on the second anniversary of the grant. Represents
44,000 shares issuable upon exercise of the vested portion of such options.
Includes an additional 25,000 shares issuable upon exercise of options
issuable to Mr. Cohen and 72,000 Conversion Shares, subject to adjustment,
issuable to the Leslie Group upon conversion of Class C Preferred Stock.
Mr. Cohen is President of the Leslie Group, Inc., which is a limited
partner of the parent of Commonwealth, and which holds 3,000 shares of
Class C Preferred Stock.
(19) Includes 27,594 shares issuable under the Settlement Warrant, 14,583 shares
issuable pursuant to the Hardy Group Warrant, 186,933 shares issuable
pursuant to the exercisable portion of options granted per Mr. Ryser's
employment agreement, and 20,834 shares issuable pursuant to other options
granted by the Company.
(20) Includes 62,499 shares of Common Stock issuable pursuant to options
exercisable within 60 days of the date hereof and 63,984 shares of Common
Stock issuable upon conversion of 2,666 shares of Class C Preferred Stock,
including 500 shares of Class C Preferred Stock held in the name of Mr.
Flury's wife.
(21) Includes 4,000 shares issued, 137,969 shares issuable under the Settlement
Warrant, 42,177 shares issuable pursuant to the Hardy Group Warrant,
219,053 shares issuable pursuant to the exercisable portion of options
granted per Mr. Hardy's consulting agreement, and 20,834 shares issuable
pursuant to other options granted by the Company.
(22) Represents shares of Common Stock issuable upon conversion of Series D
Preferred Stock.
(23) Includes 2,545,141 shares of Common Stock which may be obtained pursuant to
options exercisable within 60 days of the date hereof, 183,542 shares of
Common Stock into which the 7,500 shares of Class B Preferred Stock are
convertible and 135,984 shares of Common Stock into which 5,666 shares of
Class C Preferred Stock are convertible. Also includes 389,891 shares of
Common Stock subject of an option exercisable commencing on July 1, 1996
granted by Four M and 284,854 shares owned of record by I-Link, Ltd. (see
footnote 6), and excludes certain unvested options granted by the Company.
SELLING SECURITYHOLDERS
The following table assumes that each Selling Stockholder is
offering for sale securities previously issued or issuable by the Company and/or
shares of Common Stock issuable in the event of conversion or exercise of
outstanding securities. The Company has agreed to pay all expenses in connection
therewith (other than brokerage commissions and fees and expenses of their
respective counsel). None of the Selling Securityholders has ever held any
position with the Company or had any other material relationship with the
Company except that Clay Wilkes, the owner of GNET, the general partner of
I-Link, Ltd., is a director of the Company. Mr. Babcock is also a director of
the Corporation and Messrs. Ryser, Flury and Hardy are officers of the Company
and/or I-Link. See "The Company," "1996 Offerings," and "Certain Relationships
and Related Transactions."
66
<PAGE>
The following table sets forth the beneficial ownership of the Securities
by each person who is a Selling Stockholder. The Company will not receive any
proceeds from the sale of such securities by the Selling Stockholders.
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Richard Adams
c/o Commonwealth Associates -- 45,000(36) * 0%
733 Third Avenue
New York, NY 10017
ADF Inc. -- 10,992 (9) * 0%
P.O. Box 908
Helen, GA 30545
Paul R. Alter -- 18,000 (9) * 0%
1111 Park Avenue
New York, NY 10128
Anasazi Partners Limited Partners -- 36,000 (9) * 0%
108 Charles Street
Boston, MA 02114
Basil Asciutto -- 42,000 (7)(34) * 0%
82 Haywood Street
Staten Island, NY 10307
R. Huston Babcock, M.D. -- 183,542 (44) 5.8% 2.8%
741 12th Street North
St. Petersburg, FL 33705
Edward Dallin Bagley -- 36,000 (9) * 0%
8 Shadow Wood Lane
Sandy, UT 84092
William Baquet -- 640,284 (32) 5.5% 0%
33 Libby Avenue
Hicksville, NY 11801
Steve M. Barnett -- 36,000 (9) * 0%
666 Dundee Road, Suite 1704
Northbrook, IL 60062
Bartlesville Wesleyan College -- 13,584 (9) * 0%
2201 Silver Lake Road
Bartlesville, OK 74006
Richard L. Bazelon and Eileen A. Bazelon, JT TEN -- 36,000 (9) * 0%
3009 Foxx Lane
Philadelphia, PA 19144
John Beardmore -- 50,000 (14) * 0%
P.O. Box 457
Alexandria, VA 22313
John Becker -- 18,000 (9) * 0%
2709 Monte Creston Drive
Belmont, CA 94002
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Benchmark Equity Group, Inc. -- 558,903 (19) 4.5% 0%
700 Gemini
Houston, TX 77058
Oded Berkowitz -- 15,000 (33) * 0%
200 East 58th Street, #5H
New York, NY 10021
Sandra Bernstein -- 24,000 (9) * 0%
10 Carriage Drive
Old Westbury, NY 11568
Harold S. Blue -- 36,000 (9) * 0%
2501 David Road, #230
Ft. Lauderdale, FL 33317
Bondstreet Partners Limited -- 72,000 (9) * 0%
64 West 12th Street
New York, NY 10011
Ronald B. Booth -- 18,000 (9) * 0%
Marew L. Booth
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
The British Life Office Limited -- 180,000 (9) 1.5% 0%
Reliance House
Tunbridge Wells
Kent TN4 8B1 England
Robert A. Bryson -- 18,000 (9) * 0%
2982 Castro Lane
Holladay, UT 84117
Robert L. Burr and Catherine W. Burr -- 18,000 (9) * 0%
5168 Renaissance Avenue
San Diego, CA 92122
Richard Campanella -- 10,000 (33) * 0%
5 Lower Overlook Road
Gillette, NJ 07933
J.A. Cardwell -- 18,000 (9) * 0%
5467 Upper Valley Road
El Paso, TX 79932
James A. Cardwell Jr. -- 18,000 (9) * 0%
1105 Los Jardines
El Paso, TX 79912
Drew Carmi -- 28,000 (37) * 0%
8216 Skyline Drive
Los Angeles, CA 90046
Zachary Carmi -- 31,500 (38) * 0%
1365 York Avenue
New York, NY 10021
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
John A. Catsimatidis -- 36,000 (9) * 0%
817 Fifth Avenue, 14th Floor
New York, NY 10021
Joe Cayre -- 100,000 (36) * 0%
16 East 40th Street
New York, NY 10016
Michael Cayre -- 15,000 (36) * 0%
16 East 40th Street
New York, NY 10016
Christiana Bank Luxembourg S.A. -- 36,000 (9) * 0%
16 Avenue Pasteur
1-2015 Luxembourg
David L. Cohen -- 36,000 (9) * 0%
923 Harvard Ct.
Woodmere, NY 11598
Jonathan R. Cohen -- 9,000 (9) * 0%
50 East 42nd Street, Suite 200
New York, NY 10017
Robert H. Cole -- 9,000 (9) * 0%
5102 Los Alamitos Ct.
Midland, TX 79705
Commonwealth Associates 750,000 (29) 1,864,240 (30) 14.9% 0%
733 Third Avenue
New York, NY 10017
Conzett Europa Invest Ltd. -- 396,000 (9) 3.3% 0%
c/o Bank Julius Baer
330 Madison Avenue
New York, NY 10017
Scott Cook -- 230,078 (21) 1.9% 0%
1700 Pacific Avenue, Suite 500
Dallas, TX 75201
Richard Corbin -- 9,000 (9) * 0%
2000 Broadway, #21A
New York, NY 10023
Gerald B. Cramer -- 36,000 (9) * 0%
707 Westchester Avenue
White Plains, NY 10604
Cramer Taos Partners -- 36,000 (9) * 0%
707 Westchester Avenue
White Plains, NY 10604
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
James Crandall and Claudia Crandell JTTEN -- 18,000 (9) * 0%
6045 Serene Drive
Las Vegas, NV 89130
S.C. Culbreth -- 50,000 (14) * 0%
10 Tidewater Drive
Ormond Beach, FL 32174
Michael P. Curtis -- 18,000 (9) * 0%
14 Stonehedge Drive
Wilmington, MA 01887
Richard G. Dahlen -- 54,000 (9) * 0%
and Pricilla A. Dahlen
16467 Horseshoe Ridge Rd.
Chesterfield, MO 63005
Richard G. David -- 39,000 (9) * 0%
David & Hagner
1120 19th Street, N.W.
Washington, DC 20036
David J. Dercher -- 9,000 (9) * 0%
6801 Ludlow Street
Upper Darby, PA 19082
Sidney Deutsch -- 36,000 (9) * 0%
17214 Ryton Lane
Boca Raton, FL 33496
DLJSC IRA -- 12,000 (9) * 0%
F/B/O William H. Flury
Pershing Division of DLJSC
Post Office Box 2060
Jersey City, NJ 07303-9917
DLJSC IRA -- 12,000 (9) * 0%
F/B/O Sandy Flury
Pershing Division of DLJSC
Post Office Box 2060
Jersey City, NJ 07303-9917
Robert C. Donaldson and -- 18,000 (9) * 0%
Kathleen T. Donaldson
7780 Boot Hill Drive
Park City, UT 84098
Zane R. and Debbie J. Doyle -- 18,000 (9) * 0%
2966 Acorn Lane
Sandy, UT 84093
Jens Duborg -- 18,000 (9) * 0%
19 Sterling Road
N. Billenco, MA 01862
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
E&M RP Trust 80,000 (26) 152,000 (27) 1.3% 0%
655 Brea Canyon Road
Walnut, CA 91789
Jack Ehrenhaus - IRA Rollover -- 14,400 (9) * 0%
c/o Smith Barney Shearson, Inc.
2 World Trade Center
New York, NY 10048
Maxwell Lang Elliott -- 36,000 (9) * 0%
27271 Ridge Lake Court
Bonita Springs, FL 34134
Entermedia Growth Partners LP -- 120,000 (9) 1.0% 0%
1900 Wazee Street, Suite 106
Denver, CO 80202
Faisal Finance (Switzerland) S.A. -- 100,800 (9) * 0%
84 Au Louis-Casai
Post Office Box 42
CH-1216 Cointrin, Geneva, Switzerland
Kenneth R. Falchuk -- 36,000 (9) * 0%
126 Cottage Street
Brookline, MA 02146
Michael S. Falk -- 187,525 (24) 1.6% 0%
One Beekman Place, Apt. 15A
New York, NY 10022
Falk Family Foundation -- 130,000 (33) 1.1% 0%
c/o Michael S. Falk
One Beekman Place, Apt. 15A
New York, NY 10022
Fiducie Desjardins, A/C 900595-0-59 -- 36,000 (9) * 0%
c/o Commonwealth Assoc.
733 Third Avenue
New York, NY 10017
Fiducie Desjardins, A/C 744766-7-59 -- 36,000 (9) * 0%
c/o Commonwealth Assoc.
733 Third Avenue
New York, NY 10017
Manny Fink IRA -- 36,000 (9) * 0%
c/o Oppenheimer
1 World Financial Center
New York, NY 10281
S. Marcus Finkle -- 54,000 (9) * 0%
117 AABC
Aspen, CO 81061
William H. Flury -- 63,984 (35) 1.1% *
2824 Lucky John Road
Park City, UT 84060
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Flynn Investment Corporation -- 90,000 (9) * 0%
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Founders Equity Group -- 250,000 (43) 2.1% 0%
2602 McKinney, Suite 220
Dallas, TX 75204
Four M International, Ltd. -- 2,329,155 (11) 19.1% 0%
1980 Post Oak Boulevard
Houston, TX 77056
Dr. Philip Freedman -- 18,000 (9) * 0%
1365 York Avenue, Apt. 28A
New York, NY 10021
David Funk -- 10,000 (36) * 0%
4606 Othesda Court
Rockland, CA 95677
Maurice J. Gallagher -- 58,488 (9) * 0%
c/o Gallagher Investment Corp.
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Gallagher Investment Corp. -- 84,000 (9) * 0%
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Rich Galtierri -- 15,000 (33) * 0%
400 Carriage Lane
Wyckoff, NJ 07481
Edith G. Gampel TTEE -- 36,000 (9) * 0%
Edith G. Gampel Irrevocable Tr. Dtd. 9/1/92
19495 Biscayne Blvd., Suite 906
Aventura, FL 33180
Evan Gartenberg -- 11,500 (8) * 0%
143-03 Cronston Avenue
Neponsh, NY 11694
Lawrence Genin -- 18,000 (9) * 0%
61 English Turn
New Orleans, LA 70131
Michael J. George -- 18,000 (9) * 0%
19 Hale Street
Haverhill, MA 01830
Ned Gilleland Sr. -- 36,000 (9) * 0%
232 S. Sea Pines Dr.
Hilton Head, SC 29928
Charles Giordano -- 10,000 (36) * 0%
335 Lightner Avenue
Staten Island, NY 10314
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
John J. Giuffrida IRA -- 18,000 (9) * 0%
Bear Stearns Securities Co., Custodian
245 Park Avenue
New York, NY 10167
Paul D. Goldenheim -- 9,000 (9) * 0%
4 Bald Hill Pl.
Wilton, CT 06897
Zachary Gomes -- 36,000 (9) * 0%
155 Perry Street
New York, NY 10014
H. Eugene Graves -- 72,000 (9) * 0%
313 West Moreno Street
Pensacola, FL 32502
Fredrik Grunewald -- 36,000 (9) * 0%
Herrviksvagen 21
13940 Varindo, Sweden
David Hardy -- 210,886 (39) 2.6% *
13751 S. Wadsworth Park Drive #200
Draper, UT 84020
Hare & Co. -- 36,000 (9) * 0%
1 Wall Street
New York, NY 10286
Mel Harris -- 36,000 (9) * 0%
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Andrew B. Hart -- 9,000 (9) * 0%
12570 Skyline Boulevard
Oakland, CA 94619
Phyllis Henderson -- 20,000 (36) * 0%
17 Salem Road
Hicksville, NY 11801
Hercules Systems Inc. -- 18,000 (9) * 0%
2900 Hearne
Shreveport, LA 71103
George Hodor -- 36,000 (9) * 0%
15 Pleasantville Road
Ossining, NY 10562
I-Link Ltd. -- 284,854 (15) 2.4% 0%
c/o GNet Enterprises, Inc.
c/o Clay Wilkes
2100 E. Bengal Boulevard, #M104
Salt Lake City, UT 84121
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Joseph P. Ingarra -- 36,988 (6) * 0%
120 Kensington Road
Garden City, NY 11530
Intergalactic Growth Fund Inc. -- 36,000 (9) * 0%
Post Office Box N-341
Nassau, Bahamas
J-Mark Computer Corp. -- 36,000 (9) * 0%
13111 Brooks Drive, #A
Baldwin Park, CA 91706
William J. Jackson and Ann S. Jackson -- 54,000 (9) * 0%
2919 West Autumn Run Circle
Sugar Land, TX 77479
A.T. Jagman Trustee -- 36,000 (9) * 0%
Anthony T. Jagman
1415 Renson Street
Lansing, MI 48910
Jeffries International -- 22,800 (28) * 0%
46 New Broad Street
London EC2M 1JD England
Chatri Jhynjhnuwala -- 36,000 (9) * 0%
Lourdes Jhynjhnuwala
25 Harbor Drive
Corona Del Mar, CA 92635
Peggy Jordan -- 36,000 (9) * 0%
610 Wingspread
Peachtree City, GA 30369
Mansour Khayyam -- 36,000 (9) * 0%
27 Harbour Road
Kings Point, NY 11024
Robert B. Kimball III -- 36,000 (9) * 0%
107 Wood Street
Groveland, MA 01834
Spencer Kirk -- 253,063 (40) 2.1% 0%
c/o Hardy & Allen
60 East South Temple, Suite 2200
Salt Lake City, UT 84111
Bernard Kirsner TTEE -- 24,000 (9) * 0%
Bernard Kirsner Trust-DTD
6196 Vista Linda Lane
Boca Raton, FL 33433
Sheldon Kraft -- 20,000 (33) * 0%
H2 Downing Street #1
New York, NY 10014
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Vincent Labarbara -- 49,750 (34)(45) * 0%
1266 Ocean Boulevard
Sea Bright, NJ 07760
Daniel R. Lee -- 36,000 (9) * 0%
500 Skokie Blvd., Suite 200
Northbrook, IL 60062
Leslie Group Inc. -- 72,000 (9) * 0%
1370 Avenue of the Americas, 26th Floor
New York, NY 10019
Douglas Levine -- 36,000 (9) * 0%
88 University Place
New York, NY 10003
Daniel M. Libby -- 9,000 (9) * 0%
333 East 68th Street
New York, NY 10021
Phillip C. Lockwood -- 18,000 (9) * 0%
11 Kendall Drive
Northborough, MA 01532
John Luck -- 18,000 (9) * 0%
1 Marsh Bird Lane
Savannah, GA 31411
Maerki Baumann & Co. A.G. -- 336,000 (25) 2.8% 0%
8002 Zurich, Switzerland
Joseph Mandarino 40,000(4) 209,988 (5) 1.8% 0%
280 Watchogue Road
Staten Island, NY 10314
Fred and Ann Margolin -- 36,000 (9) * 0%
10515 Lennox Lane
Dallas, TX 75229
Mario Marsillo Jr. -- 21,000 (46) * 0%
23 Ebey Lane
Staten Island, NY 10312
Scott A. Mednick -- 200,000 (22) 1.7% 0%
7972 Mulholland Drive
Los Angeles, CA 90046
Herbert Meislich -- 36,000 (9) * 0%
338 Lacey Drive
New Milford, NJ 07646
Arnold R. Meyer Trustee -- 36,000 (9) * 0%
Arnold R. Meyer Estate Trust
19707 Turnberry Way
Aventura, FL 33180
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Patrick H. Miller Jr. and -- 54,000 (9) * 0%
Lee Miller JTWROS
1266 W. Paces Ferry Road, N.W.
Atlanta, GA 30327
Alvin Mirman -- 26,733 (34)(47) * 0%
4183 Shell Road
Sarasota, FL 34242
David Morley -- 9,000 (9) * 0%
2 Longbeach
Grey Grouville
Jersey CI, UK
Ronald Moschetta -- 12,500 (33)(48) * 0%
122 Genessee Boulevard
Atlantic Beach, NY 11509
Keyvan Novinkakht -- 36,000 (9) * 0%
433 N. Palm Dr., #403
Beverly Hills, CA 90210
Orbis Pension Trustees Limited -- 540,000 (9) 4.4% 0%
1 Connaught Place
London W2 2DY England
Frederick J. Oswald -- 9,000 (9) * 0%
3312 Big Horn Trail
Plano, TX 75075
Steve Parker -- 10,000 (36) * 0%
6307 Winston Drive
Bethesda, MD 20817
Gary R. Perrine and -- 18,000 (9) * 0%
Rebecca C. Perrine JTWROS
2470 Tarpon Road
Naples, FL 34112
Ronald Piasecki -- 180,000 (9) 1.5% 0%
17854 W. Spring Lake Rd.
Spring Lake, MI 49456
Robert L. Priddy -- 130,488 (9) 1.1% 0%
1800 Phoenix Boulevard, Suite 126
Atlanta, GA 30349
Alex Radulovic -- 769,824 (17) 7.6% *
13751 S. Wadsworth Park Drive
Draper, UT 84020
Eric Rand -- 45,500 (10)(34) * 0%
345 Rumson Road
Little Silver, NJ 07391
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Republic New York Securities -- 36,000 (9) * 0%
American Equities Overseas
1 Hanson Place
Brooklyn, NY 11243
Lawrence J. Rodler -- 18,000 (9) * 0%
1 Victoria Street
Cumberland House, Fifth Floor
Hamilton Bermuda HM11
Richard Rosenbloom -- 40,250 (34)(49) * 0%
42 Chicopee Drive
Wayne, NJ 07470
William A. Rosser and Karen S. Westrell -- 36,000 (9) * 0%
Tenants in Common
2946 Robinson Hill Road
Golden, CO 80403
Gerald S. Royal -- 18,000 (9) * 0%
Mary E. Royal
8111 84th Street, NE
Marysville, WA 98270
Rush Family Revocable Trust -- 9,000 (9) * 0%
TR DTD 4-13-93
335 N. Maple Drive
Beverly Hills, CA 90210
Karl S. Ryser, Jr. -- 42,177 (41) 1.2% *
13751 South Wadsworth Park Drive #200
Draper, UT 84020
Monroe H. Schenker and -- 18,000 (9) * 0%
Barbara P. Schenker
22604 Caravelle Circle
Boca Raton, FL 33433-6309
Leonard M. Schiller -- 19,488 (9) * 0%
17323 Bridleway Trail
Boca Raton, FL 33496
Phillip J. Schiller -- 19,488 (9) * 0%
17323 Bridleway Trail
Boca Raton, FL 33496
Schneider Fuel Oil Inc. Pension Plan -- 36,000 (9) * 0%
Edward T. Schneider, Trustee
275 E. 7th Street
Mt. Vernon, NY 10550
William R. Schoen -- 9,000 (9) * 0%
5 Kenilworth Court
Novato, CA 94945
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Vikki K. Schorlenner -- 9,000 (9) * 0%
Post Office Box 57
Beeville, TX 78104
Peter M. Scotto -- 18,000 (9) * 0%
33 Tharp Lane
Marlboro, NJ 07746
Lawrence Seftel and Sandra Bernstein -- 12,000 (9) * 0%
7620 Dorchester Rd.
Boynton Beach, FL 33437
Murray Segal -- 21,500 (6)(34) * 0%
300 East 56th Street
New York, NY 10022
Carl Shaifer -- 38,000 (42) * 0%
8515 Seminole Street
Philadelphia, PA 19118
Edward Shea -- 99,984 (9) * 0%
c/o E&M RP Trust
655 Brea Canyon Road
Walnut, CA 91789
Alvin Siegel -- 18,000 (9) * 0%
1530 Palisade Avenue
Fort Lee, NJ 07024
Marc Siegel -- 127,000 (34)(50) 1.0% 0%
2 Bridle Way
Fort Lee, NJ 07024
SJG Management Inc. -- 9,000 (9) * 0%
4934 Sable Pine Circle, #920C
West Palm Beach, FL 33417
George L. Smith -- 18,000 (9) * 0%
403 Dater Hill Road
Troy, NY 12186
George W. Smith -- 18,000 (9) * 0%
4049 Darby Lane
Seaford, NY 11783
Thomas C. Smith -- 36,000 (9) * 0%
1817 Sacramento Terrace
Plano, TX 75075
David L. Stellway -- 9,000 (9) * 0%
10400 SW Riverside Drive
Portland, OR 97219
Theodore Stern and Elizabeth Stern -- 72,000 (9) * 0%
1943 Wightman Street
Pittsburgh, PA 15217
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Joel A. Stone -- 54,000 (9) * 0%
2839 Woodmere Dr.
Northbrook, IL 60062
Michael Stranahan -- 90,000 (33) * 0%
21 Hedgerow W.
Swedesboro, NJ 08085
T6-G Limited Partnership -- 771,192 (31) 6.5% 0%
185 South State Street
Salt Lake City, UT 84111
T.G.A., Inc. -- 130,001 (20) 1.1% 0%
c/o David Royal
8421 Wilshire Boulevard
Beverly Hills, CA 90211
Milton A. Teplin -- 18,000 (9) * 0%
31 Rogers Drive
New Rochelle, NY 10804
Trident I, LLC -- 18,048 (9) * 0%
c/o Benchmark Equity Group, Inc.
700 Gemini
Houston, TX 77058
Angelo Vivolo -- 18,000 (9) * 0%
140 East 74th Street
New York, NY 10021
Watts Texas Limited Partnership -- 50,000 (13) * 0%
525 17th Street
Rock Island, IL 61201
Joyce N. Westmoreland -- 36,000 (9) * 0%
6946 Moniteau Ct.
Baton Rouge, LA 70809
Clay Wilkes -- 2,610,008 (16) 24.9% 2.2%
2100 E. Bengal Boulevard, #M104
Salt Lake City, UT 84121
Floyd C. Wilkes -- 334,850 (18) 2.9% 0%
13751 S. Wadsworth Park Drive #200
Draper, UT 84020
Edward L. Wilson Jr. -- 18,000 (9) * 0%
1900 McFarland
Baytown, TX 77520
Charles L. Wisseman -- 9,000 (9) * 0%
805 La Salle Drive
Champaign, IL 61820
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
J. Michael Wolfe -- 36,000 (9) * 0%
403 Greenwood Avenue
Clarksville, TN 37040
Joseph Wong -- 53,096 (23) * 0%
c/o Grand Fur Trading Company, Ltd.
10 A Humphreys Avenue
1/F Kowloon, Hong Kong
Joseph Wynne -- 10,000 (33)(34) * 0%
10 Crest Road East
North Merrick, NY 11566
Alfred Yau -- 18,000 (9) * 0%
13111 Brooks Drive #A
Baldwin Park, CA 91706
David L. Yeager -- 72,000 (9) * 0%
2881 S. 98th Street
West Allis, WI 53227
The Yorkin Trust -- 36,000 (9) * 0%
345 N. Maples Drive, #206
Beverly Hills, CA 90210
David H. Zises -- 36,000 (9) * 0%
20 Patten Circle
Newton Centre, MA 02159
Kenneth J. Zises -- 36,000 (9) * 0%
c/o Zises Associates
20 William Street
Wellesley, MA 02181
</TABLE>
- --------------------------------
* Less than one percent.
(1) As to each person or entity named as beneficial owners, such person or
entity's percentage of ownership is determined by assuming that any options
or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the date hereof have been
exercised or converted, as the case may be.
(2) Unless otherwise indicated, assumes the conversion and/or sale of the
entirety of the securities being offered by the noted shareholder.
(3) Represents the shares of Common Stock issuable upon exercise of the
Settlement Warrant, as adjusted.
(4) Represents the Mandarino Warrant to purchase Common Stock.
(5) Includes 52,500 shares of Common Stock issued pursuant to the conversion of
a portion of the principal of a 10% Note, 73,488 shares of Common Stock
(previously defined as the "Conversion Shares") issuable upon conversion of
Class C Preferred Stock, 40,000 shares of Common Stock issuable upon
exercise of the Mandarino Warrant, and 44,000 shares of Common Stock
previously purchased by exercise of Four M Options. The conversion price of
the Class C Preferred Stock assumes that the closing bid price of the
Common Stock is not lower than $2.50 during any five consecutive trading
days during the period commencing August 21, 1996 and ending 18 months
thereafter. To the extent that the closing bid price of the Common Stock is
lower than $2.50 for such period, the holder of the Class C Preferred Stock
would be entitled to a lower conversion rate and the number of Conversion
Shares issuable would be proportionately higher.
(6) Includes 20,000 Kanter Shares and 1,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(7) Includes 40,000 Kanter Shares and 2,000 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
80
<PAGE>
(8) Includes 10,000 Kanter Shares and 1,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(9) Represents Conversion Shares issued and/or issuable upon conversion of
Class C Preferred Stock (see also FN5).
(10) Includes 30,000 Kanter Shares and 15,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(11) Includes 1,957,675 shares subject of the Four M Options.
(12) Represents shares of Common Stock issued pursuant to the conversion of a
portion of the principal of a 10% Note.
(13) Includes 25,000 shares of Common Stock issued in connection with the I-Link
Acquisition and 25,000 shares of Common Stock issuable upon exercise of the
Cook Option.
(14) Includes 12,500 shares of Common Stock issued and an additional 12,500
shares of Common Stock which may be purchased upon exercise of Four M
Options and 25,000 shares of Common Stock issuable upon exercise of the
Cook Option.
(15) Represents shares of Common Stock issued in connection with the I-Link
Acquisition. The registration statement of which this prospectus is a part
includes the distribution of the I-Link, Ltd. shares to the following
persons and their respective offers and sales of such securities: Rod Dial
(212,046 shares), Kim Watkins (6,935 shares), John Peterson (6,935 shares),
Brian Kerns (4,624 shares), Mike Radulovic (13,289 shares), Mark Wellander
(13,289 shares), Floyd A. Wilkes (6,934 shares), Steve Mitchell (6,934
shares), Toni Rae Peterson (6,934 shares) and Brandon Mayfield (6,934
shares). The address of each of such parties is c/o I-Link, Ltd. See "The
Company."
(16) Includes 1,646,263 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. and 284,854 shares held of record by I-Link,
Ltd. Also includes 389,891 shares of Common Stock which may be purchased
upon exercise of Four M Options and 289,000 shares of Common Stock
previously purchased by exercise of Four M Options. Of the shares owned,
60,000 have been pledged to secure the repayment of loans in the principal
amount of $150,000 made in March and April 1997 and other contractual
commitments. The loans bear interest at the rate of 8% per annum and are
due and payable on or before September 30, 1997, at the discretion of the
payee in cash or the shares of Common Stock.
(17) Includes 269,824 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd., and 500,000 shares of Common Stock which may
be purchased upon exercise of Four M Options.
(18) Includes 301,339 shares of Common Stock which may be purchased upon
exercise of Four M Options and 33,511 shares of Common Stock issued in
connection with the acquisition of I-Link, Ltd.
(19) Includes 92,692 shares of Common Stock issued in connection with the I-Link
Acquisition and 91,771 shares of Common Stock issuable upon conversion of
Class B Preferred Stock subject of an option exercisable commencing July 1,
1996 granted by R. Huston Babcock to the noted shareholder and an
additional 356,382 shares of Common Stock which may be purchased upon
exercise of Four M Options. Also includes 18,048 shares of Common Stock
issued upon conversion of 752 shares of Class C Preferred Stock
beneficially owned by Trident I, LLC, of which the noted shareholder is the
manager with the power to exercise investment, dispositive and voting
control.
(20) Represents shares of Common Stock issued in connection with the I-Link
Acquisition.
(21) Includes 75,086 shares of Common Stock issued in connection with the I-Link
Acquisition, 79,992 Conversion Shares issused upon conversion of Class C
Preferred Stock (see also FN5), 25,000 shares of Common Stock issuable upon
exercise of the Cook Option, and 25,000 shares of Common Stock issued and
an additional 25,000 shares of Common Stock issuable upon exercise of
Four M Options.
(22) Includes 100,000 shares of Common Stock issued in connection with the
I-Link Acquisition and 100,000 shares previously purchased by exercise of
Four M Options.
(23) Includes 18,096 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 35,000 shares of Common Stock issued
upon conversion of a promissory note in February 1996.
(24) Includes 18,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5), 64,525 shares of Common Stock issuable upon
exercise of the named shareholder's interest in the Commonwealth Warrant
and 105,000 Kanter Shares held by the named shareholder. The Company has
been advised that the named shareholder is an affiliate or associated
person of Commonwealth. Does not include shares of Common Stock held by
Commonwealth or other affiliates or associates of Commonwealth or shares of
Common Stock which may be held by Commonwealth from time to time in its
trading account in connection with ordinary market-making activities.
(25) Includes 72,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 264,000 shares of Common Stock issuable
upon conversion of Class C Preferred Stock issuable in accordance with and
upon conversion of the Convertible Notes in the event of the amendment of
the Company's Articles of Incorporation to increase its authorized capital
stock and designation of Class C Preferred Stock. See "Description of
Securities-Convertible Promissory Notes."
(26) Represents the E&M Warrant to purchase Common Stock.
(27) Includes 72,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 80,000 shares of Common Stock issuable
upon exercise of the E&M Warrant.
(28) Represents shares of Common Stock issuable upon conversion of Class C
Preferred Stock issuable in accordance with and upon conversion of the
Convertible Notes in the event of the amendment of the Company's Articles
of Incorporation to increase its authorized capital stock and designation
of Class C Preferred Stock. See "Description of Securities-Convertible
Promissory Notes."
(29) Represents the Commonwealth Warrant to purchase Common Stock.
(30) Includes 223,544 shares issued and an additional 270,696 shares of Common
Stock which may be purchased upon exercise of Four M Options and 530,000
shares of Common Stock owned by certain affiliates and control persons of
the named shareholder. Also includes 750,000 shares of Common Stock
issuable upon exercise of the Commonwealth Warrant and 90,000 shares of
Common Stock issuable upon conversion of 3,750 shares of Class C Preferred
Stock, which are held by certain affiliates of the named stockholder. The
registration statement of which this prospectus is a part includes the
contemplated distribution of certain of the
81
<PAGE>
Commonwealth Warrants, and/or the shares of Common Stock issuable upon
exercise of such Commonwealth Warrants, to the following persons and their
respective offers, and sales of such securities: Michael Falk (64,525
shares), Al Mirman (26,733 shares), Keith Rosenbloom (25,250 shares) Robert
O'Sullivan (19,020 shares), Eric Rand (15,500 shares), Robert Beuret
(15,300 shares), Cornelia Eldridge (15,000 shares), Michael Lyall (12,500
shares), Vincent Labarbara (9,750 shares), Inder Tallur (7,500 shares),
Andres Bello (6,000 shares), Cathy Ross (4,000 shares), Eric Rubenstein
(3,633 shares), Mario Marsillo (3,000 shares), Juan Lopera (2,877 shares),
Robert Sheets (2,667 shares), Beth Lipman (2,538 shares), Ronald Moschetta
(2,500 shares), Edward Vanacore (2,500 shares), Vincent Calicchia (2,500
shares), Marc Siegel (27,000 shares), Basil Ascuitto (2,000 shares),
Jennifer Solow (2,000 shares), Murray Segal (1,500 shares), Evan Gartenberg
(1,500 shares), Zack Carmi (1,500 shares), Moustafa Zayed (1,500 shares),
Lisa Jagerman (1,000 shares), Brad Van Siclen (1,000 shares), Richard
Perreira (1,000 shares), Said Aboumar (500 shares), Wilford Adkins (500
shares), Jerome Messana (500 shares), John Tyus (500 shares), Tarek Ahamd
(500 shares), Michael Volpe (500 shares), Stephen Labarbara (500 shares),
and Russell Bailenson (500 shares). The address of each of such parties is
c/o Commonwealth Associates.Does not include shares of Common Stock which
may be held by Commonwealth from time to time in its trading account in
connection with ordinary market-making activities.
(31) Includes 171,192 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5), 548,891 shares of Common Stock issued in
connection with the acquisition of I-Link, Ltd., and 51,109 shares
previously purchased by exercise of Four M Options.
(32) Includes 243,891 Kanter Shares and 15,503 Four M Shares held by the named
shareholder, and an additional 380,890 shares of Common Stock which may be
purchased upon exercise of Four M Options.
(33) Represents Kanter Shares held by the named shareholder.
(34) The Company has been advised that the named shareholder is an affiliate or
associated person of Commonwealth. Does not include shares of Common Stock
held by Commonwealth or other affiliates or associates of Commonwealth or
shares of Common Stock which may be held by Commonwealth from time to time
in its trading account in connection with ordinary market-making
activities.
(35) Includes 39,984 shares of Common Stock issuable upon conversion of Class C
Preferred Stock (see also FN5). Also includes 12,000 Conversion Shares
issued in the name of the IRA accounts for the benefit of each of the named
shareholder and his wife.
(36) Represents shares of Common Stock which may be purchased upon exercise of
Four M Options.
(37) Includes 10,000 shares of Common Stock which may be purchased upon exercise
of Four M Options and 18,000 Conversion Shares issuable upon conversion of
Class C Preferred Stock (see also FN5).
(38) Includes 20,000 shares of Common Stock which may be purchased upon exercise
of Four M Options, 1,500 shares of Common Stock issuable upon exercise of
the named shareholder's interest in the Commonwealth Warrant and 10,000
Kanter Shares.
(39) Includes 137,969 shares of Common Stock which may be purchased upon
exercise of Settlement Warrants and 72,917 shares of Common Stock which may
be purchased upon exercise of Hardy Group Warrants.
(40) Includes 165,562 shares of Common Stock which may be purchased upon
exercise of Settlement Warrants and 87,500 shares of Common Stock which may
be purchased upon exercise of Hardy Group Warrants.
(41) Includes 27,594 shares of Common Stock which may be purchased upon exercise
of Settlement Warrants and 14,583 shares of Common Stock which may be
purchased upon exercise of Hardy Group Warrants.
(42) Includes 20,000 shares of Common Stock which may be purchased upon exercise
of Four M Options and 18,000 Conversion Shares issuable upon conversion of
Class C Preferred Stock (see also FN5).
(43) Represents Four M shares held by the named shareholder.
(44) Includes 183,542 shares of Common Stock into which the 7,500 shares of
Class B Preferred Stock owned by the noted stockholder are convertible;
91,771 of the shares of Common Stock issuable upon conversion of such
shares of the Class B Preferred Stock are subject to an option granted by
the noted stockholder to Benchmark.
(45) Includes 40,000 Kanter Shares and 9,750 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(46) Includes 18,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 3,000 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(47) Represents shares of Common Stock issuable upon exercise of the named
shareholder's interest in the Commonwealth Warrant.
(48) Includes 10,000 Kanter Shares and 2,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(49) Includes 15,000 Kanter Shares and 25,250 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(50) Includes 100,000 Kanter Shares and 27,000 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(51) Represents shares transferred to the named shareholder pursuant to his
beneficial interest in shares of Common Stock originally issued by the
Company to I-Link, Ltd. in connection with the I-Link Acquisition.
MARKET FOR THE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap MarketSM
("Nasdaq") tier of the Nasdaq Stock MarketSM under the symbol "ILNK." Prior to
March 8, 1996, the Common Stock was traded on Nasdaq under the symbol "MDCR.".
Although the Common Stock is currently listed for quotation on Nasdaq, there can
be no assurance given that the Company will be able to continue to satisfy the
requirements for maintaining quotation of such
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securities on Nasdaq or that such quotation will otherwise continue. The Company
has no current plans to apply for listing of any of the shares of Class B
Preferred Stock, Class C Preferred Stock, the Commonwealth Warrants or any of
its other securities for quotation on Nasdaq. See "Risk Factors--Continued
Nasdaq Listing."
The range of high and low bid information for the Common Stock for
each full quarterly period during 1997 and within the two prior fiscal years is
as follows:
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
----------------------- -------- -------
<S> <C> <C>
March 31, 1995 $2.13 $1.13
June 30, 1995 1.13 0.63
September 30, 1995 1.13 0.88
December 31, 1995 1.25 1.00
March 31, 1996 $7.63 $1.00
June 30, 1996 9.75 6.13
September 30, 1996 7.50 4.06
December 31, 1996 6.00 4.00
March 31, 1997 $7.50 $3.63
June 30, 1997 15.50 4.00
September 30,1997 10.56 4.00
</TABLE>
These quotations reflect interdealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
As of September 30, 1997, there were approximately 300 stockholders
of Common Stock of record and approximately 3,500 beneficial owners. In
addition, as of September 19, 1997, there were approximately 120 individual
participants in security position listings furnished by Cede & Co., New York,
New York, registered clearing agency and depository. On September 30, 1997, the
closing bid price for a share of Common Stock was $8.75.
RECENT TRANSACTIONS
Transactions With Winter Harbor, L.L.C.; Series M Preferred Stock
On June 5, 1997, the Company entered into a term loan agreement
("Loan Agreement") and promissory note ("Note") with Winter Harbor, L.L.C.
("Winter Harbor") pursuant to which Winter Harbor agreed to loan to the Company
the principal sum of $2,000,000 (the "Loan") for capital expenditures and
working capital purposes. As further consideration for Winter Harbor's
commitment to make the Loan, the Company granted to Winter Harbor a warrant
("Loan Warrant") to purchase up to 500,000 shares of Common Stock at a purchase
price of $4.97 per share, subject to adjustment, pursuant to the terms of a
Warrant Agreement between the parties. The Loan Warrant expires on March 11,
2002, and contains demand and piggyback registration rights and customary anti-
dilution terms. The maturity date of the Note is October 15, 1998; however, the
Loan Agreement anticipates an equity investment in the Company by Winter Harbor
(the "Investment"). Upon closing of the Investment, all principal and accrued
interest then due under the Note may, at the option of Winter Harbor, be
credited toward payment of Winter Harbor's purchase price for the Investment and
the Note shall be cancelled. The loan from Winter Harbor has an interest rate of
prime plus 2%. In addition to the stated interest rate, the Company will
recognize debt issuance cost (non-cash) over the life of the loan (maturity date
is October 15, 1998) of approximately $3,800,000 which reflects the approximate
fair value of the warrants issued in connection with the debt. The Company
expended significant time and effort pursuing various financing alternatives and
determined that the Winter Harbor proposal was the best alternative available to
the Company.
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In August 1997, the Company and Winter Harbor amended their
agreement to provide that the Company would be allowed to borrow up to an
additional $3,000,000 (thus revising the maximum amount of the Loan to
$5,000,000). In the event the Company borrows against such additional credit, it
has agreed to issue to Winter Harbor warrants to purchase 100,000 shares of
Common Stock for each $1,000,000 in additional borrowing. The exercise price for
such additional warrants shall equal the closing bid price of the Common Stock
on the date each such $1,000,000 increment is borrowed by the Company. On August
18, 1997, the Company borrowed an additional $3,000,000 pursuant to such
arrangement, bringing the total principal amount due under the Note to
$5,000,000, and issued an additional 300,000 warrants to Winter Harbor in
connection therewith.
Winter Harbor is owned by First Media, L.P., a private media and
communications company which is a private investment principally of Richard E.
Marriott and his family. The Company's general counsel, David E. Hardy, is a
brother of Ralph W. Hardy, Jr. who is general counsel and a minority equity
holder in Winter Harbor. David E. Hardy has no ownership or association with
Winter Harbor. As a result of this relationship, as well as personal
relationships of David E. Hardy with the principals of Winter Harbor,
discussions were initiated which led to Winter Harbor's investment in the
Company.
The Company and Winter Harbor executed a Securities Purchase
Agreement, dated as of September 30, 1997, and closed on October 10, 1997,
pursuant to which Winter Harbor invested $12,100,000 in a new series of the
Company's convertible preferred stock (the "Series M Preferred Stock"). Winter
Harbor purchased approximately 2,545 shares of Series M Preferred Stock
(convertible into 2,545,000 shares of Common Stock) for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provided for purchase of
approximately 1,855 additional shares of Series M Preferred Stock (convertible
into 1,855,000 shares of Common Stock). Such additional shares of Series M
Preferred Stock were paid for by exchanging the $5,000,000 outstanding principal
balance plus approximately $100,000 accrued interest due under the Note. As
additional consideration for its equity financing commitments, Winter Harbor was
issued additional warrants by the Company to acquire (a) 2,500,000 shares of
Common Stock at an exercise price of $2.75 per share (the "Series A Warrants"),
(b) 2,500,000 shares of Common Stock at an exercise price of $4.00 per share
(the "Series B Warrants") and (c) 5,000,000 shares of Common Stock at an
exercise price of $4.69 (the "Series C Warrants"). The respective exercise
prices for the Series A Warrants, the Series B Warrants and the Series C
Warrants (collectively, the "Investment Warrants") shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) have demand registration rights and
anti-dilution rights and (ii) contain cashless exercise provisions.
The Series M Preferred Stock is entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred or
common stock receives any dividends. Thereafter, the Series M Preferred Stock
will participate with the Common Stock in the issuance of any dividends on a per
share basis. Moreover, the Series M Preferred Stock will have the right to veto
the payment of dividends on any other class of stock. The Series M Preferred
Stock shall be convertible at any time prior to the fifth anniversary of its
issuance, at the sole option of Winter Harbor, into shares of Common Stock on a
one thousand-for-one basis; provided, however, that the Series M Preferred Stock
shall be automatically converted to Common Stock on the fifth anniversary of its
issuance at no cost to Winter Harbor. The conversion price shall be, in the case
of discretionary conversion, $2.75 per share of Common Stock, or, in the case of
automatic conversion, the lower of $2.75 per share or 50% of the average closing
bid price of the Common Stock for the ten trading days immediately preceding the
fifth anniversary of issuance. The basis for discretionary conversion, or the
conversion price for automatic conversion, shall be adjusted upon the occurrence
of certain events, including without limitation, issuance of stock dividends,
recapitalization of the Company, or the issuance of stock by the Company at less
than the fair market value thereof. Conversion of the Series M Preferred Stock
will be subject to approval by the Company's shareholders of an increase in the
number of shares of authorized capital stock at the Company's next annual
shareholders meeting. The Series M Preferred Stock will vote with the Common
Stock on an as-converted basis on all matters which are submitted to a vote of
the stockholders, except as may otherwise be provided by law or by the Company's
Articles of Incorporation or By-laws; provided, however, that the Series M
Preferred Stock will have the right to appoint two members of the Company's
board of directors.
Upon completion of the Winter Harbor Investment, the Company will
recognize a (non-cash) preferred stock dividend (assuming a common stock market
value of $9.00 per share) in the approximate amount of $100,000,000 at the date
of the investment. The actual dividend will be determined based upon the
actual
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common stock market price on the date the equity investment is finalized. This
amount is calculated as the difference between the exercise or conversion price
per common share per the agreement as compared to the market price of the Common
Stock on the date of the closing, plus the value of the warrants issuable in
connection with the Investment.
MiBridge Acquisition; Series D Preferred Stock
On August 12, 1997 the Company entered into an agreement with
MiBridge, Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the
principal shareholder of MiBridge, pursuant to which the Company acquired all of
the issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
owner of patent-pending audio-conferencing technology and is a leader in
creating speech-encoding and compression algorithms designed to produce superior
audio quality and lower delay over low-band networks. The Company will pay the
stockholders of MiBridge (the "MiBridge Stockholders") consideration consisting
of (i) an aggregate $2,000,000 in cash, payable in quarterly installments over
two years, and (ii) an aggregate 1,000 shares of a series of the Company's
convertible preferred stock to be created (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock are convertible at the option of the
MiBridge Stockholders, at any time during the nine months following the closing
of the MiBridge Acquisition, into such number of shares of Common Stock as shall
equal the sum of $6,250,000 divided by $9.25 (the "Series D Conversion Price"),
which price was the closing bid price of the Company's Common Stock on June 5,
1997 (the date that the first letter agreement relating to the transaction was
executed). On the nine-month anniversary of the closing of the MiBridge
Acquisition, any unconverted Series D Preferred Stock shall automatically
convert to Common Stock. In either case, the Series D Preferred Stock shall be
converted at the lower of the Series D Conversion Price or the average closing
bid price for the five trading days immediately preceding the date the Company
receives notice of conversion or the automatic conversion date, as the case may
be.
The Company has entered into an employment contract with Mr. Nahumi
providing terms, conditions and benefits similar to those provided in employment
contracts with existing members of the Company's senior management, including
standard confidentiality, non-competition and assignment of invention
provisions. Mr. Nahumi's annual salary shall be at least $100,000, and Mr.
Nahumi will devote his full time to managing the operations of MiBridge under
the direction of the Company.
DESCRIPTION OF SECURITIES
Common Stock
The Company is currently authorized to issue 75,000,000 shares of
Common Stock, having a par value of $.007 per share. As of September 30, 1997,
there are 12,180,165 shares of Common Stock issued and outstanding and
approximately 300 holders of record of the Common Stock, and approximately 3,500
beneficial owners. Each share of Common Stock entitles the holder thereof to one
vote on each matter submitted to the stockholders of the Company for a vote
thereon. The holders of Common Stock: (i) have equal ratable rights to dividends
from funds legally available therefor when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all of the assets of the
Company available for distribution to holders of Common Stock upon liquidation,
dissolution or winding up of the affairs of the Company; (iii) do not have
preemptive, subscription or conversion rights, or redemption or sinking fund
provisions applicable thereto; and (iv) as noted above, are entitled to one non-
cumulative vote per share on all matters submitted to stockholders for a vote at
any meeting of stockholders. Prior to any payment of dividends to the holders of
Common Stock, all accrued and unpaid dividends on any outstanding shares of
Preferred Stock must be paid. Other than as set forth herein, the Company
anticipates that, for the foreseeable future, it will retain earnings, if any,
to finance the operations of its businesses. The payment of dividends in the
future will depend upon, among other things, the capital requirements and the
operating and financial conditions of the Company.
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Preferred Stock
The Articles of Incorporation authorize the issuance of up to
10,000,000 shares of preferred stock, $10.00 par value per share (previously
defined as the "Preferred Stock"). The Board of Directors is authorized to issue
shares of Preferred Stock from time to time in one or more series and, subject
to the limitations contained in the Articles of Incorporation and any
limitations prescribed by law, to establish and designate any such series and to
fix the number of shares and the relative conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences. New issuances of shares of Preferred Stock with voting rights can
affect the voting rights of the holders of outstanding shares of Preferred Stock
and Common Stock by increasing the number of outstanding shares having voting
rights, and by the creation of class or series voting rights. Furthermore,
additional issuances of shares of Preferred Stock with conversion rights can
have the effect of increasing the number of shares of Common Stock outstanding
up to the amount of Common Stock authorized by the Articles of Incorporation and
can also, under certain circumstances, have the effect of delaying or preventing
a change in control of the Company and/or otherwise adversely affect the rights
of holders of outstanding shares of Preferred Stock and Common Stock. To the
extent permitted by the Articles of Incorporation, such shares of Preferred
Stock may have preferences over the Common Stock (and other series of Preferred
Stock) with respect to dividends and liquidation rights. As of September 30
1997, 22,500 shares of Preferred Stock had been designated Class B Preferred
Stock (of which 7,500 shares are issued and outstanding), 240,000 shares of
Preferred Stock had been designated Class C Preferred Stock (of which 218,018
are issued and outstanding), and 7,500 shares of Preferred Stock had been
designated 12% Cumulative Convertible Preferred Stock (no shares of which are
issued and outstanding).
Class B Preferred Stock
There are 22,500 shares of Class B Preferred Stock authorized to be
issued, 7,500 of which are issued and outstanding. Each share of Class B
Preferred Stock entitles the holder thereof to receive cumulative dividends. The
initial dividend rate for the Class B Preferred Stock was 5.5%. Effective April
1, 1992, the rate has been adjusted monthly, to be equal to the published rate
paid by Texas Commerce Bank, N.A., Houston, Texas, on 30-day certificates of
deposit in effect on the first day of each such month, plus 2%. As of December
1, 1995, the Class B Preferred Stock dividend rate was 5.0%. Dividends are
payable in cash quarterly on the first day of July, October, January and April
of each year that any shares of Class B Preferred Stock are outstanding.
Dividends accrue on each share of Class B Preferred Stock whether or not earned
or declared and whether or not there are funds of the Company legally available
for payment thereof. Each share of Class B Preferred Stock is convertible at the
option of the holder thereof into shares of Common Stock. The number of shares
of Common Stock into which shares of Class B Preferred Stock are convertible is
derived by multiplying the number of shares of Class B Preferred Stock to be
converted by a fraction, the numerator of which is $10.00 and the denominator of
which is the conversion price ("Conversion Price"), which is adjustable. The
initial Conversion Price was $0.058375. As of June 30, 1997, the Conversion
Price was $0.408625; therefore the number of shares of Common Stock issuable if
all 7,500 outstanding shares of Class B Preferred Stock were converted as of
such date would be 183,542. Except as otherwise provided by law, shares of Class
B Preferred Stock have no voting rights.
The Class B Preferred Stock is subject to redemption by the Company
at any time. If called for redemption, the right to convert Class B Preferred
Stock to Common Stock shall terminate on the close of business on the day before
the date fixed for actual payment of the redemption price. No shares of Class B
Preferred Stock designated for redemption pursuant to any notice of redemption
shall be entitled to any dividends after the applicable redemption date. On the
redemption date, all rights of the holders of such shares as stockholders of the
Company by reason of the ownership of such shares shall cease, except the right
to receive the redemption price of such shares upon presentation and surrender
of the certificate representing such shares. No Class B Preferred Stock
designated for redemption shall be deemed to be outstanding after the redemption
date. The redemption price is $10.00 per share of Class B Preferred Stock, plus
the amount of any accrued and unpaid dividends on such share on the date payment
of such redemption price is paid.
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In the event of the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company, the holders of the
Class B Preferred Stock shall be entitled to liquidation rights identical to the
holders of the Class A Preferred Stock; however, such liquidation rights are
subordinate to the Class A Preferred Stock, but superior to any other series of
Preferred Stock and to the Common Stock.
Class C Preferred Stock
There are 240,000 shares of Class C Preferred Stock designated, of
which 218,018 are issued and outstanding. The holders of the Class C Preferred
Stock are entitled to cumulative preferential dividends, when, as and if
declared by the Board of Directors, on a quarterly basis on November 15,
February 15, May 15 and August 15 each year in an amount equal to 8% per annum
of the liquidation preference per share of $60.00. Dividends will be paid, to
the extent permissible under the Florida Business Corporation Act, to the
holders of the Class C Preferred Stock in cash or, at the option of the Company,
as determined by the Board of Directors, in shares of Common Stock (the
"Dividend Shares") (based upon the last sale price of a share of Common Stock
for the five trading days preceding the record date for a particular dividend),
provided that such Dividend Shares are covered by an effective registration
statement. Except as otherwise provided by law, shares of Class C Preferred
Stock have no voting rights.
Conversion Rights. Unless previously redeemed, the Class C Preferred
Stock is convertible into shares of the Company's Common Stock, at any time
commencing November 21, 1996, at the option of the holder, into such number of
shares of the Company's Common Stock as shall equal $60 divided by the lower of
(i) $2.50, or (ii) the closing bid price for any five consecutive trading days
during the period commencing on September 6, 1996 and ending on March 5, 1998
(previously defined as the "Conversion Price"), subject to certain adjustments
for (a) the sale or issuance of Common Stock by the Company at a price less than
the Conversion Price (except for shares issuable upon exercise or conversion of
securities outstanding or issuable by the Company as of the date hereof), (b) in
the event the Company's registration statement relating to the Conversion Shares
is not declared effective within twelve months after September 6, 1996 the
Conversion Price shall be subject to a reduction of ten percent for each 90 day
delay in the effective date of such registration statement, or (c) in the event
the closing bid price is less than $2.50 for five consecutive trading days
during the period from September 6, 1996 to the date eighteen months thereafter
("the Adjustment Period,") the Conversion Price shall be reduced to the lower of
the then current Conversion Price or the lowest of the average closing bid price
for five consecutive trading days during the Adjustment Period. In no event
shall the Conversion Price be adjusted below $1.25 on account of the adjustments
described in (a), (b) or (c); however, the Conversion Price is subject to
adjustment under certain other circumstances. As of September 30, 1997, 21,982
shares of Class C Preferred Stock have been converted.
Automatic Conversion. Unless previously redeemed, the Class C
Preferred Stock shall be automatically converted into the Conversion Shares on
September 6, 2001 at a Conversion Price equal to the lower of the then current
Conversion Price or 50% of the average closing bid price of the Company's Common
Stock for the ten trading days immediately preceding the fifth anniversary
of the Final Closing.
Redemption. The Class C Preferred Stock is redeemable at any time
prior to September 6, 2000, at the option of the Company, as determined by the
Board of Directors, on not less than thirty nor more than sixty days written
notice to registered holders at a redemption price equal to $60 per share plus
accrued and unpaid dividends, provided (i) the Conversion Shares are covered by
an effective registration statement; and (ii) during the immediately preceding
thirty consecutive trading days ending within fifteen days of the date of the
notice of redemption, the closing bid price of the Company's Common Stock is not
less than $8.00 per share.
The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the Company, on not less than thirty nor
more than sixty days written notice to registered holders at a redemption price
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equal to $90 plus accrued and unpaid dividends, provided the Conversion Shares
are covered by an effective registration statement or the Conversion Shares are
otherwise exempt from registration.
Registration Rights. Within 12 months of September 6, 1996, the
Company shall file a registration statement under the Securities Act covering
the Common Stock underlying the Class C Preferred Stock (previously defined as
the "Conversion Shares"). If the registration statement is not declared
effective within such 12 month period, the Conversion Price shall be subject to
an additional reduction of 10% for each 90 day delay in the effective date of
the Registration Statement and the dividend rate shall be increased to 12%;
provided, however, that in the event the Company files any registration
statement prior to the expiration of 12 months from September 6, 1996, the
Conversion Shares shall be likewise registered at such time; and further
provided that the Conversion Price shall not be reduced below $1.25 per share.
The 10% Notes
The Company issued $1,000,000 in principal amount of 10% Notes on
February 23, 1996. Commonwealth acted as the placement agent of the 10% Notes.
Each 10% Note has a minimum face amount of $50,000 and provides for the accrual
of interest at the simple annual rate of 10%, payable at maturity. The 10% Notes
were due upon the earlier of August 31, 1996 (the "Maturity Date") or the
Company's receipt of proceeds of at least $4 million from an equity or debt
financing (the "Accelerated Maturity Date"). The Company had the right to extend
the Maturity Date of some or all of the 10% Notes until February 28, 1997 upon
payment to the holder(s) of the 10% Note(s) of a cash payment equal to two and
one-half percent (2.5%) of the then outstanding principal amount of such 10%
Note(s). In the event of extension by the Company, the interest rate with
respect to the unpaid principal balance would have increased to the simple
annual rate of thirteen percent (13%). The unpaid principal balance of the 10%
Notes was prepayable by the Company without penalty upon 30 days notice to the
holder.
Up to $1,250 of each $50,000 (i.e., 2.5%) of unpaid principal amount
of a 10% Note was convertible at the option of the holder into 17,500 shares of
Common Stock (or $.0714 per share) (subject to adjustment) at any time after
March 31, 1996 but prior to the Maturity Date or Accelerated Maturity Date. Upon
the occurrence of an Event of Default (as defined in the 10% Note), the
conversion right in the 10% Note shall be amended such that the remaining unpaid
principal balance shall be convertible into shares of Common Stock at 40% of the
fair market value (the average of the closing bid and ask prices on the last ten
trading days of the prior calendar month) per share of Common Stock. Effective
as of August 21, 1996, holders of an aggregate of $1,000,000 in principal of the
10% Notes elected to convert $25,000 in principal to 350,000 shares of Common
Stock.
The non-convertible portion of the principal of the 10% Notes was
repaid from the proceeds of the Class C Offering. Simultaneous with the
Company's repayment, holders of the 10% Notes instructed the Company to allocate
an aggregate of $709,800 in principal amount of the 10% Notes to purchase an
aggregate of 11,018 shares of Class C Preferred Stock.
The 10% Notes provide for demand registration rights for the shares
of Common Stock issued or issuable upon conversion of the 10% Note on one
occasion at any time after March 1, 1996 but prior to February 28, 1999, upon
the written request from the holders of at least fifty percent (50%) of the
shares of Common Stock issued or issuable upon conversion of the 10% Notes. In
addition the shares of Common Stock issued or issuable upon conversion of
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the 10% Notes shall have piggy-back registration rights in the event that the
Company proposes to register any of its securities under the Act in connection
with the public offering thereof solely for cash (other than any registration
statement on the Forms S-4, S-8 or a similar form); provided, however, that the
Company shall have no such obligation after three years from the date of
issuance of the 10% Notes or if the managing underwriter of the subject proposed
offering expresses its objection thereto. Holders of an aggregate of $1,000,000
in principal amount of the 10% Notes demanded registration of the shares of
Common Stock on September 9, 1996.
Convertible Promissory Notes
The Company issued an aggregate of $717,000 in principal amount of
Convertible Promissory Notes (previously defined as the "Convertible Notes") on
September 6, 1996 in connection with the Class C Offering. Commonwealth acted as
the placement agent for such notes. Each Convertible Note is due on September
30, 1997 with interest at the rate of eight percent (8%) per annum. The
Convertible Notes are prepayable by the Company without penalty upon 30 days
notice provided that the Company has effected an amendment to its Articles of
Incorporation to increase its authorized capital stock and designated sufficient
Class C Preferred Stock to accommodate conversion of the Convertible Notes.
The entirety of the unpaid principal amount of the Convertible Notes
will be automatically converted into shares of Class C Preferred Stock at the
rate of $60 per share of Class C Preferred Stock upon the amendment of the
Company's Articles of Incorporation to increase the number of shares of
Preferred Stock to at least 2,000,000 and the authorized number of shares of
Common Stock to at least 75,000,000 shares (the "Articles Amendment") and the
designation of sufficient shares to accommodate conversion. The Convertible
Notes are convertible into an aggregate of 11,950 shares of Class C Preferred
Stock.
Each of the following shall constitute an event of default (an
"Event of Default") under the Convertible Notes: (i) the failure to pay when due
any principal or interest thereunder; (ii) the failure of the Company to effect
the Articles Amendment within seven months of issuance of the Convertible
Note; (iii) the violation by the Company of any covenant or agreement contained
in the Convertible Note and the continuance of such violation for a period of
thirty days after written notice to the Company of such failure; (iv) any change
in control of the Company which the Board of Directors of the Company deems to
be hostile or unfriendly; (v) the assignment for the benefit of creditors by the
Company; (vi) the application for the appointment of a receiver or liquidator
for the Company or for property of the Company; (vii) the filing of a petition
in bankruptcy by or against the Company; (viii) the issuance of an attachment or
the entry of a judgment against the Company in excess of $500,000; (ix) a
default by the Company with respect to any other material indebtedness or
obligation; (x) the making or sending of a notice of an intended bulk sale by
the Company; or (xi) the termination of existence, dissolution or insolvency of
the Company. There is no sinking fund or other security for the payment of the
Convertible Notes.
Settlement Warrant
As of November 3, 1994, the Company issued a Common Stock Purchase
Warrant (previously defined as the "Settlement Warrant") to JW Charles Financial
Services, Inc. (previously defined as "JW Charles") pursuant to the terms of a
Financial Consulting Agreement dated as of November 1, 1994 between the Company
and Corporate Management Group, Inc. The Settlement Warrant entitled the holder
to purchase an aggregate of 250,000 shares of Common Stock at an initial
exercise price of $2.00 per share, subject to adjustment, at any time through
November 3, 1999. Pursuant to the adjustment provisions, the Settlement Warrant
was subsequently adjusted to entitle the holder to purchase an aggregate of
331,126 shares of Common Stock at an exercise price of $1.51 per share. The
Settlement Warrant contains demand registration rights during the exercise
period and piggyback registration rights for a period of five years. On April
29, 1997, all right, title and interest in the Settlement Warrant was
transferred to the Hardy Group pursuant to the Settlement Agreement between JW
Charles and the Company. See "Legal Proceedings" and "Certain Relationships and
Related Transactions."
89
<PAGE>
Commonwealth Warrants
On August 21, 1996, in connection with the Company's Class C
Offering, the Company entered into the Placement Agent's Common Stock Warrant
Agreement and the Consultant's Common Stock Warrant Agreement with Commonwealth
Associates (previously defined as "Commonwealth"). Together, the Placement
Agent's Common Stock Warrant Agreement and the Consultant's Common Stock Warrant
Agreement are collectively referred to as the "Commonwealth Warrant
Agreements." The Commonwealth Warrant Agreements are substantially identical
except that the Placement Agent's Common Stock Warrant Agreement
and related Warrant Certificate entitle Commonwealth to purchase 250,000 shares
of Common Stock and the Consultant's Warrant Agreement and related Warrant
Certificate entitle Commonwealth to purchase 500,000 shares of Common Stock
(previously defined as the "Commonwealth Warrants"). The Commonwealth Warrants
entitle Commonwealth to purchase up to an aggregate of 750,000 shares of Common
Stock at any time from March 1, 1997 until August 20, 2001 at an exercise price
per share of $2.50, subject to adjustment. At its option, Commonwealth may
effect a "cashless exercise" during the warrant exercise period by exchanging
the Commonwealth Warrants for a specified number of shares of Common Stock (the
"Total Share Number") less a number of shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Total Share Number and the
then-applicable exercise price by (ii) the market price (as defined) of a share
of Common Stock. The holders of the Commonwealth Warrants and/or shares issuable
upon exercise of the Commonwealth Warrants (the "Commonwealth Shares") have
piggyback registration rights through August 20, 2003 and demand registration
rights from August 20, 1997 through August 1, 2003; provided, however, that in
the event the Company does not file a registration statement covering the shares
of Common Stock issued upon conversion of the 10% Notes within ninety-five
days of a request of a majority of the 10% Noteholders, the demand registration
rights accelerate from August 20, 1997 to the 96th day following such demand. In
the event the Company has not used its best efforts to file a registration
statement within ninety-five days of receipt of demand therefor by the 10%
Noteholders or within thirty days after demand by Commonwealth upon
acceleration of its demand registration rights, the Company will be required to
repurchase any Commonwealth Shares at the higher of the market price (as
defined) on the date of notice of demand for registration or the expiration of
the period by which the Company must have filed the registration statement and
must repurchase any outstanding Commonwealth Warrants at the market price of the
Common Stock less the exercise price of the Commonwealth Warrants.
Four M Options
On February 21, 1996, Four M International, Ltd. ("Four M"), a
principal shareholder of the Company granted certain options exercisable
commencing July 1, 1996 (subject to the satisfaction of certain conditions) to
purchase 3,915,570 shares of Common Stock. Subsequent to their initial issuance,
1,586,415 of such options have been exercised, 371,480 of such options have
expired and 1,957,675 Four M Options remain outstanding. Henry Y.L. Toh, a
director of the Company, is one of the two directors of Four M. The initial
exercise price of $1.79 per share represents the lesser of 200% of the average
of the closing bid and ask price per share of Common Stock for the ten business
days preceding July 1, 1996 or $1.79 per share. Commonwealth and affiliates or
associates thereof have the right to purchase 270,696 shares of Common Stock
prior to December 31, 1997. Benchmark has the right to purchase 356,392 shares
prior to December 31, 1997. Certain then-members of management of I-Link,
namely, Clay Wilkes, Floyd Wilkes and Alex Radulovic, have the right to purchase
an aggregate of 824,891 shares prior to December 31, 1997. Other individuals
have the right to purchase 505,696 shares prior to December 31, 1997.
In August 1996, the Four M Options were amended to provide that in
the event that $200,000 in principal amount (i.e., exercise proceeds) of the
Four M Options have been exercised prior to December 31, 1996, the exercise
period of the remaining Four M Options exercisable during 1996 (the "1996 Four M
Options") will be extended to September 6, 1997 and the exercise price would be
increased by 4% of the then current exercise price for each 30 day period or
portion thereof commencing January 1, 1997 in which the remainder of the 1996
Four M Options are not exercised. From December 1996 through September 6, 1997,
an aggregate of 1,586,415 Four M Options were exercised by certain of the
holders thereof and proceeds aggregating $3,828,239 were received by Four M. The
exercise price per share of the Four M Options which remain outstanding is
$1.79.
90
<PAGE>
Babcock Shares
The Babcock Shares are issuable upon conversion of outstanding Class B
Preferred Stock. On February 21, 1996 R. Huston Babcock, M.D., a director of
the Company, granted certain options exercisable commencing July 1, 1996
(subject to the satisfaction of certain conditions) to purchase 183,542 shares
of Common Stock issuable upon conversion of outstanding Class B Preferred Stock.
The exercise price is equal to the lesser of 200% of the average of the closing
bid and ask price per share of Common Stock for the ten business days preceding
July 1, 1996 or $1.79 per share. Benchmark received the right to purchase 91,771
shares of Common Stock prior to December 31, 1996 (which option has expired) and
91,771 shares prior to December 31, 1997.
Kanter Option
On January 31, 1996, Walnut Capital Corp. ("WCC"), Windy City, Inc. ("WCI")
and Canadian Imperial Bank of Commerce and Trust Company (Bahamas) Limited
("CIB") (the "Kanter Group") entered into an agreement for the grant of an
option to various purchasers, including certain affiliates and associated
persons of Commonwealth, for the sale of 40,000 shares of Class A Preferred
Stock and/or the 978,891 shares of Common Stock of the Company issuable upon
conversion of such Class A Preferred Stock owned by the Kanter Group to the
purchasers. The option became effective February 7, 1996 and continued through
February 11, 1996, unless extended. The consideration for the purchase was
$485,000. The Shareholders' Agreement between Four M, WCC, WCI and CIB was
terminated concurrent with the sale by the Kanter Group by agreement among the
parties to the Shareholders' Agreement.
Cook Option
On October 19, 1995, Scott Cook loaned the principal amount of $200,000 to
I-Link, Ltd., one-half of which was guaranteed by the Company. The amount
guaranteed by the Company was secured under a Security Agreement pursuant to
which GNET Enterprises, Inc., the general partner of I-Link, Ltd. granted a
security interest in certain assets of I-Link, Ltd. In addition, the Company
issued to Mr. Cook a Common Stock Purchase Option to Purchase Common Stock for
the purchase of 100,000 shares of Common Stock at an exercise price of $1.00 per
share commencing January 1, 1996 through December 31, 1996. The Cook Option
provides for piggyback registration rights for three years beginning January 1,
1996. On April 24, 1996, Mr. Cook transferred 25,000 of the Cook Options to
S.C. Culbreth, 25,000 to John Beardmore and 25,000 to Watts Texas Limited
Partners.
91
<PAGE>
E&M Warrants
In connection with a loan to the Company in June 1996 of $250,000 by E&M RP
Trust, the Company issued the E&M Warrants to purchase 80,000 shares of Common
Stock to E&M. The E&M Warrants entitle the holder to purchase the Common Stock
at an exercise price of $4.00 per share at any time during the period ending
June 9, 1999. The E&M Warrants contain demand and piggyback registration rights
commencing July 31, 1997 through June 9, 1999 as to the E&M Warrants and shares
of Common Stock.
Mandarino Warrants
In connection with a loan to the Company in June 1996 of $125,000 by Joseph
Mandarino, the Company issued the Mandarino Warrants to purchase 40,000 shares
of Common Stock to Mandarino. The Mandarino Warrants entitle the holder to
purchase the Common Stock at an exercise price of $4.00 per share at any time
during the period ending June 9, 1999. The Mandarino Warrants contain demand and
piggyback registration rights commencing July 31, 1997 through June 9, 1999 as
to the Mandarino Warrants and shares of Common Stock.
Hardy Group Warrants
In connection with the JW Charles Settlement Agreement, in April 1997 the
Company issued the Hardy Group Warrants to purchase an aggregate of 175,000
shares of Common Stock to the members of the Hardy Group. The Hardy Group
Warrants entitle the holders to purchase the Common Stock at an exercise price
of $2.50 per share at any time during the period ending April 29, 2002. The
Hardy Group Warrants contain demand and piggyback registration rights as to the
Hardy Group Warrants and underlying shares of Common Stock.
Anti-Takeover Measures
The Articles of Incorporation and Bylaws contain provisions that could
discourage potential takeover attempts and prevent shareholders from changing
the Company's management. The Articles of Incorporation provide for a
classified Board of Directors and that vacancies on the Board of Directors shall
be filled only by a majority of the remaining directors then in office.
In addition, the Bylaws provide, among other things, that no proposal by a
stockholder shall be presented for vote at a special or annual meeting of
stockholders unless such stockholder shall, not later than the close of business
on the fifth day following the date on which notice of the meeting is first
given to stockholders, provide the Board of Directors or the Secretary of the
Company with written notice of intention to present a proposal for action at the
forthcoming meeting of stockholders, which notice shall include the name and
address of such stockholder, the number of voting securities he or she holds of
record and which he or she holds beneficially, the text of the proposal to be
presented at the meeting and a statement in support of the proposal. Any
stockholder may make any other proposal at an annual meeting or special meeting
of stockholders and the same may be discussed and considered, but unless stated
in writing and filed with the Board of Directors or the Secretary prior to the
date set forth above, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the stockholders taking place sixty
days or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business proposed by
a stockholder (acting in such capacity) shall be acted upon at such annual
meeting unless stated and filed as described above.
Transfer and Warrant Agent
American Stock Transfer & Trust Company, New York, New York is the
Registrar and Transfer Agent for the Company's Preferred Stock and Common Stock.
92
<PAGE>
PLAN OF DISTRIBUTION
The Securities subject hereto are being offered for sale by the Selling
Securityholders. Consequently, the Selling Securityholders will receive the
proceeds from the sale of such securities by the Selling Securityholders
pursuant to this Prospectus. The Company will receive the proceeds, if any,
from the exercise of the Settlement Warrants, the Commonwealth Warrants, the
Cook Option, the E&M Warrants, the Mandarino Warrants and the Hardy Group
Warrants. The Securities may be sold from time to time by the Selling
Securityholders or by pledgees, transferees, or other successors in interest, on
Nasdaq (or such other exchange on which the securities are listed at the time of
sale) at prices and terms then prevailing or related to the then current market
price, delivered in satisfaction of previously incurred indebtedness or other
contractual obligations, or sold directly to purchasers in privately negotiated
transactions by and subject to the discretion of the Selling Securityholders.
The Selling Securityholders may from time to time offer their respective
securities for sale through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Stockholders and/or the purchasers of such securities for whom
they may act as agents. The Selling Securityholders and any underwriter, dealer
or agent who participates in the distribution of such Selling Securityholders'
securities may be deemed to be "underwriters" under the Securities Act and any
profit on the sale of such securities by any of them and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
may be deemed to be underwriting compensation under the Securities Act.
At the time a particular offer of the Securities is made by or on the
behalf of a Selling Securityholder, a Prospectus and a Prospectus Supplement, to
the extent required, will be distributed which will set forth the number of
securities being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for such securities purchased from the Selling Securityholders, any
discounts, commissions and other items constituting compensation from the
Selling Securityholders, any discounts, commissions or concessions allowed,
reallowed or paid to dealers, and the proposed selling price to the public.
The Securities may be sold from time to time in one or more transactions:
(i) at an offering price which is fixed or which may vary from transaction to
transaction depending upon the time of sale, or (ii) at prices otherwise
negotiated at the time of sale. Such prices will be determined by the Selling
Securityholders or by agreement between the Selling Securityholders and their
underwriter.
In order to comply with the applicable securities laws, if any, of certain
states, the Securities will be offered or sold in such states through registered
or licensed brokers or dealers in those states. In addition, in certain states,
such securities may not be offered or sold unless they have been registered or
qualified for sale in such states or an exemption from such registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations promulgated under the Exchange Act,
any person engaged in a distribution of securities may not simultaneously bid
for or purchase securities of the same class for a period of two business days
prior to the commencement of such distribution. In addition and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-5, 10b-6 and 10b-7, in
connection with transactions in the Shares during the effectiveness of the
registration statement of which this Prospectus is a part. All of the foregoing
may affect the marketability of such securities.
The Company has paid all of the expenses incident to the registration of
the foregoing securities (including registration pursuant to the securities laws
of certain states) other than: (i) any fees or expenses of any counsel retained
by any Selling Securityholder and any out-of-pocket expenses incurred by any
Selling Securityholder or any person retained by any Selling Securityholder in
connection with registration of the Securities and (ii) commissions, expenses,
reimbursements and discounts of underwriters, dealers or agents, if any.
93
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the registration of the securities
offered hereby will be passed upon for the Company by De Martino Finkelstein
Rosen & Virga, Washington, D.C.
EXPERTS
The consolidated balance sheet of Medcross, Inc. as of December 31, 1996,
and the consolidated statements of operations and cash flows for each of the two
years in the period ended December 31, 1996; the balance sheet of Family
Telecommunications Incorporated as of December 31, 1996 and the statements of
operations and cash flows for the period from the date of inception (March 20,
1996) to December 31, 1996; and the balance sheet of MiBridge, Inc. as of
December 31, 1996 and the statements of operations and cash flows for the period
from the date of inception (March 18, 1996) to December 31, 1996 included in
this prospectus have been included herein in reliance on the reports of Coopers
& Lybrand L.L.P., independent accountants, given the authority of that firm as
experts in accounting and auditing.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Medcross, Inc.
Report of Independent Accountants...................................................................... F-2
Consolidated Balance Sheet as of December 31, 1996..................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995.......................................................................... F-7
Notes to Consolidated Financial Statements............................................................. F-8
Consolidated Balance Sheet (unaudited) as of June 30, 1997............................................. F-26
Consolidated Statements of Operations (unaudited) for the three months ended June 30, 1997
and 1996 and for the six months ended June 30, 1997 and 1996........................................ F-27
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1997 and 1996...... F-28
Notes to Consolidated Financial Statements............................................................. F-29
Family Telecommunications Incorporated
Report of Independent Accountants...................................................................... F-36
Balance Sheet as of December 31, 1996.................................................................. F-37
Statement of Operations for the period from March 20, 1996 (inception) to December 31, 1996............ F-38
Statement of Cash Flows for the period from March 20, 1996 (inception) to December 31, 1996............ F-39
Notes to Financial Statements.......................................................................... F-40
Pro Forma Combined Financial Statements (unaudited)
Medcross, Inc. and Family Telecommunications Incorporated
Pro Forma Combined Balance Sheet as of December 31, 1996 (unaudited)................................ F-46
Medcross, Inc., Family Telecommunications Incorporated
Pro Forma Statement of Operations for the year ended December 31, 1996 (unaudited).................. F-47
Notes to the Pro Forma Combined Financial Statements (unaudited)....................................... F-48
MiBridge, Inc.
Report of Independent Accountants...................................................................... F-50
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................... F-51
Statements of Operations for the period from inception (March 18, 1996) to
December 31, 1996 and for the six months ended June 30, 1997 (unaudited)............................ F-52
Statements of Changes in Stockholders' Equity for the period from inception (March 18, 1996)
to December 31, 1996 and for the six months ended June 30, 1997 (unaudited)......................... F-53
Statements of Cash Flows for the period from inception (March 18, 1996) to
December 31, 1996 and for the six months ended June 30, 1997 (unaudited)............................ F-54
Notes to Financial Statements.......................................................................... F-55
Pro Forma Combined Financial Statements (unaudited)
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc.
Pro Forma Combined Balance Sheet as of June 30, 1997 (unaudited).................................... F-62
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc. Pro
Forma Statement of Operations for the six month period ended June 30, 1997 (unaudited).............. F-63
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc.
Pro Forma Statement of Operations for the six month period ended
December 31, 1996 (unaudited)....................................................................... F-64
Notes to the Pro Forma Combined Financial Statements (unaudited)....................................... F-65
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Medcross, Inc.:
We have audited the accompanying consolidated balance sheet of Medcross, Inc.
and Subsidiaries ("the Company") as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medcross, Inc. and
Subsidiaries as of December 31, 1996, and the consolidated results of their
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand, L.L.P.
Salt Lake City, Utah
April 11, 1997
F-2
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1996
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 4,500,227
Accounts receivable less allowances of $652,019 780,907
Inventory less allowances of $260,033 557,036
Certificate of deposit - restricted 208,500
Prepaid expenses 47,472
Other current assets 11,411
--------------
Total current assets 6,105,553
--------------
Property and equipment
Office furniture, equipment and leasehold improvements 388,191
Network services furniture and equipment 2,110,996
Medical equipment and vehicles 2,975,701
--------------
5,474,888
Less accumulated depreciation (2,618,252)
--------------
Net property and equipment 2,856,636
--------------
Other assets:
Intangible assets less accumulated amortization of $254,506 486,028
Certificate of deposit - restricted 1,761,312
Other assets 224,301
--------------
Total other assets 2,471,641
--------------
Total assets $ 11,433,830
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,379,451
Accrued litigation settlement 821,000
Note payable - related party 88,000
Notes payable 1,007,000
Current portion of long-term debt - related party 43,554
Current obligations under capital lease 187,047
--------------
Total current liabilities 4,526,052
--------------
Long-term debt - related party 44,128
Capital lease obligation 236,705
Minority interest in consolidated subsidiaries 328,328
--------------
Total liabilities 5,135,213
--------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $10 par value, 247,500 shares outstanding 2,475,000
Common stock, $.007 par value, authorized 20,000,000 shares, issued and
outstanding 10,607,597 shares 74,253
Additional paid-in capital 30,874,910
Accumulated deficit (27,125,546)
--------------
Total stockholders' equity 6,298,617
--------------
Total liabilities and stockholders' equity $ 11,433,830
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Health care service revenue, net $ 2,212,544 $ 2,785,064
Network service revenue 170,532 -
Equipment sales and service - 337,889
-------------- ----------
Net operating revenue 2,383,076 3,122,953
-------------- ----------
Operating costs and expenses:
Salaries and benefits 1,825,138 1,123,340
Selling, general and administrative 2,863,963 1,199,519
Cost of goods sold - equipment sales and service - 154,481
Communications network expenses 1,120,779 -
Depreciation and amortization 1,094,004 465,020
Provision for inventory valuation 260,033 -
Repairs and maintenance 288,662 309,255
Provision for doubtful accounts 197,565 365,093
Research and development 347,504 -
Acquired in-process research and development 14,577,942 -
-------------- ----------
Total operating costs and expenses 22,575,590 3,616,708
-------------- ----------
Operating loss (20,192,514) (493,755)
-------------- ----------
Other income (expense):
Interest expense (2,191,629) (160,423)
Interest income 147,322 10,717
Equity in net income (loss) of unconsolidated subsidiaries (3,211) 20,500
Litigation settlement expense (821,000) -
Other income (8,108) 58,612
-------------- ----------
Total other expense (2,876,626) (70,594)
-------------- ----------
Loss before minority interest in income of consolidated
subsidiaries (23,069,140) (564,349)
Minority interest in income of consolidated subsidiaries 4,900 12,440
-------------- ----------
Net loss $ (23,064,240) $ (551,909)
============== ==========
Net loss per common share after preferred dividends $ (6.53) $ (.39)
============== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $(23,064,240) $ (551,909)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities
Depreciation and amortization 1,094,004 465,020
Accrued litigation settlement 821,000 -
Warranty liability - (94,091)
Expense for warrants issued below market 11,875 16,667
Imputed interest on convertible notes 1,945,000 -
Acquired in-process research and development 14,577,942 -
Common stock issued for services 12,500 50,000
Provision for inventory valuation 260,033 -
Provision for doubtful accounts 197,565 365,093
Gain (loss) on sale of property and equipment (3,080) 765
Equity in net loss (income) of unconsolidated subsidiaries 3,211 (20,500)
Minority interest in net income of consolidated subsidiaries (4,900) (12,440)
Forgiveness of debt (10,220) -
Increase (decrease) from changes in:
Accounts receivable (29,377) (161,353)
Inventory 12,919 91,926
Organization costs refunded - 14,055
Additions to other assets (204,406) -
Other current assets 15,591 46,465
Accounts payable and accrued expenses (475,702) 109,664
------------ -----------
Net cash provided (used) by operating activities (4,840,285) 319,362
------------ -----------
Cash flows from investing activities
Purchases of property and equipment (677,004) (23,222)
Proceeds from sale of property and equipment 3,080 5,755
Investment in unconsolidated subsidiary - (6,250)
Purchase of certificates of deposit - restricted (1,962,601) -
Proceeds from maturity of certificate of deposit - restricted 60,000 -
Distributions from unconsolidated subsidiary 3,039 -
Sale of interest in unconsolidated subsidiary - 28,000
------------ -----------
Net cash provided (used) by investing activities (2,573,486) 4,283
------------ -----------
</TABLE>
- continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities
Proceeds from notes payable $ 2,502,333 $ 218,000
Repayment of notes payable (2,499,833) (151,000)
Repayment of long-term debt (491,523) (370,871)
Payment of capital lease obligations (285,444) (246,451)
Proceeds from issuance of preferred stock, net of offering costs 12,290,000 -
Proceeds from exercise of warrants and options 356,013 1,820
Minority interest distributions
(36,865) (54,750)
------------- -----------
Net cash provided (used) by financing activities 11,834,681 (603,252)
---------- ---------
1 (2,234)
Effect of foreign currency translation on cash flows ---------- -----
Increase (decrease) in cash and cash equivalents 4,420,911 (281,841)
Cash and cash equivalents at beginning of year 79,316 361,157
------------- -----------
Cash and cash equivalents at end of year $ 4,500,227 $ 79,316
============= ===========
Supplemental cash flow information
- ----------------------------------
Interest paid $ 189,107 $ 129,859
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATMENT OF STOCKHOLDER'S EQUITY
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional
----------
Preferred Stock Common Stock Paid-in Accumulated
--------- ----- ------ ----- ------- -----------
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 216,805 $2,168,050 1,521,449 $10,650 $3,268,255 $(3,511,165)
Conversion of preferred stock into
common stock (9,305) (93,050) 227,714 1,594 91,456
Common stock issued for services 50,000 350 62,150
Common stock issued for cancellation of
note payable 1,849 13 5,188
Common stock issued for employee stock
purchase plan 2,080 15 1,805
Foreign currency translation adjustment 1,764
Net loss - - - - - (551,909)
-------- --------- --------- ------ --------- ---------
Balance at December 31, 1995 207,500 2,075,000 1,803,092 12,622 3,428,854 (4,061,310)
Conversion of preferred stock into common
stock (200,000) (2,000,000) 4,894,461 34,261 1,965,739
Exercise of stock options 189,637 1,327 354,686
Common stock issued for the
acquisition of I-Link Worldwide 3,000,000 21,000 12,579,000
Sale of Class C preferred stock for cash,
net of offering costs of $2,110,000 240,000 2,400,000 9,890,000
Common stock issued for cancellation of
notes payable 720,407 5,043 699,756
Issuance of stock warrants below market
value of common stock 11,875
Interest expense associated with issuance
of convertible notes at a discount 1,945,000
Foreign currency translation adjustment 4
Net loss (23,064,240)
------- --------- ---------- ------ ---------- ----------
Balance at December 31, 1996 247,500 $2,475,000 10,607,597 $74,253 $30,874,910 $(27,125,546)
======= ========= ========== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Nature of business
Medcross, Inc. and subsidiaries ("the Company") operate in three businesses.
Domestically the Company is a provider of diagnostic and clinical services to
healthcare facilities and directly to patients both with its own equipment and
equipment of other entities under management contracts. Through its acquisition
in February 1996 of I-Link Worldwide, Inc. ("I-Link"), the Company is a provider
of business communication services. In China, the Company sells and services
used medical equipment.
Principles of consolidation
The consolidated financial statements include the accounts of Medcross, Inc. and
the following subsidiaries:
- Medcross Imaging, Ltd., a limited partnership, provides mobile magnetic
resonance imaging services to healthcare facilities. The Company is the
sole general partner of the partnership and had an 81.75% ownership
interest as of December 31, 1996 and 1995.
- Waters Edge Scanning Associates, Inc., a Florida corporation, provides
magnetic resonance imaging services. This wholly owned subsidiary
acquired the assets of Waters Edge Scanning Associates, Ltd. and its
general partner, Florida Medical Enterprises, Inc. on June 1, 1993.
- Urological Ultrasound Services of Tampa Bay, Inc., a Florida corporation,
provides mobile ultrasound services. This wholly owned subsidiary began
operations in October 1994 after completion of an acquisition of the 75%
ownership interest not previously owned by the Company. Prior to that
time, the Company recorded its share of income or loss from the 25%
ownership interest on the equity method. On May 1, 1995, this subsidiary
distributed all of its assets net of liabilities to the Company. All of
the assets of this subsidiary, except cash, were contributed to Waters
Edge Scanning Associates, Inc. and this subsidiary was dissolved in 1996.
- Medcross Asia, Ltd., a Hong Kong corporation, was formed by the Company as
a wholly owned subsidiary in 1993. This corporation is seeking investment
and equipment trading opportunities in the Far East.
- Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), a
People's Republic of China (PRC) corporation formed in January 1994, sells
and services used computerized tomography (CT) equipment in the Shenyang
Province of the PRC. The Company has a 51% ownership interest in SMHME.
- I-Link Worldwide Inc., a Utah corporation, was acquired by the Company
in February 1996 and is a wholly owned subsidiary. I-Link Worldwide Inc.
provides business communication services.
All significant intercompany transactions are eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less.
F-8
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
Non-Cash Transactions
Non-cash transactions not otherwise reflected in the consolidated statement of
cash flows include the following:
In February 1995, a holder of Class B Preferred Stock converted 9,305
shares into 227,714 shares of common stock.
In September 1995, one of the note holders of the $600,000 promissory note
demanded payment, due in common stock. A reduction of $5,201 of the debt
resulted in an issuance of 1,849 shares of common stock.
In February 1996, the Company acquired all of the outstanding shares of
I-Link Worldwide Inc. in exchange for 4,000,000 shares of Common Stock of
the Company, of which 2,600,000 shares were held in escrow, until August
1996 when 1,600,000 shares were released.
In August 1996, in accordance with the terms of the Stock Purchase
Agreement entered into during the I-Link acquisition, 1,600,000 shares of
Common Stock held in escrow for the benefit of the seller were released
resulting in acquired in-progress research and development expense in the
amount of $9,800,000 and a corresponding increase in additional paid-in
capital.
In 1996 holders of Class A Preferred Stock converted 200,000 shares into
4,894,461 shares of common stock.
During 1996, certain convertible promissory notes totaling $704,799
(principal amount) were converted into 720,407 shares of common stock.
During 1996, I-Link financed $605,609 of equipment through capital leases.
Inventory
Inventories consist of used and refurbished computerized tomography scanners
held for sale in China. Inventories are valued at the lower of cost or market
using the specific identification method.
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated using the
declining balance method for medical equipment and straight-line method for
other assets over the estimated useful lives of the assets, two to nine years.
Expenditures for maintenance and repairs are charged to expense as incurred, and
renewals and betterments are capitalized. Gains or losses on disposals are
credited or charged to operations.
Intangible assets
Organization costs are amortized on the straight-line basis over a period of
sixty months. Loan costs are amortized as an adjustment to interest expense over
the period of the loans (36 months to 60 months). Syndication and other issuance
costs incurred with respect to equity offerings of the Company and sale of
limited partnership interests are deferred and offset against the proceeds of
the offerings at closing. Goodwill resulting from purchase of Waters Edge
Scanning Associates, Inc., is amortized on the straight-line basis over a period
of twenty-five years. The Company regularly evaluates whether events or
circumstances have occurred that indicate the carrying value of the intangible
assets may not be recoverable. When factors indicate the asset may not be
recoverable, the Company uses an estimate of the related undiscounted future
cash flows compared to the carrying value of intangibles to determine if an
impairment exists. Adjustments are made if the sum of expected future net cash
flows is less than carrying value.
F-9
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
Revenue recognition
The Company recognizes revenue from health care services at the time services
are performed net of contractual allowances based on agreements with third party
payers. The Company records revenue from equipment sales when installation is
completed. Advance deposits received prior to installation are recorded as a
current liability. The Company recognizes revenue from business communication
services as services are rendered or as products are delivered to customers.
Warranty liability
Equipment sales are generally accompanied by a service warranty. Expected future
product warranty costs are recorded as an expense and liability when the product
is sold.
Foreign currency translation
The functional currency for the Company's foreign operations is the applicable
local currency. The translation from the applicable foreign currencies to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for income statement items using a weighted
average exchange rate for the period. The gains or losses, net of applicable
deferred income taxes, resulting from such translations are included in
stockholders' equity. Some transactions of the Company and its subsidiaries are
made in currencies different from their own. Gains and losses from these
transactions are generally included in income as they occur. Net foreign
currency transaction gains or losses are not material for any of the periods
presented.
Income taxes
The Company records deferred taxes in accordance with the Financial Accounting
Standards Board (FASB) Statement 109, "Accounting for Income Taxes." The
Statement requires recognition of deferred tax assets and liabilities for the
temporary differences between the tax bases of assets and liabilities and the
amounts at which they are carried in the financial statements based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Net loss per share
Net loss per share of common stock is computed based on the weighted average
number of common and common equivalent shares outstanding during the period.
Options, warrants and convertible preferred stock are excluded from the
calculation, when their effect would be anti-dilutive.
Net loss per common share for 1996 and 1995 were calculated as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss per consolidated statement of operations $(23,064,240) $ (551,969)
Cumulative preferred stock dividends not paid in current year (343,629) (128,669)
Preferred stock dividend on class C convertible cumulative
redeemable preferred stock (20,880,000) -
----------- ---------
Net loss applicable to common stock $(44,287,869) $ (680,578)
=========== =========
Weighted average shares outstanding 6,780,352 1,756,540
=========== =========
Net loss per common share $ (6.53) $ ( .39)
=========== =========
</TABLE>
F-10
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
The preferred stock dividend (non cash) on Class C convertible redeemable
preferred stock is calculated as the difference between the conversion price per
common share per the private offering memorandum as compared to the market price
for the common stock on the date the preferred shares were sold. The dividend
was recognized over the period between the sale of the preferred stock and the
date the preferred shares could first be converted.
Financial Instruments
As of December 31, 1996 and 1995, the carrying amounts for cash, cash
equivalents, certificates of deposit and other current assets or liabilities
that are considered to be financial instruments approximate their fair value
because of the short maturity of these instruments. The carrying amounts for the
Company's line of credit and other non convertible debt also approximates fair
value based on current rates available to the Company for debt of a similar
nature and maturity. The Company's convertible promissory notes, with a carrying
value of $717,000 at December 31, 1996 have a fair value of $1,452,000 based on
the quoted market price of the stock at December 31, 1996.
Reclassifications
Certain balances in the December 31, 1995 financial statements have been
reclassified to conform with the current year presentation. These changes had
no effect on previously reported net loss, total assets, liabilities or
stockholders' equity.
Note 2 - Major customers and concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents with financial
institutions in Utah and Florida and attempts to limit its exposure in any one
particular instrument. At December 31, 1996 the Company's cash deposits exceeded
the federally insured limits by $4,300,000.
The Company provided magnetic resonance imaging services to two major customers
in 1996 and 1995. The revenue and accounts receivable balances, net of
contractual allowances, at year-end for each of these customers were as follows:
<TABLE>
<CAPTION>
Revenue Accounts Receivable
------- -------------------
1996 1995 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A $433,338 $566,945 $55,204 $87,223
Customer B 248,000 304,791 22,750 18,200
</TABLE>
Note 3 - Certificates of Deposit-Restricted
During 1996, I-Link entered into a 24 month; $3.5 million operating lease. As a
condition of that lease, I-Link obtained a letter of credit totaling $1.575
million. To secure the letter of credit the Company has restricted Certificates
of deposit (CDs) in the same amount. These funds will be released when the lease
expires. I-Link also has restricted CDs totaling $150,812 used to secure lines
of credit in connection with capital leases totaling approximately $610,000. As
of December 31, 1996, I-Link also has restricted CDs totaling $244,000 of which
$215,000 is used for a security deposit on the facilities which I-Link occupied
in early 1997. The remaining $30,000 is collateral for I-Link's corporate credit
cards. These monies are held in escrow accounts and bear interest which is to be
paid to I-Link. Of the above monies held in escrow, $208,500 will be released
during 1997.
Note 4 - Notes payable
<TABLE>
<S> <C>
Uncollateralized promissory note, payable to Mortgage Network International, interest
payable at 10.5% payable monthly. $ 88,000
==========
Line of credit, $700,000, payable to First Union National Bank, interest payable
at 3/4% above prime rate, (prime rate was 8.25% at December 31, 1996), principal
balance due June 30, 1996, collateralized by accounts receivable
and general assets of the Company. $ 290,000
Convertible promissory notes, interest payable quarterly at 8% per
annum, uncollateralized. 717,000
---------
Total notes payable $ 1,007,000
=========
</TABLE>
F-11
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes payable - continued
The Company has reached an agreement with First Union National Bank pursuant to
which the Company has agreed to secure alternative financing to repay amounts
outstanding under the line of credit while continuing to repay the outstanding
balance in increments of $10,000 per month commencing on July 1, 1996. The line
of credit contains restrictive covenants relating to equity requirements,
minimum cash balances, acquisitions, debt to equity ratios, borrowing base
requirements, and net cash flow coverage requirements.
The convertible promissory notes were issued in September 1996 in conjunction
with a private placement offering Class C Preferred Stock of the Company. The
promissory notes will automatically be converted into 11,950 shares of Class C
Preferred Stock at $60 per share upon the amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Preferred Stock to
at least 2,000,000. Each convertible note is due on July 31, 1997 with interest
at the rate of 8% per annum. The notes are prepayable by the Company without
penalty upon 30 days notice provided that the Company has effected an amendment
to its Articles of Incorporation to increase its authorized capital stock and
designated sufficient Class C Preferred Stock to accommodate conversion of the
notes, though the holders of the promissory notes may elect to convert the
notes in lieu of accepting repayment.
Interest expense (non-cash) of $1 million has been recognized by the Company
representing the difference between the conversion price per common share
relating to the convertible promissory notes and the exercise price of
warrants issued with other notes as compared to the market price of the Common
Stock on the date the promissory notes and warrants were issued.
Note 5 - Long-term debt - related party
Long-term debt at December 31, 1996 was as follows:
<TABLE>
<S> <C>
Uncollateralized promissory note, payable to Mortgage Network International due in 36 equal
monthly installments of principal and interest totaling $4,225.32. The interest rate is 10.5% $ 87,682
Less current portion 43,554
-------
$ 44,128
=======
</TABLE>
Note 6 - Commitments under long-term leases
As of December 31, 1996, I-Link financed approximately $610,000 of leased
capital assets. Capital lease payments made in 1996 and 1995 were $160,000 and
$45,000, respectively.
In 1996, I-Link entered into a two-year equipment lease relating to the
financing of an aggregate of $3.5 million worth of equipment purchases necessary
to build the I-Link network. As a condition of that equipment lease, I-Link
obtained a standby letter of credit totaling $1.575 million to the benefit of
the lessor. In order to obtain this letter of credit, I-Link deposited $1.575
million into a certificate of deposit to be held until the obligation is
satisfied. The certificate of deposit bears interest which is payable to I-Link,
and will be released to I-Link when the lease expires. At the end of the lease,
at I-Link's option, the equipment secured by the lease can be purchased at fair
market value. I-Link also leases fiber optic data lines. The terms vary from 1-6
years.
The Company leases office and network equipment facilities throughout the United
States. The terms vary from 1-7 years. I-Link delivered $214,000 in certificates
of deposit to the landlord as a security deposit for rented facilities which are
refundable in periodic amounts as the lease expires.
F-12
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Commitments under long-term leases, continued
Future minimum payments, by year and in the aggregate, under noncancellable
capital leases and operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1996.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1997 $ 228,000 $3,414,000
1998 187,000 3,053,000
1999 69,000 1,248,000
2000 - 1,243,000
2001 - 415,000
Thereafter - 252,000
-------- ---------
Total minimum payments 484,000 $9,625,000
=========
Less amount representing interest 60,248
--------
Present value of net minimum less payments 423,752
Less current portion 187,047
--------
Long-term capital lease obligations $ 236,705
========
</TABLE>
The Company's rental expense for operating leases was $1,316,000 and $41,172 for
fiscal years ending December 31, 1996 and 1995, respectively.
Note 7 - 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 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, 1,400,000 shares of the common stock were issued at the time
of acquisition. In August 1996, 1,600,000 shares of Common Stock were released
from escrow upon the receipt of proceeds from the completion of the Company's
offering of Class C Preferred Stock. The remaining 1,000,000 shares of common
stock are to be released from escrow 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.
The acquisition cost of $12,600,000 (representing the 3 million shares issued to
date) was allocated to the net liabilities of $2,003,000 (based on their fair
market values) with the balance of $14,603,000 allocated to in-process research
and development and software costs acquired. These were expensed as
technological feasibility of the in-process technology had not yet been
established and the technology had no alternative future use.
In the event the remaining 1,000,000 shares of common stock are released from
escrow upon the occurrence of one of the above criteria, the shares will be
valued at the then market value of the Company's common stock. As the issuance
of the contingent shares relates to the recognition of revenue relating to the
acquired technology, the value of the shares would be recorded as an increase to
the intangible assets of the Company, subject to applicable valuation criteria.
The following pro forma summary presents the consolidated results of operations
for the Company for 1996 and 1995, as if the acquisition of I-Link had occurred
at the beginning of 1995. This pro forma information is presented for
informational purposes only and may not be indicative of the results of
operations that would have occurred had the acquisition taken place at the
beginning of 1995.
F-13
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Acquisition of subsidiary, continued
<TABLE>
<CAPTION>
Years ended December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $2,383,000 $352,000
Net loss (17,386,000) (8,016,000)
Loss per common share $(5.52) $(2.60)
</TABLE>
At the time of the acquisition of I-Link, the Company issued certain convertible
promissory notes. The Company also issued convertible promissory notes in
September, 1996. Interest expense (non-cash) $1,945,000 has been recorded in
1996 relating to these promissory notes and warrants issued with other notes.
The interest expense is calculated as the difference between the conversion
price per common share per the promissory notes as compared to the market price
for the common stock on the date the promissory notes were issued. The interest
expense was recognized over the period between the date the promissory notes
were issued and the date the promissory notes could first be converted.
Note 8 - Income taxes
The income tax benefit for the years ended December 31, 1996 and 1995 consists
of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current tax expense $ - $ -
Deferred tax expense (benefit) - -
----------- -----------
Income tax benefit $ - $ -
=========== ===========
</TABLE>
The reported benefit from income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income before
taxes for the following reasons:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected federal statutory tax benefit $(7,841,842) $(187,649)
Increase (reduction) in taxes resulting from:
State income taxes (net of federal benefit) (673,059) (30,355)
Non-deductible meals and entertainment 7,283 33
Non-deductible litigation settlement expense 279,140 -
Non-deductible interest on convertible notes 661,300 -
Allowance for doubtful accounts - 115,644
Change in valuation allowance 7,559,551 108,484
Other 7,627 (6,157)
------------ ----------
$ - $ -
============ ==========
</TABLE>
At December 31, 1996, the Company had net operating loss and capital loss
carryforwards for both federal and state income tax purposes of approximately
$7,400,000 and $60,000, respectively. The net operating loss carryforwards will
expire between 2006 and 2011 if not used to reduce future taxable income. The
capital loss carryforwards will expire in 1997.
F-14
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Income taxes, continued
The components of the net deferred tax asset and liability as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Tax net operating loss carryforwards $ 2,759,930
Acquired in process research and development 5,257,333
Capital loss carryforwards 22,267
Excess book depreciation and amortization 61,706
Other 95,686
Valuation allowance (7,944,647)
-----------
Total deferred tax asset 252,275
Deferred tax liability: -------------
Allowance for doubtful accounts ( 252,275)
-------------
Total deferred tax liability ( 252,275)
-------------
Net deferred tax asset $ -
=============
</TABLE>
The valuation allowance at December 31, 1996 has been provided to reduce the
total deferred tax assets to the amount which is considered more likely than not
to be realized. The net increase in the valuation allowance for the year ended
December 31, 1996 was $7,559,551. The change in the valuation allowance is due
primarily to the increase in net operating loss carryforwards and acquired in-
process research and development costs which were expensed for books and
capitalized for tax purposes, and because the Company has not generated net
income from its business communication services. It is at least reasonably
possible that a change in the valuation allowance may occur in the near term.
Note 9 - Litigation settlement
A complaint was filed on April 12, 1996 by JW Charles Financial Services, Inc.
("JWC") against the Company in which JWC alleged that the Company breached the
terms of a warrant to purchase 331,000 shares of the Company's common stock
purchase ("warrant") by failing to prepare and file with the Securities and
Exchange Commission ("SEC") a registration statement covering the common stock
underlying the JWC warrant. JWC was seeking specific performance, i.e.
registering the shares with the SEC, and monetary damages. On or about April 11,
1997 the Company reached an agreement in principle relating to the settlement of
the lawsuit. The lawsuit will be dismissed upon payment of $600,000 to JWC in
consideration for the purchase of the warrant. The JWC warrant will be purchased
by an investor group led by the Company's general counsel and its treasurer and
chief financial officer. It is not expected that the Company's funds will be
utilized. In connection with the purchase of the JWC warrant, it is contemplated
that the Company will grant certain additional consideration to the investor
group, including new warrants to purchase 175,000 shares of common stock at an
exercise price equal to or in excess of the conversion price of the Class C
Preferred Stock. Such warrants will have registration rights and anti-dilution
provisions. The Company has recorded on its financial statements for the year
ended December 31, 1996 a liability and related expense for the settlement of
litigation in the amount of $821,000 representing the estimated difference
between the warrant price and the value of the warrant.
Note 10 - Stockholders' equity
Preferred stock
In 1992, the Board of Directors approved and filed with the state of Florida an
Amendment to the Articles of Incorporation designating 200,000 shares of
preferred stock as Class A Variable Rate Cumulative Convertible Preferred Stock
("Class A Preferred Stock") and 22,500 shares of preferred stock as Class B
Variable Rate Cumulative Convertible Preferred Stock ("Class B Preferred
Stock"). The Class A Preferred Stock and Class B Preferred Stock both have a par
value of $10 per share and are entitled to receive cumulative dividends at a
rate equal to 2% above the 30 day certificate of deposit rate in effect on the
first day of each month at the Texas Commerce Bank. The Company has the right to
redeem the Class A and Class B Preferred Stock for $10 per share plus the amount
of any accrued and unpaid dividends. Shares of Class A and
F-15
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stockholders' equity, Preferred stock, continued
Class B Preferred Stock may be converted into such number of whole shares of
common stock as is determined by multiplying the number of shares of Class A
Preferred Stock by a fraction, the numerator of which is $10 and the denominator
is the conversion price ($.408625). Each share of Class A Preferred Stock will
entitle the holder thereof to that number of votes which is equal to the number
of shares of common stock into which the Class A Preferred Stock is convertible.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of the Class A Preferred Stock shall be
entitled to distribution before any payments shall be made in respect to the
Class B Preferred Stock or common stock in amounts equal to the par value per
share plus all accrued and unpaid dividends and the holders of Class B Preferred
Stock shall be entitled to distribution before any payments shall be made in the
respect to common stock in an amount equal to the par value per share plus all
accrued and unpaid dividends.
In August 1996 the Company filed with the State of Florida an Amendment to the
Articles of Incorporation amending the designation of 240,000 shares of
preferred stock as Class C Convertible Cumulative Preferred Stock (the "Class C
Preferred Stock"). The Class C Preferred Stock has a par value of $10 per share
and holders are entitled to receive cumulative preferential dividends equal to
8% per annum of the liquidation preference per share of $60.00. Unless
previously redeemed, the Class C Preferred Stock is convertible into shares of
the Company's Common Stock ("Conversion Shares"), at any time commencing
November 21, 1996, at the option of the holder, into such number of shares of
the Company's Common Stock as shall equal $60 divided by the lower of (i) $2.50,
or (ii) the closing bid price for any five consecutive trading days during the
period commencing on September 6, 1996 and ending on March 5, 1998 (subject to
certain anti-dilution adjustments). As of December 31, 1996, none of the shares
of Class C Preferred Stock has been converted. The Class C Preferred Stock is
redeemable at any time prior to September 6, 2000, at the option of the Company
at a redemption price equal to $60 per share plus accrued and unpaid dividends,
provided (i) the Conversion Shares are covered by an effective registration
statement; and (ii) during the immediately preceding thirty (30) consecutive
trading days ending within fifteen (15) days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$8.00 per share. The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the Company at a redemption price equal to
$90 plus accrued and unpaid dividends, provided the Conversion Shares are
covered by an effective registration statement or the Conversion Shares are
otherwise exempt from registration.
At December 31, 1996, the Company had no shares of Class A Preferred Stock,
7,500 shares of Class B Preferred Stock, and 240,000 shares of Class C Preferred
Stock issued and outstanding.
At December 31, 1996, 30,000 of the 500,000 shares of preferred stock authorized
remain undesignated and unissued. Dividends in arrears at December 31, 1996 were
$19,599 and $288,000 for Class B Preferred Stock and Class C Preferred Stock,
respectively.
Note 11 - Stock-Based Compensation Plans
At December 31, 1996 the Company has five stock based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed option plans. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method outlined
by FASB Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $(23,064,240) $(551,909)
Pro forma $(25,563,988) $(587,001)
Loss per share As reported $(6.53) $(.39)
Pro forma $(6.90) $(.41)
</TABLE>
F-16
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: expected volatility
of 103% and 103%,
F-17
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-Based Compensation Plans, continued
risk free rates of 5.79% and 5.78%, expected lives of 3 and 3 years and dividend
yield of zero for both years.
<TABLE>
<CAPTION>
1996 1995
---- ----
Options Weighted Ave Options Weighted Ave
and Warrants Exercise Price and Warrants Exercise Price
------------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 850,169 $1.78 615,381 $3.19
Granted 5,322,000 5.45 331,526 1.87
Exercised (188,724) 2.02 0 0.00
Forfeited (222,150) 2.82 (96,738) 2.75
---------- ---- -------- ----
Outstanding at end of year 5,761,295 $5.14 850,169 $1.78
========= =======
Options and Warrants exercisable at year end 2,153,294 588,495
Weighted-average fair value of Options and
Warrants granted during the year $5.45 $1.87
</TABLE>
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options and
Warrants Number
Outstanding at Weighted Average Weighted Exercisable at Weighted
Exercise price 12/31/96 Remaining Life Average Exercise 12/31/96 Average Exercise
Price Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.875 to $2.500 1,701,961 5.7 years $2.00 1,701,961 $2.00
$3.875 to $4.875 746,334 7.1 years 4.34 201,334 4.18
$5.000 to $6.5000 124,500 9.0 years 5.55 0 0.00
$6.750 to $7.000 3,188,500 4.6 years 6.99 249,999 7.00
----------------------------------------------------------------------------------------------------------------
5,761,295 5.3 years $5.14 2,153,294 $2.79
========= ========= ===== ========= =====
</TABLE>
Executive stock option plan
The Company's Executive Stock Option Plan which expired in June 1995, authorized
the granting of stock options to key employees of the Company including
officers. Options granted under the Plan are non-qualified stock options
exercisable at a price not less than the highest bid price per share at which
the stock is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System on the date the option is granted. Options are
exercisable not less than one year or more than five years after the grant date.
As of December 31, 1996, no options for the purchase of common stock were
outstanding. During 1996, 3,780 options were exercised and no options were
exercised in 1995.
Director stock option plan
The Company's Director Stock Option Plan under which Board terminated future
grants in October 1995, authorized the granting of stock options to Directors of
the Company. Options granted under the Plan are non-qualified stock options
exercised for a price equal to the fair market value per share of common stock
on the date of any such grant. Options are exercisable not less than six months
or more than ten years after the date of grant.
As of December 31, 1996, options for the purchase of 8,169 shares of common
stock at prices ranging from $0.875 to
F-18
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-Based Compensation Plans, continued
$3.875 per share were outstanding, all of which are exercisable within 60 days.
During 1996, 15,228 options were exercised and no options were exercised in
1995.
Stock purchase plan
In accordance with the Employee Qualified Stock Purchase Plan adopted in June
1990, employees may contribute up to 10 percent of their base wages towards the
purchase of the Company's common stock. The option price is the lesser of 85% of
the market value on the first business day of the Payment Period (September 1)
or the last business day of the Payment Period (August 31). As of December 31,
1996, the Company had 35,146 shares of common stock reserved for issuance on
exercise of the purchase rights. On August 31, 1996, 913 shares of common stock
were issued at a price of $0.875 per share. On August 31, 1995, 2,080 shares of
common stock were issued at a price of $0.875 per share.
1995 Director stock option plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Director Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary grants of stock
options which qualify as incentive stock options (the "Incentive Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as options which do not so qualify (the "Non-Qualified Options") to be
issued to directors. In addition, stock appreciation rights (the "SARs") may be
granted in conjunction with the grant of Incentive Options and Non-Qualified
Options.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options, and SARs to purchase up to 250,000 shares of common stock
(subject to adjustment in the event of stock dividends, stock splits, and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of common stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employee. The
shares of common stock subject to the 1995 Director Plan may be made available
from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified Options on a
discretionary basis pursuant to the following formula: each member of the Board
of Directors then serving shall receive a Non-Qualified Option to purchase
10,000 shares of common stock at an exercise price equal to the fair market
value per share of the common stock on that date. Pursuant to such formula,
directors received options to purchase 10,000 shares of common stock as of
October 17, 1995, and will receive options to purchase 10,000 shares of common
stock on the first business day of each January beginning in 1996. Each option
is immediately exercisable for a period of ten years from the date of grant. The
Company has 250,000 shares of common stock reserved for issuance under the 1995
Director Option Plan. As of December 31, 1996, options exercisable to purchase
190,000 shares of common stock at prices ranging from $1.00 to $1.25 per share
are outstanding and exercisable within 60 days. During 1996, 40,000 options were
exercised.
1995 Employee stock option plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options,
Non-Qualified Options, and SARs.
Directors of the Company are not eligible to participate in the 1995 Employee
Plan. The 1995 Employee Plan provides for the grant of stock options which
qualify as Incentive Stock Options under Section 422 of the Code, to be issued
to officers
F-19
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
who are employees and other employees, as well as Non-Qualified Options to be
issued to officers, employees, and consultants. In addition, SARs may be granted
in conjunction with the grant of Incentive Options and Non-Qualified Options.
F-20
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-based compensation plans, continued
The 1995 Employee Plan provides for the grant of Incentive Options,
Non-Qualified Options, and SARs of up to 400,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1996, options to purchase 75,000 shares of common stock
with exercise prices of $1.125 have been granted under the 1995 Employee Plan.
To date, no options have been exercised under the 1995 Employee Plan.
Other warrants and options
Pursuant to the terms of a Financial Consulting Agreement dated as of November
3, 1994 between the Company and JW Charles Financial Services, Inc., the Company
issued a Common Stock Purchase Warrant (the "JW Charles Warrant") covering
250,000 (331,126 as adjusted) shares of common stock to JW Charles Financial
Services as partial consideration for its rendering financial consulting
services to the Company. The warrant is exercisable at a price of $1.51 per
share and expires on November 3, 1999.
The JW Charles Warrant (the "Warrant") contain anti-dilution provisions
providing for adjustments in the exercise price. The Warrant also contains
anti-dilution provisions providing for adjustments in the number of shares
covered by the warrant. The holder of the Warrant has no voting, dividend, or
other stockholder rights or privileges unless and until the Warrants have been
exercised. The holder of the Warrant has been granted "piggy back" registration
rights under the Securities Act of 1933 with respect to the Warrants and the
underlying shares of common stock. The Company will pay the expense of such
registration and of such registration qualifications of the Warrant and
underlying shares of common stock under the Securities Act of 1933 of such dates
as the holder of the Warrant may determine (See Note #9).
Pursuant to the issuance of a promissory note by I-Link to Scott Cook, the
Company issued a Common Stock Purchase Option covering 100,000 shares of the
Company's common stock. The option is exercisable at a price of $1.00 and
expires on December 31, 1999.
In April 1996 the Company approved the issuance of 1 million options to John
Edwards at an option price of $7 per share as part of his employment agreement.
The options vest over a 3 year period and expire in 2006.
On July 1, 1996 the Company approved options to purchase 1,500,000 and 500,000
shares of common stock to Clay Wilkes and Alex Radulovic respectively. Each
option has an exercise price of $7.00 per share, vesting in 25% increments in
the event that the average closing bid price of a share of the Company's common
stock for five consecutive trading days exceeds $10, $15, $20 and $25,
respectively. Such option becomes exercisable (to the extent vested) on June 30,
1997, vests in its entirety on June 30, 2001 and lapses on June 30, 2002.
In August 1996, Commonwealth Associates, the Placement Agent for the Company's
offering of Class C Preferred Stock and 8% Convertible Notes, designated Joseph
Cohen as its nominee for election to the Board of Directors and Michael Falk, an
affiliate of Commonwealth Associates, as a non-voting advisor to the Board of
Directors. Commonwealth Associates was also granted, in connection with such
offering, the right to approve the Company's selection of a second outside
director to be nominated for election at the next annual or special meeting of
stockholders. Mr. Cohen serves as a Class II Director of the Company and a
member of the Compensation and Audit Committees of the Board of Directors. The
Company has agreed to issue options to purchase 64,000 shares of Common Stock to
Mr. Cohen, exercisable at the fair market value of the Common Stock on September
30, 1996. Of such options, 24,000 vest and become exercisable immediately upon
grant, and 20,000 shall vest and become exercisable on the first anniversary of
the grant, and 20,000 shall vest and become exercisable on the second
anniversary of the grant.
In August 1996, William Flury, Vice President of Sales & Marketing of I-Link
loaned I-Link the sum of $100,000. The
F-21
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-based compensation plans, continued
loan plus a loan origination fee of $5,000 was repaid in September 1996. 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 for general working capital purposes of I-Link.
In August 1996, John Edwards, President and Chief Executive Officer of I-Link
loaned I-Link the sum of $131,250 (including a $6,250 original issue discount),
which was repaid in August 1996. 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 $4.875 per share. Funds from the loan were used to pay a
$100,000 payment due to AT&T and for general working capital purposes of I-Link.
In September 1996, the Company closed a private placement offering of Class C
Preferred Stock. As a result of this transaction, the Company issued a warrant
to purchase 250,000 shares of its Common Stock at an exercise price of $2.50 per
share as compensation to the Placement Agent. In addition, a Consulting
Agreement was entered into with the Placement Agent, in which a warrant to
purchase 500,000 shares of the Company's Common Stock at an exercise price of
$2.50 per share was issued.
John Edwards agreed to amend his employment contract on August 21, 1996, to
reduce his salary from $175,000 to $96,000. In consideration of the salary
reduction, the Company agreed to grant him options, which vested immediately, to
purchase 250,000 shares of Common Stock for 10 years at an exercise price of
$4.875 per share.
In October, 1996 the Company agreed to issue 250,000 shares of common stock each
to William Flury and Karl S. Ryser Jr. pursuant to their employment agreements.
The options were issued at $4.41 based on the closing price of the stock at
grant date. The options vest quarterly over a three-year period and expire in
2000.
During 1996, the Company agreed to issue 343,000 options to employees at a price
equal to the closing stock price on the grant date. The options vest quarterly
over a three-year period and expire in 10 years.
During 1996 the Company issued 120,000 warrants to non-employees at $4 per
share. The warrants expire in 1999.
Note 12 - Geographic segment information
The Company's operations consist of providing diagnostic and clinical outpatient
health care services and business communication services domestically and the
sale and service of used medical equipment in the People's Republic of China
(PRC). Financial information for the different geographic segments is as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1996 Domestic China Corporate Eliminations Consolidated
- ----------------- -------- ----- --------- ------------ ------------
Communications
Network
-------
Healthcare
----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,967,384 $ 170,532 $ 0 $ 335,254 $ (90,094) $ 2,383,076
=========== ============ ========== =========== ========== ===========
Operating Profit (Loss) $ 41,615 $ (19,501,391) $ (284,615) $ (358,029) $ (90,094) $(20,192,514)
=========== ============ ========== =========== ========== ===========
Identifiable Assets $ 2,509,402 $ 8,196,473 $ 750,468 $ 185,258 $ 267,771 $ 11,433,830
=========== ============ ========== =========== ========== ===========
Amortization and
Depreciation $ 377,561 $ 690,920 $ 1,191 $ 24,332 $ - $ 1,094,004
=========== ============ ========== =========== ========== ===========
</TABLE>
F-22
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Capital Expenditures $ 0 $ 677,004 $ 0 $ 0 $ - $ 677,004
=========== ============ ========== =========== ========== ===========
</TABLE>
F-23
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Geographic segment information, continued
<TABLE>
<CAPTION>
Year Ended
December 31, 1995 Domestic China Corporate Eliminations Consolidated
- ----------------- -------- ----- --------- ------------ ------------
Communications
Network
-------
Healthcare
----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $2,486,708 $ N/A $ 340,233 $ 423,956 $ (127,944) $3,122,953
========= ============= ============= ========= ========= =========
Operating Profit (Loss) $ 196,714 $ N/A $ (171,083) $ (519,386) $ 0 $ (493,755)
========= ============= ============= ========= ========= =========
Identifiable Assets $2,509,402 $ N/A $ (1,098,742) $ 682,277 $ (682,157) $4,146,683
========= ============= ============= ========= ========= =========
Amortization and
Depreciation $ 377,561 $ N/A $ 13,011 $ 13,511 $ 0 $ 465,020
========= ============= ============= ========= ========= =========
Capital Expenditures $ 0 $ N/A $ 2,046 $ 375 $ -- $ 23,222
========= ============= ============= ========= ========= =========
</TABLE>
The corporate office provides management and operational services for domestic
outpatient health care services. The elimination's represent charges for these
services to entities included in the consolidation.
Note 13 - Related party transactions
In addition to related party transactions disclosed elsewhere, during the first
quarter of 1995, the Company received advances totaling $218,000 from Mortgage
Network International ("MNI"). Henry Y.L. Toh, a Director of the Company, has
management control over MNI. Such advances were previously payable upon demand.
Subsequent to the extension of such advances, the Board of Directors approved
delivery of a promissory note representing the aggregate amount of such
advances, which promissory note matured by its terms on October 1, 1995 and
bears interest at one percent over the prime rate of interest established by
Southwest Bank of Texas, N.A. Subsequently, the Company and MNI modified the
Note such that: (i) the principal amount of $130,000 with interest thereon at
the rate of 10.5% will be paid in thirty-six (36) equal payments of
approximately $4,200 and (ii) the remaining principal amount of $88,000 with
interest thereon at the rate of 10.5% will be paid in twenty-one (21) equal
monthly payments of $4,600.
Note 14 - Employment Agreements
The Company has entered into employment contracts with eight of its executive
officers and management personel. These agreements generally continue until
terminated by the executive or the Company, and provide for salary continuation
for a specified number of months under certain circumstances. Certain of the
agreements provide the employees with certain additional rights, including the
vesting of unvested stock options, in the event of a change of control of the
Company occurs. The agreements contain non-competition and confidentiality
provisions. As of December 31, 1996, if the eight employees under contact were
to be terminated by the Company, the Company's liability would be approximately
$1,425,000.
Note 15 - Subsequent events
On January 13, 1997, pursuant to the terms of a Share Exchange Agreement for the
Acquisition of Family Telecommunications Incorporated by Medcross, Inc.
effective as of January 1, 1997 (the "Exchange Agreement"), the Company acquired
the outstanding stock of Family Telecommunications Incorporated, a Utah
corporation ("FTI"), from the stockholders of FTI, namely, Robert W. Edwards,
Jr. and Jerald L. Nelson. The consideration for the transaction consists of an
aggregate of 400,000 shares of the Company's common stock to be issued by the
Company upon the satisfaction of certain conditions including approval by the
Company's shareholders of an amendment to the Articles of Incorporation
authorizing an increase in the number of shares of common stock from 20 million
to 50 million and no material breach of any representation by the former
stockholders. The purchase price was determined based upon the negotiated value
of the assets and operations of FTI. The acquisition will be accounted for using
the purchase method of accounting.
During 1996 the Company advanced $685,000 to FTI for equipment purchases of
which $120,000 remained outstanding and was included in Other Assets at December
31, 1996.
John W. Edwards, President, a Director and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the
F-24
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal shareholder and one of the two shareholders of FTI, are brothers.
There was no affiliation or relationship between the Company, its affiliates,
officers or directors or associates of such persons and FTI or any of its
officers, directors or stockholders prior to the execution of the Exchange
Agreement except as set forth herein.
FTI is an FCC licensed long-distance carrier and provider of telecommunications
services.
F-25
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30,
1997
----
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 1,176,386
Accounts receivable, less allowance of $1,069,389 3,936,492
Certificate of deposit - restricted 198,640
Inventory, less allowance of $260,033 763,263
Other current assets 199,074
----------
Total current assets 6,273,855
----------
Property and equipment:
Property and equipment 7,360,958
Less accumulated depreciation (3,198,000)
----------
Net property and equipment 4,162,958
----------
Other assets:
Intangible assets, net of amortization of $467,384 11,600,414
Certificate of deposit - restricted 1,742,711
Other assets 124,065
----------
Total other assets 13,467,190
----------
Total assets $ 23,904,003
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,163,076
Notes payable - related party 88,000
Notes payable - other 957,000
Current portion of long-term debt - related party 43,554
Current portion of long-term debt - other 408,429
Current obligations under capital lease 187,047
----------
Total current liabilities 8,847,106
Long-term debt, net of debt issuance costs of $3,615,000 610,114
Obligations under capital leases 147,274
Minority interest in consolidated subsidiaries 299,198
----------
Total liabilities 9,903,692
----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10 par value, 247,500 shares outstanding 2,475,000
Common stock, $.007 par value, authorized 20,000,000 shares
issued and outstanding 10,627,597 shares 74,393
Additional paid-in capital 40,236,521
Deferred compensation from stock options (4,200,000)
Common stock to be issued 11,289,583
Accumulated deficit (35,875,186)
----------
Total stockholders' equity 14,000,311
----------
Total liabilities and stockholders' equity $ 23,904,003
==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-26
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications service revenue $ 2,266,492 $ - $ 4,414,825 $ -
Health care service revenue 582,298 582,490 1,179,555 1,174,670
Marketing services revenue 720,490 - 720,490 -
Other revenue - 55,338 - 72,364
------------ ---------- ------------ ------------
Net operating revenue 3,569,280 637,828 6,314,870 1,247,034
------------ ---------- ------------ ------------
Operating costs and expenses:
Telecommunications network expense 4,174,708 224,302 7,065,790 322,535
Marketing services costs 640,739 - 640,739 -
Selling, general and administrative 2,378,890 1,035,682 5,026,034 2,030,285
Provision for doubtful accounts 368,273 49,619 503,498 90,863
Depreciation and amortization 618,443 195,818 1,019,938 525,191
Provision for asset valuation - - 213,944 -
Acquired in-process research
and development - - - 4,777,943
Research and development 234,246 - 345,334 -
------------ ---------- ------------ ------------
Total operating costs and expenses 8,415,299 1,505,421 14,815,277 7,746,817
------------ ---------- ------------ ------------
Operating loss (4,846,019) (867,593) (8,500,407) (6,499,783)
------------ ---------- ------------ ------------
Other income (expense):
Interest expense (74,118) (75,127) (420,475) (1,067,766)
Interest and other income (expense) 57,199 (2,765) 142,114 12,762
------------ ---------- ------------ ------------
Total other expense (16,919) (77,892) (278,361) (1,055,004)
------------ ---------- ------------ ------------
Loss before minority interest in net loss
of consolidated subsidiaries (4,862,938) (945,485) (8,778,768) (7,554,787)
Minority interest in net loss of
consolidated subsidiaries 20,039 2,006 29,128 63
------------ ---------- ------------ ------------
Net loss $ (4,842,899) $ (943,479) $ (8,749,640) $ (7,554,724)
============ ========== ============ ============
Loss per common share after
Preferred dividends $( 0.48) $( 0.21) $( 0.88) $( 2.03)
============ ========== ============ ============
Weighted average common shares outstanding 10,627,597 4,535,539 10,617,597 3,753,470
============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-27
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
----------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,749,640) $(7,554,724)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,019,938 525,191
Provision for doubtful accounts 503,498 90,863
Imputed interest on convertible notes 320,000 945,000
Acquired in-process research and
development - 4,777,943
Provision for asset valuation 213,944 -
Amortization of deferred stock option
compensation 200,000 -
Minority interest in net loss of
consolidated subsidiaries (29,128) (63)
Change in assets and liabilities net of
effects from purchase of FTI:
Accounts receivable (2,603,976) (79,192)
Inventory 369 (110)
Other assets 91,815 (191,395)
Other current assets (289,773) 2,673
Accounts payable and accrued expenses 4,282,225 617,499
------------ ------------
Net cash used by operating activities (5,040,728) (866,315)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (483,992) (3,576)
Proceeds received from maturity of
certificate of deposit - restricted - 60,000
Cash received from purchase of FTI 435,312 -
------------ ------------
Net cash provided by (used in) investing
activities (48,680) 56,424
------------ ------------
Cash flows from financing activities:
Repayment of note payable - related party - (117,832)
Proceeds from notes payable - other - 1,475,000
Repayment of notes payable - other (50,000) (174,575)
Proceeds from long-term debt 2,000,000 -
Repayment of long-term debt (117,501) (51,751)
Payment of capital lease obligations (89,431) (286,354)
Issuance of common stock 22,499 306,065
Minority interest distributions - (36,865)
------------ ------------
Net cash provided by financing activities 1,765,567 1,113,688
------------ ------------
Increase (decrease) in cash and cash equivalents (3,323,841) 303,797
Cash and cash equivalents at beginning of period 4,500,227 80,157
------------ ------------
Cash and cash equivalents at end of period $1,176,386 $383,954
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
Organization. The interim financial data are unaudited; however, in the opinion
of the management of Medcross, Inc. and Subsidiaries (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-month periods ended June 30, 1997 and June 30,
1996, (b) the financial position at June 30, 1997, and (c) cash flows for the
six-month periods ended June 30, 1997 and June 30, 1996. The financial
statements should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 and its quarterly report on
Form 10-QSB for the three months ended March 31, 1997.
The unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
for the three-month and six-month periods ended June 30, 1997 are not
necessarily indicative of those to be expected for the entire year.
Reclassification. Certain balances in the June 30, 1996 financial statements as
amended have been reclassified to conform to the current period presentation.
These changes had no effect on previously reported net loss, total assets,
liabilities or stockholders' equity.
Marketing services revenue. During the second quarter of 1997 the Company
launched a multi-level marketing (MLM) channel to market its telecommunication
services. Marketing services revenues from the MLM channel include revenues
recognized from independent representatives for training, promotional and
presentation materials.
Intangibles. The Company regularly evaluates whether events or circumstances
have occurred that indicate the intangible assets may not be recoverable. When
factors indicate the asset may not be recoverable, the Company uses an estimate
of the related undiscounted future cash flows compared to the carrying value of
intangibles to determine if an impairment exists. Adjustments are made if the
sum of the expected future net cash flows is less than carrying value. No such
adjustments were necessary in the periods being reported on.
Note 2 - Supplemental Cash Flow Information
In February 1996, the Company acquired all of the issued and outstanding stock
of I-Link Worldwide, Inc. in exchange for the issuance of an aggregate of
4,000,000 shares of common stock of the Company, of which 1,000,000 shares were
held in escrow as of December 31, 1996. In June 1997, the Company became
obligated to issue the remaining 1,000,000 shares of common stock (fair value of
$8,875,000) from escrow.
In April and June 1996, holders of certain promissory notes issued by the
Company converted $10,000 and $180,542, respectively, into 140,000 and 64,372,
respectively, shares of Common Stock.
In January 1997, the Company agreed to issue 400,000 shares of common stock to
acquire all of the issued and outstanding stock of Family Telecommunications
Inc. ("FTI") effective January 1, 1997.
F-29
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Supplemental Cash Flow Information, continued
In April 1997, the Company issued warrants to purchase 175,000 shares of common
stock in connection with an $821,000 litigation settlement payable.
In June 1997, the Company issued warrants to purchase 500,000 shares of common
stock in connection with a $2,000,000 loan. The value of the warrants was
recorded as debt issuance costs.
Note 3 - Acquisition of Subsidiaries
Family Telecommunications Incorporated. On January 13, 1997, pursuant to the
terms of a Share Exchange Agreement for the acquisition of Family
Telecommunications Incorporated by Medcross, Inc. effective as of January 1,
1997 (the "Exchange Agreement"), the Company acquired the outstanding stock of
Family Telecommunications Incorporated, a Utah corporation ("FTI"), from the
stockholders of FTI, namely Robert W. Edwards, Jr. and Jerald L. Nelson. The
consideration for the transaction consists of an aggregate of 400,000 shares of
the Company's common stock to be issued by the Company upon approval by the
Company's shareholders of an amendment to the Articles of Incorporation
authorizing an increase in the number of shares of common stock from 20 million
to 50 million. The purchase price was determined upon the negotiated value of
the assets and operations of FTI. The acquisition has been accounted for using
the purchase method of accounting in the quarter ended March 31, 1997. FTI is an
FCC licensed long-distance carrier and provider of telecommunications services.
John W. Edwards, President, a Director and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the principal shareholder of FTI, are
brothers. There was no affiliation or relationship between the Company, its
affiliates, officers or directors or associates of such persons and FTI or any
if it's officers, directors or stockholders prior to the execution of the
Exchange Agreement except as set forth herein.
The acquisition cost of $2,415,000 (representing the fair value of the 400,000
shares to be issued) was allocated to the tangible net liabilities of $135,000
(based on their fair market value) with the excess acquisition cost over fair
value of assets acquired of $2,550,000 allocated to intangible assets. The
intangible assets are being amortized over periods ranging between three and ten
years. The fair values of assets acquired and liabilities assumed in conjunction
with this acquisition were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $435,312) $ 1,740,000
Long-term assets 3,716,000
Current liabilities (1,330,000)
Long-term liabilities (1,711,000)
--------------
Net purchase price $ 2,415,000
==============
</TABLE>
As part of the common stock acquisition of FTI, the Company assumed current and
long-term obligations in the amount of $1,991,000 as of December 31, 1996 to a
long-distance provider for FTI's line costs. The note was increased
approximately $700,000 for long-distance usage for January 1997. The note bears
interest at 7% per annum. The note calls for payments of $50,000 per month
beginning May 5, 1997 increasing to $75,000 on April 5, 1998 and $150,000 on
October 5, 1998 with the balance of $1,100,000 due on April 5, 1999. Remaining
principal payments under this specific note as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
June 30, 1998 $ 432,000
June 30, 1999 2,175,000
--------------
Total $ 2,607,000
==============
</TABLE>
F-30
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of Subsidiaries, continued
Pro forma financial information. As discussed above, the Company acquired FTI
during the six months ended June 30, 1997. The acquisition was accounted for
using the purchase method of accounting. The consolidated financial statements
as presented include the operating results of FTI from the date of acquisition.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and FTI as if the acquisition had occurred
at March 20, 1996 (date of inception of FTI), with pro forma adjustments to give
effect to amortization of intangible assets.
<TABLE>
<CAPTION>
Three months ended
---------------------------------
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 3,569,000 $ 1,200,000
Net loss $ (4,843,000) $ (1,486,000)
Loss per share $ (0.48) $ (0.33)
<CAPTION>
Six months ended
---------------------------------
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 6,315,000 $ 1,809,000
Net loss $ (8,750,000) $ (8,096,000)
Loss per share $ (0.88) $ (2.17)
</TABLE>
MiBridge, Inc. - Subsequent Event. On June 5, 1997, the Company entered into a
letter of intent with MiBridge, Inc. a New Jersey corporation ("MiBridge")
pursuant to which the Company entered into negotiations to acquire all of the
issued and outstanding stock of MiBridge from the principal shareholder. A final
agreement was signed on August 12, 1997, with closing anticipated in the third
quarter of 1997. The consideration ($8,250,000) for the transaction consisted
of: (1) an aggregate of 1,000 shares of preferred stock to be issued, which
preferred stock is convertible into such a number of common shares as shall
equal the sum of $6,250,000 divided by $9.25 which price was the closing bid
price of the Company's common stock on June 5, 1997 (the date a letter of intent
was signed by the Company and MiBridge) and (2) a note payable in the amount of
$2,000,000 payable in cash in quarterly installments over two years. The
acquisition will be accounted for using the purchase method of accounting in the
quarter ended September 30, 1997. MiBridge is the owner of patent-pending audio-
conferencing technology and is a leader in creating speech-encoding and
compression algorithms designed to produce superior audio quality and lower
delay over low-band networks.
Management estimates that the acquisition cost of $8,250,000 (representing the
fair value of the common stock into which the 1,000 shares of preferred stock
(to be issued) can be converted and the $2,000,000 note payable) will be
allocated to tangible net assets of approximately $355,000 (based on their
estimated fair value at final closing) with the balance of $7,895,000 allocated
to acquired technology ($1,450,000), acquired in-process research and
development ($4,240,000), employment contracts for the assembled workforce
($600,000) and excess acquisition cost over fair value of net assets acquired
($1,605,000). These assets are being amortized over three years, with the
exception of the excess acquisition cost over fair value of net assets
F-31
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of Subsidiaries, continued
acquired which is being amortized over five years. The Company anticipates that
the acquired in-process research and development will be expensed upon
acquisition, as the research and development will not have reached technological
feasibility at the closing date. Based on management's best estimate of the
ultimate assets acquired and liabilities assumed at closing, the purchase price
in conjunction with this acquisition will be allocated as follows:
<TABLE>
<S> <C>
Current assets (including cash of $15,000) $ 453,000
Current liabilities (175,000)
Tangible long-term assets 77,000
Intangible long-term assets 3,655,000
In-process research and development 4,240,000
--------------
Net purchase price $ 8,250,000
==============
</TABLE>
Note 4 - Long-Term Debt
On June 6, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with Winter Harbor , LLC ("Winter
Harbor") pursuant to which Winter Harbor agreed to loan to the Company the
principal sum of $2,000,000 ("the Loan") for capital expenditures and working
capital purposes. As further consideration for Winter Harbor's commitment to
make the Loan, the Company granted to Winter Harbor a warrant ("Loan Warrant")
to purchase up to five hundred thousand (500,000) shares of common stock of the
Company (the "Common Stock") at a purchase price of $4.97 per share, subject to
adjustment, pursuant to the terms of a Warrant Agreement between the parties.
The Loan Warrant expires on March 11, 2002, and contains demand and piggyback
registration rights and customary anti-dilution terms. The maturity date of the
note is October 15, 1998.
The fair value of the warrants issued in connection with the Loan has been
reflected as debt issuance costs of $3,815,000, which amount will be amortized
over the life of the Loan. The loan balance and unamortized debt issuance costs
are reflected in the financial statements as follows:
<TABLE>
<S> <C>
Long-term portion of note payable to
a long-distance provider $ 2,202,194
Long-term debt - other 22,920
Long-term debt - Winter Harbor 2,000,000
Debt issuance costs (3,615,000)
--------------
Long-term debt, net of debt issuance costs $ 610,114
==============
</TABLE>
On August 18, 1997 the Company amended the existing Note allowing for additional
borrowings of up to $3,000,000. The incremental borrowings under this amendment
have a maturity date of February 15, 1998. For every $1,000,000 drawn down on
this extension, the Company will issue 100,000 warrants at current market price.
All other provisions of this extension are the same as the Note discussed above.
F-32
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Imputed Interest on Convertible Notes
Simultaneous with the closing of the Company's offering of Class C Preferred
Stock in September 1996, the Company issued an aggregate of $717,000 in
principal amount of Convertible Promissory Notes. The Company has recorded
interest expense (non-cash) of $320,000 related to these promissory notes in the
three months ended March 31, 1997. The interest expense is calculated as the
difference between the conversion price per common share per the promissory
notes as compared to the market price for the common stock on the date the notes
were issued. The interest expense was recognized over the period between the
date the promissory notes were issued and the date the promissory notes could
first be converted.
Note 6 - Commitments
In February 1996, the Company agreed to issue a maximum of 4,000,000 shares of
common stock to acquire the common stock of I-Link Worldwide Inc. As of June 30,
1997 the Company has issued 3,000,000 shares. The remaining 1,000,000 shares 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.
Revenues for June 1997 were in excess of $1,000,000, and accordingly, the
Company will issue the remaining 1,000,000 shares. The value of the common stock
to be issued is $8,875,000 (based on the closing market price of the common
stock on June 30, 1997) and has been recorded in the financial statements as an
intangible asset representing excess cost over fair value of net assets acquired
which is being amortized over five years.
Note 7 - Income Taxes
The Company recognized no income tax benefit for the losses generated in 1997
and 1996.
Note 8 - Loss Per Common Share After Preferred Dividends
Loss per common share is calculated as the net loss for the respective period
plus cumulative preferred stock dividends not paid in the current period of
$288,776 and $21,168 for the three months ended June 30, 1997 and 1996
respectively, and $577,923 and $53,322 for the six months ended June 30, 1997
and June 30, 1996, respectively, divided by the weighted average number of
common shares outstanding. Options, warrants and convertible preferred stock are
excluded from the calculation when their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS and
makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
F-33
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Options and Warrants
During the first six months of 1997, the Company granted options to purchase
3,545,000 shares of common stock to employees and consultants of the Company at
a price (ranging from $5.75 to $9.875) equal to the common stock price on the
day of grant. During the six months ended June 30, 1997, 20,000 options were
exercised to purchase common stock.
Included in the above grants, were 750,000 options granted to non-employees. The
fair market value of the options was recorded as deferred compensation for stock
options in the amount of $4,400,000. The deferred compensation is being
amortized over the vesting period of the options (primarily three years).
Note 10 - Changes in Stockholders' Equity
During the six months ended June 30, 1997 changes in stockholders' equity were
as follows:
Common stock increased by $140 related to the exercise of an option to purchase
20,000 shares of common stock (see note 9).
Additional paid-in capital increased due to the following:
* $303,251 which was associated with the balance of amortization of interest
expenses associated with issuance of convertible notes at a discount in 1996.
* $821,000 which was associated with issuance of warrants in connection with a
litigation settlement payable.
* $22,360 related to the exercise of an option to purchase 20,000 shares of
common stock (see note 9).
* $3,815,000 related to issuance of 500,000 warrants in connection with a debt
financing arrangement (see Note 4).
* $4,400,000 related to the issuance of options to non-employees (see note 9).
Common stock to be issued increased due to the following:
* $2,414,583 in relation to the acquisition of FTI. The amount has been
recorded as common stock to be issued as the Company does not presently
have authorized shares to issue to FTI (see note 3).
* $8,875,000 related to 1,000,000 shares of common stock to be issued in
connection with the acquisition of I-Link Worldwide (see Note 6).
Deferred compensation increased by $4,200,000 (net of $200,000 amortized during
the period ended June 30, 1997) related to the issuance of stock options to non-
employees (see note 9).
Accumulated deficit increased by $8,749,640 which is the net loss for
the first six months of 1997.
F-34
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Restatement of previously reported amounts
Subsequent to its original filing of form 10-QSB for the period ended June 30,
1997, the Company determined that certain amounts as reported in the
consolidated financial statements included transactions relative to the
acquisition of MiBridge that should not have been included in the June 30, 1997
financial statements. Although the Company had entered into a letter of intent
on June 5, 1997 to acquire MiBridge, the final closing of the acquisition is not
expected until late August 1997 and accordingly should be recorded in the
quarter ending September 30, 1997. Therefore, the June 30, 1997 financial
statements have been restated as follows.
<TABLE>
<CAPTION>
Consolidated balance sheet:
As Originally
Reported Adjustments As Amended
-------------- ------------- --------------
Assets
------
<S> <C> <C> <C>
Cash and cash equivalents $ 1,341,391 $ (165,005) $ 1,176,386
Accounts receivable 4,291,492 (355,000) 3,936,492
Other current assets 199,574 (500) 199,074
Property and equipment, net 4,213,133 (50,175) 4,162,958
Intangible assets, net 15,381,165 (3,780,751) 11,600,414
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable and accrued expenses 7,322,627 (159,551) 7,163,076
Current portion of long-term debt -- related party 1,043,554 (1,000,000) 43,554
Long-term debt -- related party 1,000,000 (1,000,000) -
Preferred stock to be issued 6,250,000 (6,250,000) -
Accumulated deficit (39,933,306) 4,058,120 (35,875,186)
<CAPTION>
Consolidated statement of operations for the
six-month period ended June 30, 1997:
<S> <C> <C> <C>
Selling, general and administrative 5,093,935 (67,901) 5,026,034
Depreciation and amortization 1,089,348 (69,410) 1,019,938
Acquired in-process research and development 3,920,000 (3,920,000) -
Research and development 346,143 (809) 345,334
Net loss (12,807,760) 4,058,120 (8,749,640)
Loss per share (1.26) 0.38 (0.88)
<CAPTION>
Consolidated statement of operations for the
three-month period ended June 30, 1997:
<S> <C> <C> <C>
Selling, general and administrative 2,446,791 (67,901) 2,378,890
Depreciation and amortization 687,853 (69,410) 618,443
Acquired in-process research and development 3,920,000 (3,920,000) -
Research and development 235,055 (809) 234,246
Net loss (8,901,019) 4,058,120 (4,842,899)
Loss per share (0.86) 0.38 (0.48)
</TABLE>
F-35
<PAGE>
Report of Independent Accountants
---------------------------------
To the Shareholders of
Family Telecommunications, Incorporated:
We have audited the balance sheet of Family Telecommunications, Incorporated as
of December 31, 1996, and the related statements of operations and cash flows
for the period from the date of inception (March 20, 1996) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Telecommunications,
Incorporated as of December 31, 1996, and the results of its operations and its
cash flows for the period from the date of inception (March 20, 1996) to
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
March 11, 1997
F-36
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
BALANCE SHEET
as of December 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 435,312
Accounts receivable (net of allowance for doubtful accounts of $781,787) 1,252,974
Accounts receivable - related party 30,726
Other current assets 20,696
-----------
Total current assets 1,739,708
-----------
Furniture and equipment:
Communications equipment 1,004,121
Office furniture and equipment 218,558
-----------
1,222,679
Less accumulated depreciation (150,261)
-----------
Total furniture and equipment, net 1,072,418
Deposits 28,491
-----------
Total assets $ 2,840,617
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 139,579
Accrued liabilities 322,778
Accrued wages - officers 144,000
Advances from related party 120,000
Settlement payable to marketing group 200,000
Notes payable 124,000
Long-term debt - current portion 280,000
-----------
Total current liabilities 1,330,357
Long-term debt 1,711,216
-----------
Total liabilities 3,041,573
-----------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Common stock, $.001 par value, 10,000 shares authorized,
4,000 issued and outstanding 4
Additional paid-in capital 1,036,915
Accumulated deficit (1,237,875)
-----------
Total stockholders' deficit (200,956)
-----------
Total liabilities and stockholders' deficit $ 2,840,617
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-37
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
STATEMENT OF OPERATIONS
For the period from March 20, 1996 (inception) to December 31, 1996
<TABLE>
<S> <C>
Revenues:
Long distance service revenues $ 3,880,457
-----------
Operating expenses:
Line costs 2,841,860
Commissions 460,030
Selling, general and administrative 1,352,732
Depreciation and amortization 150,261
Research and development 79,609
Bad debt expense 784,537
-----------
Total operating expenses 5,669,029
-----------
Operating loss (1,788,572)
-----------
Other income (expense):
Income from sales of communications hardware to a related
party, (net of $1,137,828 costs of goods sold) 585,541
Interest income 2,109
Interest expense (7,524)
Other expense (29,429)
-----------
Total other income, net 550,697
-----------
Net loss $(1,237,875)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-38
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
STATEMENT OF CASH FLOWS
For the period from March 20, 1996 (inception) to December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(1,237,875)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 150,261
Provision for losses on accounts receivable 784,537
Increase (decrease) from changes in:
Receivables (2,068,237)
Other current assets (20,696)
Deposits (28,491)
Accounts payable and accrued liabilities 2,440,577
Accrued wages - officers 144,000
Settlement payable to marketing group 200,000
-----------
Net cash used in operating activities 364,076
-----------
Cash flows from investing activities:
Additions to furniture and equipment (112,764)
-----------
Net cash used in investing activities (112,764)
-----------
Cash flows from financing activities:
Proceeds from short term notes payable 104,000
Payments on short term notes payable (40,000)
Advances from related party 120,000
-----------
Net cash provided by financing activities 184,000
-----------
Increase in cash and cash equivalents 435,312
Cash and cash equivalents at beginning of year 0
-----------
Cash and cash equivalents at end of year $ 435,312
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,200
===========
Non-cash transactions:
Contribution of equipment and furniture by shareholders
in exchange for stock of the company $ 1,036,919
Additions to furniture and equipment financed
with trade accounts payable $ 13,000
Additions to furniture and equipment financed
with short-term note payable $ 60,000
</TABLE>
The accompanying notes are an integral part of the financial statements
F-39
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------
Organization
------------
Family Telecommunications, Incorporated (the Company), a Utah corporation,
began operations on March 20, 1996. The Company provides long-distance
telephone services including 1-plus long distance service, toll free
services (800/888), worldwide calling card service, worldwide prepaid phone
card service, long distance cellular phone service, data line service and
T-span service. Through its Carrier Agreement with MCI Telecommunications
Corporation, the Company provides long-distance service in the 48
continental states. The Company is a switchless reseller (having no
equipment) in all states but Arizona where the Company provides service
through its own switches. This allows the Company to offer additional
services in its home state and surrounding states and other customized
services to its entire customer base.
The following is a summary of significant accounting policies followed by
the Company:
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts that are readily
convertible to cash.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Telecommunications equipment 5-7
Office equipment and furniture 3-7
</TABLE>
Maintenance and repairs, which are not considered betterments and do not
extend the useful life of assets, are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
Continued
F-40
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES, Continued:
-----------------------------------------------
Research and Development
------------------------
Company-sponsored research and development costs related to both present
and future products are expensed currently.
Income Taxes
------------
The Company has elected to be taxed as a U.S. small business corporation
exempt from income taxes under Sub-Chapter S of the Internal Revenue Code.
Accordingly, the Company's shareholders are responsible for federal and
state income taxes on their respective portions of the Company's earnings.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk are primarily accounts receivable. In 1996 the Company
generated approximately 89% of its long-distance revenues from one
marketing group, although collections are made from each member of the
group. The Company performs credit evaluations of its large customers but
generally does not require collateral to support customer receivables.
The majority of the Company's cash and cash equivalents are held by three
financial institutions in Phoenix, Arizona. The Company has $175,000 which
exceeds the FDIC insurance limits.
Estimates
---------
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Continued
F-41
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
------------------------------------------
The Company has estimated an allowance for doubtful accounts receivable in
the amount of $781,787 as of December 31, 1996. Management's estimate takes
into consideration current market conditions and the limited collection
experience of the Company since inception. Actual write-offs of
uncollectible accounts may differ from amounts estimated.
3. SETTLEMENT PAYABLE TO MARKETING GROUP:
-------------------------------------
The Company entered into an agreement during 1996 with a marketing group
wherein the group was to share in fees and profits related to telephone
usage by the group's members, net of commissions paid to the members. In
connection with this agreement, certain disagreements between the Company
and the marketing group existed at year end. Subsequent to December 31,
1996, the Company entered into a settlement agreement with the marketing
group, wherein the Company agreed to pay the marketing group $200,000 to
satisfy all liabilities to the group under the original agreement.
4. NOTES PAYABLE:
-------------
As of December 31, 1996, the Company has $124,000 in short-term notes
payable to various banks and individuals which are due in 1997. Two notes
totaling $100,000 are collateralized by some of the Company's furniture and
equipment and bear interest at rates ranging from 8 to 11.5 percent.
5. RELATED PARTY TRANSACTIONS:
--------------------------
The Company's principal shareholder, is a brother of the president of I-
Link Worldwide, Inc. ("I-Link") a subsidiary of Medcross, Inc. During the
period from March 20, 1996 (inception) to December 31, 1996, the Company
rendered long distance services and sold switching equipment to I-Link.
Revenues and expenses relating to these transactions are as follows:
<TABLE>
<S> <C>
Long distance revenues $ 5,026
Revenues from sale of switching equipment $ 1,723,369
Cost of switching equipment sold $ 1,137,828
</TABLE>
Continued
F-42
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. RELATED PARTY TRANSACTIONS, Continued:
--------------------------
As of December 31, 1996 the Company had a receivable from I-Link for
services in the amount of $30,726 and an advance in the amount of $120,000
from I-Link for services to be rendered by the Company for I-Link
subsequent to year-end.
Subsequent to December 31, 1996, the Company entered into a share exchange
agreement for the acquisition of the Company by Medcross, Inc. (See Note
8 - Subsequent Events)
6. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
-------------------------------------------
At the inception of the Company, owners contributed assets valued at
$1,036,919 in exchange for 4,000 shares of the Company's common stock. The
contributed assets consisted primarily of telephone switching equipment and
office equipment. The value of the stock issued for the contributed assets
and the assets themselves were valued based on the fair market value of the
contributed assets at the date of contribution as there is no active
trading market in the stock of the Company.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Leases
------
The Company leases office space under non-cancelable operating leases.
Rental expense for 1996 was $73,000. The leases grant a security interest
in substantially all of the Company's furniture and equipment during the
term of the lease. Future minimum lease payments under these leases are as
follows:
<TABLE>
<S> <C>
1997 $ 109,000
1998 113,000
1999 119,000
2000 93,000
2001 35,000
--------
$ 469,000
========
</TABLE>
Continued
F-43
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
7. COMMITMENTS AND CONTINGENCIES, Continued:
-----------------------------
Employment Agreements
---------------------
The Company has employment agreements with six employees of the Company
providing for a salary continuation (usually five years) in the event of
termination for reasons other than cause. As of December 31, 1996, if all
of the employees under contract were to be terminated by the Company
without cause under these contracts, the Company's total future payments to
these employees would be approximately $1,400,000.
8. SUBSEQUENT EVENTS:
-----------------
Restructuring of Account Payable into Long-Term Debt
----------------------------------------------------
As of December 31, 1996 the Company had an account payable in the amount of
$1,991,216 to a long distance provider for the Company's line costs.
Subsequent to year-end the Company entered into an agreement wherein the
$1,991,216 payable and the Company's line charge for January 1997 of
approximately $700,000 were converted to a long-term note payable with
interest payable at 7%. No interest will be charged until May 5, 1997. The
note calls for payments of $50,000 per month beginning May 5, 1997
increasing to $75,000 on April 5, 1998 and $150,000 on October 5, 1998 with
a balloon payment of $1,100,000 due on April 5, 1999. Principal payments
under the note will be as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
1997 $ 280,000
1998 901,000
1999 1,519,000
----------
$ 2,700,000
==========
</TABLE>
Continued
F-44
<PAGE>
FAMILY TELECOMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
8. SUBSEQUENT EVENTS, Continued:
-----------------
Restructuring of Account Payable into Long-Term Debt, Continued
----------------------------------------------------
Under terms of this agreement, the Company is also obligated to make
payments on current usage in the amount of $600,000 for February 1997 usage
(with a true-up payment 30 days after receipt of the February invoice) and
weekly payments for subsequent months current usage in the amount of
$125,000 for March and April 1997 and $150,000 for May 1997 and subsequent
usage periods. True-up payments for each month will be 30 days after
receipt of the respective month's invoice. If usage increases or decreases
more than 20% in any weekly or monthly period, the weekly payment will be
adjusted consistent with that usage.
Acquisition of the Company by Medcross, Inc.
-------------------------------------------
Subsequent to year-end and effective January 1, 1997, the Company entered
into a share exchange agreement (the "agreement") with Medcross, Inc.
(Medcross). Under the agreement, Medcross will acquire 100% of the
Company's outstanding shares of common stock in exchange for 400,000 shares
of common stock of I-Link subject to certain contingencies, approval by
Medcross shareholders at Medcross' next Shareholders' meeting of an
amendment to Medcross' Articles of Incorporation increasing the number of
authorized common shares of Medcross and entering into employment contracts
with Robert Edwards and Jerry Nelson.
F-45
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
PRO FORMA COMBINED BALANCE SHEET
As of December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Medcross, Inc. FTI Adjustment Pro Forma
-------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,500,227 $ 435,312 $ 4,935,539
Accounts receivable less allowances of $1,433,806 780,907 1,283,700 $(120,000) (D) 1,944,607
Inventory less allowances of $260,033 557,036 - 557,036
Certificate of deposit - restricted 208,500 - 208,500
Prepaid expenses 47,472 - 47,472
Other current assets 11,411 20,696 32,107
----------- ---------- ----------
Total current assets 6,105,553 1,739,708 7,725,261
----------- ---------- ----------
Property and equipment
Office furniture, equipment and leasehold improvements 388,191 218,558 606,749
Network services furniture and equipment 2,110,996 1,004,121 (84,725) (B) 3,030,392
Medical equipment and vehicles 2,975,701 - 2,975,701
----------- ---------- ----------
5,474,888 1,222,679 6,612,842
Less accumulated depreciation (2,618,252) (150,261) 150,261 (B) (2,618,252)
----------- ---------- ----------
Net property and equipment 2,856,636 1,072,418 3,994,590
----------- ---------- ----------
Other assets:
Intangible assets, net 486,028 - 2,550,003 (A) 3,036,031
Certificate of deposit - restricted 1,761,312 - 1,761,312
Other assets 224,301 28,491 252,792
----------- ---------- ----------
Total other assets 2,471,641 28,491 5,050,135
----------- ---------- ----------
Total assets $ 11,433,830 $ 2,840,617 $ 16,769,986
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,379,451 $ 926,357 $(120,000) (D) $ 3,185,808
Accrued litigation settlement 821,000 - 821,000
Notes payable 1,095,000 124,000 1,219,000
Current portion of long-term debt 43,554 280,000 323,554
Current obligations under capital lease 187,047 - 187,047
------------ ----------- -----------
Total current liabilities 4,526,052 1,330,357 5,736,409
Long-term debt 44,128 1,711,216 1,755,344
Capital lease obligation 236,705 - 236,705
Minority interest in consolidated subsidiaries 328,328 - 328,328
------------ ----------- -----------
Total liabilities 5,135,213 3,041,573 8,056,786
------------ ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock 2,475,000 - 2,475,000
Common stock 74,253 4 2,796 (A,C) 77,053
Additional paid-in capital 30,874,910 1,036,915 1,374,868 (A,C) 33,286,693
Accumulated deficit (27,125,546) (1,237,875) 1,237,875 (C) (27,125,546)
------------ ----------- -----------
Total stockholders' equity 6,298,617 (200,956) 8,713,200
------------ ----------- -----------
Total liabilities and stockholders' equity $ 11,433,830 $ 2,840,617 $ 16,769,986
=========== ========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-46
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Medcross, Inc. FTI Adjustment Pro Forma
-------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Health care service revenue, net $ 2,212,544 $ - $ - $ 2,212,544
Network service revenue 170,532 - - 170,532
Long distance service revenues - 3,880,457 (5,026) (D) 3,875,431
----------- ---------- ---------- -----------
Net operating revenue 2,383,076 3,880,457 6,258,507
----------- ---------- -----------
Operating costs and expenses:
Line costs - 2,841,860 2,841,860
Commissions - 460,030 460,030
Salaries and benefits 1,825,138 854,609 (5,026) (D) 2,674,721
Selling, general and administrative 2,863,963 498,123 3,362,086
Communications network expenses 1,120,779 - 1,120,779
Depreciation and amortization 1,094,004 150,261 272,600 (E) 1,516,865
Provision for inventory valuation 260,033 - 260,033
Repairs and maintenance 288,662 - 288,662
Provision for doubtful accounts 197,565 784,537 982,102
Research and development 347,504 79,609 427,113
Acquired in-process research and development expense 14,577,942 - 14,577,942
----------- ---------- -----------
Total operating costs and expenses 22,575,590 5,669,029 28,512,193
=========== ========== ===========
Operating loss (20,192,514) (1,788,572) (22,253,686)
----------- ---------- -----------
Other income (expense):
Sales of equipment - 585,541 (585,541) (D) -
Interest expense (2,191,629) (7,524) (2,199,153)
Interest income 147,322 2,109 149,431
Equity in net income (loss) of
unconsolidated subsidiaries (3,211) - (3,211)
Litigation settlement expense (821,000) - (821,000)
Other (8,108) (29,429) (37,537)
------------ ----------- -----------
Total other expense (2,876,626) 550,697 (2,911,470)
------------ ----------- -----------
Loss before minority interest in loss of
consolidated subsidiaries (23,069,140) (1,237,875) (25,165,156)
Minority interest in income of consolidated subsidiaries 4,900 - 4,900
----------- ---------- -----------
Net loss $(23,064,240) $(1,237,875) $(25,160,256)
=========== ========== ===========
Net loss per common share after preferred dividends $(6.53) $(6.55)
===== =====
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-47
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Preparation:
The unaudited pro forma combined balance sheet as of December 31, 1996
and the unaudited pro forma combined statements of operations for the year
ended December 31, 1996 give effect to the acquisition of 100% of the
outstanding common stock of Family Telecommunications Incorporated (FTI)
by Medcross, Inc. (the "Company") as if the acquisition, accounted for under
the purchase method of accounting, had occurred on the balance sheet date with
respect to the balance sheet and on March 20, 1996 (date of inception of FTI)
with respect to the statement of operations.
The pro forma financial statements have been prepared based upon the financial
statements of the Company and FTI as of and for the year ended December 31,
1996. These pro forma financial statements may not be indicative of the
results that actually would have occurred if the combination had been in
effect on the dates indicated or which may be obtained in the future. The
pro forma adjustments are based upon certain estimates which may
change as additional information becomes available. The pro
forma financial statements should be read in conjunction with
the audited financial statements for the Company and FTI.
NOTE 2 - Pro forma Adjustments:
The pro forma adjustments reflected in the pro forma financial
statements are summarized in items A to E below:
A. Pro forma adjustment reflects the purchase of all of the outstanding
common stock of FTI by the Company in return for the issuance of
400,000 shares of common stock of the Company to the stockholders of
FTI:
<TABLE>
<S> <C>
Common stock (400,000 shares
issued at $.007 par value with a
market value of $6.03 per share) $ 2,800
Additional paid-in capital 2,411,783
---------
Purchase price 2,414,583
Net liabilities assumed 135,420
---------
Excess (allocated to intangible assets and goodwill) $2,550,003
=========
</TABLE>
Allocation of the excess purchase price to intangible assets is as
follows: goodwill ($1,490,003), customer list ($520,000), and carrier
identification code and tariff registration status ($540,000).
Amortization lives of these intangible assets will be 10 years for
goodwill and carrier identification code and tariff registration
status and 3 years for the customer list. The allocation of excess
purchase price to these intangible assets is subject to final revisions
which may be material and if material then the amounts allocated to the
intangible assets, specifically goodwill, may be revised.
B. Pro forma adjustments to reflect the effect of purchase price
allocation adjustments to property and equipment.
C. Pro forma adjustments to remove FTI stockholders' equity accounts as of
December 31, 1996 as part of the purchase price allocation process.
F-48
<PAGE>
D. Removal of the following intercompany transactions occurring during
1996:
. intercompany accounts receivable and payables ($120,000)
. intercompany sales of long distance service ($5,026)
. profit on intercompany sale of equipment resulting in gain to FTI
($585,541)
E. Pro forma adjustments to record amortization of intangible assets (see
item A above) and adjustment to depreciation of property and equipment
due to change in value as a result of purchase price allocations (see
item B above).
F-49
<PAGE>
Report of Independent Accountants
---------------------------------
To the Stockholder of
MiBridge, Inc.:
We have audited the balance sheet of Mibridge, Inc. as of December 31, 1996, and
the related statements of operations, changes in stockholder's equity and cash
flows for the period from the date of inception (March 18, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MiBridge,
Inc. as of December 31, 1996, and the results of its operations and its
cash flows for the period from the date of inception (March 18, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Salt Lake City, Utah
August 6, 1997
F-50
<PAGE>
MIBRIDGE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 165,005 $ 25,581
Accounts receivable 15,000 30,000
Costs and estimated earnings in excess of billing
on uncompleted contracts 340,000 248,500
Inventory - 20,644
Prepaid expenses - 94,520
Deferred income taxes - 7,443
------------ ------------
Total current assets 520,005 426,688
------------ ------------
Furniture and equipment:
Equipment 64,811 54,119
Office furniture 4,115 3,026
Less accumulated depreciation (18,751) (8,411)
------------ ------------
Total furniture and equipment 50,175 48,734
------------ ------------
Capitalized software development costs, net 17,693 7,433
Intangible assets 6,750 6,750
Other assets 3,100 2,125
------------ ------------
Total assets $ 597,723 $ 491,730
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ - $ 2,499
Accrued liabilities 39,883 20,852
Accrued director's fee payable - 49,000
Deferred revenue 27,500 5,000
Income taxes payable 64,168 133,628
------------ ------------
Total current liabilities 131,551 210,979
Deferred income taxes 11,952 9,696
------------ ------------
Total liabilities 143,503 220,675
------------ ------------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, no par value, authorized 10,000,000
shares, issued and outstanding 6,000,000 shares 1,000 1,000
Additional paid-in-capital 325,000 300,000
Deferred compensation - (244,445)
Retained earnings 128,220 214,500
------------ ------------
Total stockholder's equity 454,220 271,055
------------ ------------
Total liabilities and stockholder's equity $ 597,723 $ 491,730
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-51
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF OPERATIONS
For the period from inception (March 18, 1996) to December 31, 1996 and
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Software sales and consulting $255,799 $290,700
Software development 241,500 528,500
------------ ------------
Total revenues 497,299 819,200
------------ ------------
Cost of sales:
Software sales and consulting 189,020 148,812
Software development 184,987 102,042
------------ ------------
Cost of sales 374,007 250,854
------------ ------------
Gross Margin 123,292 568,346
Operating expenses:
Selling, general and administrative 252,027 200,726
Depreciation and amortization 15,072 10,039
------------ ------------
Total operating expenses 267,099 210,765
------------ ------------
Net income (loss) before income taxes (143,807) 357,581
Income tax (provision) benefit 57,527 (143,081)
------------ ------------
Net income (loss) $(86,280) $214,500
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the period from inception (March 18, 1996) to December 31, 1996 and
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Common Stock Total
------------ Additional Deferred Retained Stockholder's
Shares Amount Paid-in Capital Compensation Earnings Equity
------ ------ --------------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 18, 1996
(inception)
Original shares issued 6,000,000 $1,000 $ - $ - $ - $ 1,000
Stock options granted
on issued shares - - 300,000 (300,000) - -
Amortization of deferred
compensation - - - 55,555 - 55,555
Net income - - - - 214,500 214,500
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,000,000 1,000 300,000 (244,445) 214,500 271,055
Stock options granted
on issued shares - - 25,000 (25,000) - -
Amortization of deferred
compensation - - - 269,445 - 269,445
Net loss (86,280) (86,280)
--------------------------------------------------------------------------------------------
Balance at June 30, 1997
(unaudited) 6,000,000 $1,000 $325,000 $ - $128,220 $454,220
============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-53
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF CASH FLOWS
For the period from March 18, 1996 (inception) to December 31, 1996 and
for the six month period ending June 30, 1997 (unaudited)
--------
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (86,280) $ 214,500
Adjustments to reconcile net income
to net cash
Provided in operating activities:
Depreciation and amortization 15,072 10,039
Amortization of deferred compensation 269,445 55,555
Deferred taxes 9,699 2,253
Increase (decrease) from changes in:
Accounts receivable 15,000 (30,000)
Costs and estimated earnings in excess
of billings on uncompleted contracts (91,500) (248,500)
Inventory 20,644 (20,644)
Prepaid expenses 94,520 (94,520)
Other assets (975) (2,125)
Accounts payable (2,499) 2,499
Accrued liabilities and other payables (76,929) 208,480
--------- ---------
Net cash provided by operating activities 166,197 97,537
--------- ---------
Cash flows from investing activities:
Additions to furniture and equipment (11,781) (57,145)
Capitalized software development costs (14,992) (9,061)
Additions to intangible assets - (6,750)
--------- ---------
Net cash used in investing activities (26,773) (72,956)
--------- ---------
Cash flows from financing activities:
Proceeds from shareholder advance - 62,000
Repayment of shareholder advance - (62,000)
Common stock issued - 1,000
--------- ---------
Net cash provided by financing activities - 1,000
--------- ---------
Increase in cash 139,424 25,581
Cash at beginning of period 25,581 -
--------- ---------
Cash at end of period $ 165,005 $ 25,581
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ - $ 7,200
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-54
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Business Information
--------------------
MiBridge, Inc. (the Company), a New Jersey corporation, began operations on
March 18, 1996. The Company develops communications software that supports
multimedia communications (voice, fax and audio) over the public switched
telephone network (PSTN), local area networks (LANs) and the Internet. The
Company creates speech encoding and compression algorithms designed to
produce superior audio quality and lower delay over low-bandwidth networks.
The interim financial data as of June 30, 1997 and for the six-month period
then ended are unaudited; however, in the opinion of management of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations, financial position and cash flows of the Company.
Inventories
-----------
Inventory consists of computer boards held for resale and is valued at the
lower of actual cost or market. Cost is determined by specific identification
of each unit.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the
following estimated useful lives:
Office equipment 3 years
Furniture 5 years
Maintenance and repairs, which are not considered betterments and do not
extend the useful life of assets, are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
Intangible Assets
-----------------
Intangible assets include certain legal expenditures for patent filing fees
relating to proprietary techniques developed by the Company. The patents are
pending; therefore, no amortization of patent filing fees is reflected in the
financial statements.
Continued
F-55
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
------------------------------------------
Revenue Recognition
-------------------
Revenues are generally recognized as products are shipped or services are
performed. Initial software royalties are recognized upon delivery of the
master copy, as the Company is not required to provide any additional
services. As minimum software usage levels are exceeded by the customer, the
Company will receive additional royalties based on a per port usage.
Most software is sold with maintenance contracts that cover periods from one
to twelve months. Revenue related to these contracts is deferred and
recognized on a straight-line basis over the term of the maintenance
agreement.
Certain development projects are jointly funded by a customer. Revenues on
these long-term funded development contracts are recognized under the
percentage of completion method of accounting and are measured based upon the
level of effort expended on the project, compared to total billings allowed
by the contract. Estimated contract earnings are reviewed and revised
periodically as the work progresses. Estimated losses are charged against
earnings in the period in which such losses are identified. In exchange for
its participation in funding the project, the customer will receive joint
marketing rights and a portion of future revenues from the sale of the
developed technology based on a revenue sharing agreement. The amount of
future revenues to be received by the customer party ranges between 20 and 55
percent and depends upon who markets the product and the terms of the
specific contract. As of December 31, 1996, there were no sales of jointly
developed products.
Software Development Costs
--------------------------
The Company capitalizes software development costs when the project reaches
technological feasibility. Research and development costs related to software
development that has not reached technological feasibility are expensed as
incurred. Capitalized software development costs are amortized at the greater
of the straight-line method over the expected life of the product (maximum
three year period) or the ratio of current revenues for a product to the
total of current and anticipated future revenues. Capitalized software
development costs were $7,433 at December 31, 1996, net of accumulated
amortization of $1,628.
Continued
F-56
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
------------------------------------------
Income Taxes
------------
The Company records deferred taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The Statement requires recognition of deferred tax assets and
liabilities for the temporary differences between the tax bases of assets and
liabilities and the amounts at which they are carried in the financial
statements based upon the enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
Concentration of Credit Risk
----------------------------
All of the Company's cash is held by one financial institution in New Jersey.
The Company has approximately $54,000 that exceeds the FDIC insurance limits
at December 31, 1996.
During the period from inception to December 31, 1996 approximately 86% of
the Company's revenues were related to one customer. Unbilled receivables
from this customer represented approximately 51% of total assets as of
December 31, 1996.
Estimates
---------
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Continued
F-57
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. LONG-TERM CONTRACT ACCOUNTING
-----------------------------
Costs and estimated earnings in excess of billings on uncompleted contracts
consist of amounts of revenue recognized on contracts for which billings have
not been recorded. Billings in excess of costs and estimated earnings on
uncompleted contracts consist of amounts of billings recognized on contracts
in excess of costs.
Contract revenues and costs related to uncompleted contracts are included in
the accompanying balance sheet as of December 31, 1996 under the following
captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 248,500
Billings in excess of costs and estimated
earnings on uncompleted contracts -
---------
$ 248,500
=========
Costs incurred on long-term contracts $ 104,000
Estimated earnings 424,500
Billings to date (280,000)
---------
$ 248,500
=========
</TABLE>
3. INCOME TAXES
------------
The income tax provision for the period since inception to December
31, 1996 consists of the following:
<TABLE>
<S> <C>
Current federal income tax provision $ 109,094
Current state income tax provision 31,734
Deferred tax provision 2,253
---------
Income tax provision $ 143,081
=========
</TABLE>
Continued
F-58
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. INCOME TAXES, continued
------------
The reported provision for income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income
before taxes primarily because of state taxes and certain non-deductible
meals and entertainment.
The components of the net deferred tax asset and liability as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Stock award compensation expense $ 22,189
Accrued director's fees 19,970
---------
Total deferred tax asset 42,159
=========
Deferred tax liability:
Excess tax depreciation (6,727)
Capitalized software development costs (2,969)
Prepaid salaries (34,716)
---------
Total deferred tax liability (44,412)
---------
Net deferred tax liability $ (2,253)
=========
</TABLE>
The net deferred tax liability as of December 31, 1996 is reflected in
the balance sheet as follows:
<TABLE>
<S> <C>
Current deferred tax asset $ 7,443
Long-term deferred tax liability (9,696)
---------
$ (2,253)
=========
</TABLE>
4. RELATED PARTY TRANSACTIONS
--------------------------
During 1996, the owner of the Company advanced a total of $62,000 to the
Company to fund operations. These advances were repaid during the period.
During the period ended December 31, 1996, the Company had sales of
$25,000 with Medcross, Inc. (see note 7).
Continued
F-59
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. STOCKHOLDER'S EQUITY
--------------------
Common Stock
------------
At the inception of the Company, the owner contributed $1,000 in exchange for
6,000,000 shares of the Company's common stock.
Additional Paid in Capital - Stock Awards
-----------------------------------------
During the year, the sole shareholder of the Company granted certain
employees options to buy shares of stock owned by the shareholder. The awards
were granted to attract and retain qualified employees for the Company, and
accordingly, the Company has accounted for these awards as if they had been
made directly by the Company. The Company applies APB Opinion No. 25 and
related interpretations in accounting for stock compensation awards. Had
compensation cost for the Company's stock-based awards been determined based
on fair-value at the grant date consistent with the minimum value method
outlined by Statement of Financial Accounting Standard No. 123, the
difference would have been insignificant.
The number of options outstanding and the weighted average exercise
price per option are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
---------- ----------
<S> <C> <C>
Outstanding at beginning of year
Granted 900,000 $0.00
--------- ----------
Outstanding at end of year 900,000 $0.00
========= ==========
Options exercisable at year end - $0.00
========= ==========
</TABLE>
The awards were granted in equal amounts in May, June and August of 1996 and
vest annually over a three year period (weighted average remaining life of
2.4 years). Additional paid-in capital and deferred compensation recorded
during the year represent the difference between the exercise price of the
options and the value of the stock, which is based on management's best
estimate of the fair value of the Company at the stock option grant date.
Compensation expense is recognized on a straight-line basis over the vesting
period of the options. Vesting of the awards would be accelerated should the
Company be purchased.
Continued
F-60
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
6. EMPLOYMENT AGREEMENTS
---------------------
The Company has employment agreements with seven employees of the Company
providing for a salary continuation (usually three years) in the event of
termination for reasons other than cause. As of December 31, 1996, if all of
the employees under contract at that date were to be terminated by the
Company without cause, the Company's total future payments to these employees
would be approximately $600,000.
7. ACQUISITION OF THE COMPANY BY MEDCROSS, INC.
--------------------------------------------
On June 5, 1997, the Company entered into a letter of intent with Medcross,
Inc. (Medcross) pursuant to which the Company entered into negotiations to
sell 100% of the Company's outstanding stock. A final agreement was signed on
August 12, 1997, with closing anticipated in the third quarter of 1997. Under
the finalized agreement, Medcross will acquire 100% of the Company's
outstanding shares of common stock in exchange for 1,000 shares of Medcross
Series D Preferred stock and a promissory note of $2,000,000, payable with
interest in quarterly installments over the two years. The preferred shares
are convertible at the option of the prior MiBridge shareholders into
Medcross common stock shares equal in number to $6,250,000 divided by the
lower of $9.25 or the average closing bid price of Medcross common stock for
the five consecutive trading days immediately preceding the conversion date.
F-61
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA COMBINED BALANCE SHEET
as of June 30, 1997 (unaudited)
--------------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 992,267 $ 184,119 $ 15,000 $ - $ 1,191,386
Accounts receivable less allowance for
doubtful accounts of $1,069,389 2,417,210 2,114,740 435,000 (596,000) A 4,370,950
Inventory less allowance of $260,033 763,263 - - - 763,263
Certificate of deposit - restricted 198,640 - - - 198,640
Other current assets 191,461 7,613 3,000 - 202,074
------------ ------------ ---------- ------------ ------------
Total current assets 4,562,841 2,306,472 453,000 (596,000) 6,726,313
------------ ------------ ---------- ------------ ------------
Property and equipment:
Property and equipment 6,090,101 1,270,857 75,000 (19,000) F 7,416,958
Less accumulated depreciation (3,046,395) (151,605) (19,000) 19,000 F (3,198,000)
------------ ------------ ---------- ------------ ------------
Net property and equipment 3,043,706 1,119,252 56,000 - 4,218,958
------------ ------------ ---------- ------------ ------------
Other assets:
Intangible assets, net 9,319,136 2,281,278 7,000 3,648,000 C/F 15,255,414
Certificate of deposit - restricted 1,742,711 - - - 1,742,711
Investment in FTI 2,414,583 - - (2,414,583) D -
Other assets 83,837 40,228 21,000 - 145,065
------------ ------------ ---------- ------------ ------------
Total other assets 13,560,267 2,321,506 28,000 1,233,417 17,143,190
------------ ------------ ---------- ------------ ------------
Total assets $ 21,166,814 $ 5,747,230 $ 537,000 $ 637,417 $ 28,088,461
============ ============ ========== ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,256,609 $ 3,501,925 $ 175,000 $ (596,000) A $ 7,337,534
Notes payable 1,045,000 - - - 1,045,000
Current portion of long-term debt 43,554 408,429 - 1,000,000 C 1,451,983
Obligations under capital lease 187,047 - - - 187,047
------------ ------------ ---------- ------------ ------------
Total current liabilities 5,532,210 3,910,354 175,000 404,000 10,021,564
------------ ------------ ---------- ------------ ------------
Long-term debt (1,592,080) 2,202,194 - 1,000,000 C 1,610,114
Obligations under capital lease 147,274 - - - 147,274
Deferred taxes - - 12,000 (12,000) H -
Minority interest in consolidated subsidiary 299,198 - - - 299,198
------------ ------------ ---------- ------------ ------------
Total liabilities 4,386,602 6,112,548 187,000 1,392,000 12,078,150
------------ ------------ ---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock 2,475,000 - - 10,000 C 2,485,000
Common stock 74,393 - 1,000 (1,000) E 74,393
Common stock to be issued 11,289,583 - - - 11,289,583
Additional paid in capital 40,236,521 2,414,583 325,000 3,500,417 C/D/E 46,476,521
Deferred compensation (4,200,000) - - - (4,200,000)
Accumulated deficit (33,095,285) (2,779,901) 24,000 (4,264,000) C/E (40,115,186)
------------ ------------ ---------- ------------ ------------
Total stockholders' equity 16,780,212 (365,318) 350,000 (754,583) 16,010,311
------------ ------------ ---------- ------------ ------------
Total liabilities and stockholders' equity $ 21,166,814 $ 5,747,230 $ 537,000 $ 637,417 $ 28,088,461
============ ============ ========== ============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements
F-62
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA STATEMENT OF OPERATIONS
for the six-month period ended June 30, 1997 (unaudited)
--------------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications service revenue $ - $4,414,825 $ - $ - $4,414,825
Health care service revenue 1,179,555 - - - 1,179,555
Marketing service revenue 720,490 - - - 720,490
Software sales and development - - 497,299 - 497,299
------------ ------------ ----------- ----------- -----------
Net operating revenue 1,900,045 4,414,825 497,299 - 6,812,169
------------ ------------ ----------- ----------- -----------
Operating costs and expenses:
Telecommunications network expense 1,496,349 5,569,441 - - 7,065,790
Marketing services costs 640,739 - - - 640,739
Selling, general and administrative 3,713,197 1,312,837 630,239 - 5,656,273
Provision for doubtful accounts 158,498 345,000 - - 503,498
Depreciation and amortization 684,333 335,605 10,340 502,167 G 1,532,445
Provision for asset valuation 213,944 - - - 213,944
Research and development 269,334 76,000 - - 345,334
------------ ------------ ----------- ----------- -----------
Total operating costs and expenses 7,176,394 7,638,883 640,579 502,167 15,958,023
------------ ------------ ----------- ----------- -----------
Operating loss (5,276,349) (3,224,058) (143,280) (502,167) (9,145,854)
------------ ------------ ----------- ----------- -----------
Other income (expense):
Interest expense (405,001) (15,474) - - (420,475)
Interest and other income 141,046 1,068 - - 142,114
------------ ------------ ----------- ----------- -----------
Total other income (expense) (263,955) (14,406) - - (278,361)
------------ ------------ ----------- ----------- -----------
Loss before minority interest in
loss of consolidated subsidiaries (5,540,304) (3,238,464) (143,280) (502,167) (9,424,215)
Minority interest in income of
consolidated subsidiaries 29,128 - - - 29,128
------------ ------------ ----------- ----------- -----------
Net loss before income taxes (5,511,176) (3,238,464) (143,280) (502,167) (9,395,087)
Income tax benefit - - 57,000 (57,000) H -
------------ ------------ ----------- ----------- -----------
Net loss $ (5,511,176) $(3,238,464) $(86,280) $(559,167) $(9,395,087)
============ ============ =========== =========== ===========
Net loss per common share after
preferred dividends $(0.57) $(0.91)
============ ===========
</TABLE>
See notes to unaudited pro forma combined financial statements
F-63
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA STATEMENT OF OPERATIONS
for the year ended December 31, 1997 (unaudited)
--------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Health care service revenue $ 2,212,544 $ - $ - $ - $ 2,212,544
Network service revenue 170,532 - - - 170,532
Long distance service revenue - 3,880,457 - (5,026) B 3,875,431
Software sales and development - - 819,200 (25,000) B 794,200
------------ ------------ -------- ----------- ------------
Net operating revenue 2,383,076 3,880,457 819,200 (30,026) 7,052,707
------------ ------------ -------- ----------- ------------
Operating costs and expenses:
Telecommunications network expense 1,120,779 3,301,890 - - 4,422,669
Costs of sales -- software - - 250,854 - 250,854
Selling, general and administrative 4,977,763 1,352,732 200,726 (5,026) B 6,526,195
Provision for doubtful accounts 197,565 784,537 - - 982,102
Depreciation and amortization 1,094,004 150,261 10,039 959,183 G 2,213,487
Provision for asset valuation 260,033 - - - 260,033
Research and development 347,504 79,609 - (25,000) B 402,113
Acquired in-process research
and development expenses 14,577,942 - - - 14,577,942
------------ ------------ -------- ----------- ------------
Total operating costs
and expenses 22,575,590 5,669,029 461,619 929,157 29,635,395
------------ ------------ -------- ----------- ------------
Operating (loss) income (20,192,514) (1,788,572) 357,581 (959,183) (22,582,688)
------------ ------------ -------- ----------- ------------
Other income (expense):
Sales of equipment - 585,541 - (585,541) B -
Interest expense (2,191,629) (7,524) - - (2,199,153)
Interest income 147,322 2,109 - - 149,431
Equity in income (loss) of
unconsolidated subsidiaries (3,211) - - - (3,211)
Litigation settlement expense (821,000) - - - (821,000)
Other (8,108) (29,429) - - (37,537)
------------ ------------ -------- ---------- ------------
Total other income (expense) (2,876,626) 550,697 - (585,541) (2,911,470)
------------ ------------ -------- ---------- ------------
(Loss) income before minority interest in
loss of consolidated subsidiaries (23,069,140) (1,237,875) 357,581 (1,544,724) (25,494,158)
Minority interest in income of
consolidated subsidiaries 4,900 - - - 4,900
------------ ------------ -------- ----------- ------------
Net (loss) income before income taxes (23,064,240) (1,237,875) 357,581 (1,544,724) (25,489,258)
Provision for income taxes - - (143,081) 143,081 H -
------------ ------------ -------- ----------- ------------
Net (loss) income $(23,064,240) $( 1,237,875) $214,500 $(1,401,643) $(25,489,258)
============ ============ ======== =========== ============
Net loss per common share after
preferred dividends $(6.53) $(6.59)
============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements
F-64
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
1. BASIS OF PRESENTATION:
---------------------
The unaudited pro forma combined balance sheet as of June 30, 1997 and the
unaudited pro forma combined statements of operations for the six-month
period ended June 30, 1997 and the year ended December 31, 1996 give effect
to the acquisitions of 100% of the outstanding common stock of Family
Telecommunications Incorporated (FTI) and MiBridge, Inc. (MiBridge) by
Medcross, Inc. (the "Company") as if the acquisitions, accounted for under
the purchase method of accounting, had occurred on the balance sheet date
with respect to the balance sheet and on March 20, 1996 (date of inception
of FTI) and March 18, 1996 (date of inception of MiBridge) with respect to
the statements of operations.
FTI was acquired by the Company effective January 1, 1997. The acquisition
of MiBridge is expected to close in the third quarter of 1997.
The pro forma financial statements have been prepared based upon the
financial statements of the Company, MiBridge and FTI as of and for the
six-month period ended June 30, 1997 and for the year ended December 31,
1996. These pro forma financial statements may not be indicative of the
results that actually would have occurred if the combinations had been in
effect on the dates indicated or which may be obtained in the future. The
pro forma adjustments are based upon certain estimates that may change as
additional information becomes available. The pro forma financial
statements should be read in conjunction with the audited financial
statements for the Company, MiBridge and FTI.
2. PRO FORMA ADJUSTMENTS:
---------------------
The pro forma adjustments reflected in the pro forma financial statements
are summarized in items A to H below:
A. Pro forma adjustment to eliminate $596,000 in intercompany accounts
receivable and notes payable of the Company and FTI, respectively.
B. Pro forma adjustment to remove the following intercompany transactions:
(1) intercompany sales (between FTI and the Company) of long-distance
service ($5,026), (2) intercompany sales (between MiBridge and the
Company) of software ($25,000) and (3) profit on intercompany sale
(between the Company and FTI) of equipment resulting in a gain to FTI of
($585,541).
F-65
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
-------
2. PRO FORMA ADJUSTMENTS, continued:
---------------------
C. Pro forma adjustment reflecting the purchase by the Company of all of
the outstanding common stock of MiBridge in return for issuance of 1,000
shares of Series D Preferred Stock of the Company and a note payable of
$2,000,000:
The purchase price allocations of FTI and MiBridge (estimate) are as
follows:
<TABLE>
<CAPTION>
FTI MiBridge Combined
---------- ---------- -----------
<S> <C> <C> <C>
Note payable $ - $2,000,000 $ 2,000,000
Common stock (400,000 shares
issued at $0.07 par value with a
market value of $6.03 per share) 2,800 - 2,800
Preferred stock (1,000 shares issued
at $10.00 par value with a total
market value of $6,250,000) - 10,000 10,000
Additional paid in capital 2,411,783 6,240,000 8,651,783
---------- ---------- -----------
Purchase price 2,414,583 8,250,000 10,664,583
Net liabilities assumed
(assets acquired) 135,420 (355,000) (219,580)
---------- ---------- -----------
Excess (allocated to intangible
assets, acquired in-process
research and development
and goodwill) $2,550,003 $7,895,000 $10,445,003
========== ========== ===========
</TABLE>
Allocation of the excess purchase price for MiBridge is anticipated to be
approximately as follows: goodwill ($1,605,000), workforce in place
($600,000), completed technology ($1,450,000) and in-process research and
development ($4,240,000). Goodwill is amortized over 5 years. All other
intangible assets are amortized over three years. Acquired in-process
research and development will be expensed at the acquisition date (expected
to be in the third quarter of 1997), but is not included in the pro forma
statements of operations as it represents a non-recurring charge. The
allocation of excess purchase price to these intangible assets and in-
process research and development is subject to final revisions which, if
material, the amounts allocated to the intangible assets, specifically
goodwill, may be revised.
F-66
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
2. PRO FORMA ADJUSTMENTS, continued:
---------------------
Allocation of excess purchase price for FTI to intangible assets is as
follows: goodwill ($1,490,003), customer list ($520,000), and carrier
identification code and tariff registration status ($540,000). Goodwill and
carrier identification code and tariff registration status are being
amortized over 10 years. The customer list is being amortized over three
years. These intangible assets and related amortization are reflected in
the FTI column (as of and for the six-month period ended June 30, 1997) as
the acquisition was effective January 1, 1997. Accordingly, pro forma
adjustments relative to the acquisition of FTI are required only for the
combined statement of operations for the year ended December 31, 1996.
D. The historical balance sheet of FTI as presented includes the transactions
recorded at the acquisition date to give effect to the purchase price
allocation. The related investment in FTI ($2,414,583) by the Company is
being carried on the Company's books as "Investment in FTI" and on FTI's
books as additional paid-in capital. This pro forma adjustment is provided
to eliminate these intercompany accounts.
E. Pro forma adjustments to remove MiBridge estimated stockholder's equity
accounts as of the acquisition date as part of the purchase price
allocation process.
F. Pro forma adjustments to reflect the estimated effect of the purchase price
allocation adjustments to property and equipment of MiBridge.
G. Pro forma adjustments to record estimated amortization of intangible assets
(see item C above) of MiBridge and FTI. No pro forma adjustment is required
for the amortization of intangible assets of FTI for the six-month period
ended June 30, 1997 as these amounts are already included in the historical
amounts presented in the FTI column.
H. Pro forma adjustment to reflect the impact of filing a consolidated income
tax return and to eliminate the deferred tax liabilities of MiBridge as a
result of the purchase price allocation.
F-67
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
3. NET LOSS PER COMMON SHARE AFTER PREFERRED DIVIDENDS:
---------------------------------------------------
The pro forma net loss per common share for the six-month period ended June
30, 1997 is computed based on the weighted average number of common and
common equivalent shares outstanding during the period (10,617,597) and
assumes that the 400,000 shares to be issued in connection with the FTI
acquisition were outstanding for the entire period. The pro forma net loss
per common share for the year-ended December 31, 1996 is computed based on
the weighted average number of common and common equivalent shares
outstanding during the year (6,780,352) and assumes that the 400,000 shares
to be issued in connection with the FTI acquisition were outstanding from
March 20, 1996 (date of inception of FTI). Options, warrants and
convertible preferred stock (as in the case of the MiBridge acquisition)
are excluded from the calculation as their effect would be anti-dilutive.
The net loss per common share after preferred dividends includes $577,923
and $21,223,629 of cumulative preferred stock dividends not paid for the
six-month period ended June 30, 1997 and the year ended December 31, 1996,
respectively.
F-68
<PAGE>
No dealer, salesman or any other person has been authorized in connection
with this offering to give any information or to make any representations other
than those contained in this Prospectus. The Prospectus does not constitute an
offer or a solicitation in any jurisdiction to any person to whom it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the circumstances of the Company or
the facts herein set forth since the date hereof.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
AVAILABLE INFORMATION..........................................................
PROSPECTUS SUMMARY.............................................................
RISK FACTORS...................................................................
THE COMPANY...................................................................
USE OF PROCEEDS...............................................................
CAPITALIZATION................................................................
DIVIDEND POLICY...............................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS..........................................
BUSINESS OF I-LINK............................................................
BUSINESS OF THE MEDICAL IMAGING DIVISION......................................
DESCRIPTION OF PROPERTY.......................................................
LEGAL PROCEEDINGS.............................................................
1996 OFFERINGS................................................................
MANAGEMENT....................................................................
EXECUTIVE COMPENSATION........................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................
SELLING SECURITYHOLDERS.......................................................
MARKET FOR THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS...................
RECENT TRANSACTIONS...........................................................
DESCRIPTION OF SECURITIES.....................................................
PLAN OF DISTRIBUTION..........................................................
LEGAL MATTERS.................................................................
EXPERTS.......................................................................
INDEX TO FINANCIAL STATEMENTS................................................F-1
</TABLE>
331,126 Settlement Shares
8,083,857 Shares of Common Stock
6,046,800 Conversion Shares
750,000 Commonwealth Warrants
750,000 Commonwealth Shares
183,542 Babcock Shares
100,000 Cook Options
100,000 Cook Shares
80,000 E&M Warrants
80,000 E&M Shares
40,000 Mandarino Warrants
40,000 Mandarino Shares
175,000 Hardy Group Warrants
175,000 Hardy Group Shares
I-LINK INCORPORATED
----------
PROSPECTUS
----------
[__________], 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 607.0850 of the Florida Business Corporation Act empowers a
corporation to indemnify any person who was or is a party to a proceeding by
reason of the fact that he was or is an officer, director, employee or agent of
the corporation against liability incurred in connection with such proceeding.
Such person must have acted in good faith and in a manner reasonably believed to
be in or not opposed to, the best interests of the corporation. With respect to
any criminal proceeding, such person must have had no reasonable cause to
believe his conduct was unlawful. Any such indemnification may only be made upon
a determination by the corporation that such indemnification is proper because
the person met the applicable standard of conduct.
The Florida Business Corporation Act provides further that the
indemnification permitted thereunder is not exclusive; provided, however,
indemnification is not permitted to be made on behalf of any such person if a
judgment or final adjudication establishes (i) a violation of the criminal law
unless such person had reasonable cause to believe his conduct was lawful or no
reasonable cause to believe his conduct was unlawful; (ii) such person derived
an improper personal benefit from the transaction; (iii) as to any director such
proceeding arose from an unlawful distribution under Section 607.0834; or (iv)
willful misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by the corporation or a shareholder.
The Company's By-Laws provide that the Company shall indemnify any such
person to the fullest extent provided by law and empowers the Company to
purchase and maintain insurance on behalf of any such person.
The Company previously entered into indemnification agreements in 1988
with certain officers and directors of the Company for indemnification against
expenses (including attorneys' fees, through all proceedings, trials, and
appeals), judgments, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending, or contemplated action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
arising from any actual or alleged breach of duty, neglect, effort, or other
action taken or omitted, solely in the capacity as an officer and/or a director
of the Company; provided that no indemnification will be made in respect of any
acts or omissions (a) involving gross negligence or willful misconduct, (b)
involving libel or slander, or (c) based upon or attributable to gaining,
directly or indirectly, any profit or advantage to which he was not legally
entitled.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE
UNENFORCEABLE.
Other Arrangements
The Company maintains a "claims made" officers and directors
liability insurance policy with coverage limits of $3,000,000 and a maximum
$100,000 deductible amount for each claim.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with
the registration of the securities subject of this registration statement, other
than underwriting discounts and commissions, are estimated as follows:
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<PAGE>
<TABLE>
<S> <C>
SEC Registration Fee $ 26,920.12
Blue Sky Fees and Expenses 10,000.00
Printing and Engraving Expenses 20,000.00
Registrant's Counsel Fees and Expenses 50,000.00
Accountant's Fees and Expenses 40,000.00
Miscellaneous Expenses 3,079.88
-----------
Estimated Total $150,000.00
===========
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
The Registrant has issued the following securities during the past
three years:
In November 1994, the Company issued a Common Stock Purchase Warrant to
JW Charles Financial Services, Inc. to purchase 250,000 shares of Common Stock
(331,126 shares as adjusted) pursuant to the terms of a Financial Consulting
Agreement between the Company and Corporate Management Group, Inc.
Pursuant to a Consulting Agreement dated as of August 6, 1995 between
the Company and Timothy R. Barnes, the Company issued a Common Stock Purchase
Warrant to purchase 36,858 shares of Common Stock to Mr. Barnes.
In October 1995, the Company issued a Common Stock Purchase Option to
Scott Cook to purchase 100,000 shares of Common Stock in connection with a loan
to I-Link, Ltd.
In February 1996, in connection with the purchase of all of the issued
and outstanding shares of I-Link Worldwide Inc., the Company issued an aggregate
of 4 million shares of Common Stock to the owners of I-Link Worldwide Inc.
In February 1996, in connection with loans, the Company issued a Series
II Non-Negotiable 10% Convertible Promissory Note in the principal amount of
$50,000 to Joseph Wong and a Series III Non-Negotiable 10% Convertible
Promissory Note in the principal amount of $50,000 to Trident I, LLC. Each of
the holders of the notes converted $5,000 of the principal amount of the notes
to 70,000 shares of Common Stock in June 1996.
In February 1996, the Company completed a private placement of
$1,000,000 in aggregate principal amount of convertible promissory notes (the
"10% Notes"). Up to $1,250 of each $50,000 in principal amount of the 10% Note
was convertible at any time at the option of the holder, into an aggregate of
350,000 shares of Common Stock at the rate of approximately $.0714 per share,
subject to certain anti-dilution adjustments; and such principal amount was
converted to Common Stock in August 1996. Commonwealth Associates served as the
placement agent for the offering.
On September 6, 1996, the Company closed a private placement of 240,000
shares of Class C Preferred Stock, $10 par value per share. In addition, the
Company issued $717,000 of principal amount of Convertible Promissory Notes
payable on April 1, 1997 (the "Maturity Date") and bearing interest at 8% per
annum (previously defined as the "Convertible Notes"). The unpaid principal
amount of a Convertible Note will be automatically converted into shares of
Class C Preferred Stock at any time prior to the close of business on the
Maturity Date at the rate of $60 per share of Class C Preferred Stock upon
certain conditions being met. Commonwealth Associates acted as the placement
agent for the Class C Offering.
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<PAGE>
The Company issued to Commonwealth Placement Agent Warrants to purchase
up to 250,000 shares of the Company's Common Stock and Consultant's Warrants to
purchase up to 500,000 shares of Common Stock (together previously defined as
the "Commonwealth Warrants"). The Commonwealth Warrants will be exercisable for
five (5) years commencing March 1997 at an exercise price of $2.50 per share,
subject to adjustment.
In April 1996, pursuant to an employment agreement, the Company agreed
to grant to John W. Edwards, President of the Company, an option to purchase 1
million shares of Common Stock of the Company. In consideration for the
amendment of the employment agreement, effective August 21, 1996, the Company
agreed to grant Mr. Edwards options to purchase 250,000 shares of Common Stock.
In June 1996, the Company completed a private placement of $375,000 in
principal amount of Non-Negotiable 8% Promissory Notes and Common Stock Purchase
Warrants to purchase 120,000 shares of Common Stock at an exercise price of
$4.00 per share. Commonwealth served as the placement agent for the offering.
In July 1996, the Company approved the grant of options to purchase
1,500,000 and 500,000 shares of Common Stock, respectively, to Clay Wilkes and
Alex Radulovic, officers of I-Link.
In August 1996, the Company agreed to issue to William H. Flury and
John W. Edwards, officers of the company and/or I-Link, warrants to purchase
5,000 shares and 25,000 shares, respectively, in connection with loans to
I-Link.
In October 1996, pursuant to an employment agreement, the Company
agreed to grant to each of Karl S. Ryser, Jr. and William H. Flury, officers of
I-Link, options to purchase 250,000 shares of Common Stock of the Company.
In January 1997, the Company entered into a Share Exchange Agreement
with Family Telecommunications Incorporated (subsequently renamed I-Link
Communications, Inc. and referred to herein as "FTI") pursuant to which the
Company acquired the outstanding stock of FTI in exchange for 400,000 shares of
Common Stock of the Company subject to the satisfaction of certain conditions.
In April 1997, the Company agreed to issue to the Hardy Group
warrants to purchase an aggregate of 175,000 shares of Common Stock, in
connection with the Settlement Agreement between JW Charles and the Company.
In May 1997 the Company issued additional options to purchase shares of
Common Stock to certain of its officers or officers of I-Link, as follows: John
Edwards and Robert Edwards--500,000 shares of Common Stock each; Karl S. Ryser,
Jr., David Hardy and William Flury--250,000 shares of Common Stock each. In
addition, each of Messrs. Ryser and Hardy received commitments that the Company
would issue each of them options to purchase 300,000 shares of Common Stock, but
only in the event of the closing of a contemplated investment in the Company by
Winter Harbor, L.L.C.
In June 1997, the Company agreed to issue to Winter Harbor, L.L.C.
("Winter Harbor") warrants (the "WH Loan Warrants") to purchase up to 500,000
shares of Common Stock in connection with a loan by Winter Harbor to the
Company. In addition, on the same date the Company executed a letter of intent
with Winter Harbor pursuant to which Winter Harbor contemplates making an
investment in the Company in the amount of $12,100,000. Upon closing of the
Winter Harbor investment, the Company has agreed to issue to Winter Harbor (i)
shares of a new series of preferred stock (the "Series M Preferred Stock") which
will be convertible into an aggregate of 4,400,000 shares of Common Stock, and
(ii) additional warrants to acquire (a) 2,500,000 shares of Common Stock (the
"Series A Warrants"); (b) 2,500,000 shares of Common Stock (the "Series B
Warrants"); and (c) 5,000,000 shares of Common Stock (the "Series C Warrants").
In August 1997 the Company amended its loan arrangements with Winter
Harbor such that the total amount of indebtedness was increased thereunder. In
connection with such amendment the Company issued an additional 300,000 warrants
to purchase Common Stock to Winter Harbor.
In August 1997, the Company executed an agreement with MiBridge, Inc.
pursuant to which the Company agreed to acquire MiBridge. The closing of the
MiBridge Acquisition occurred on September 2, 1997. The Company agreed it would
issue to the shareholders of MiBridge, as consideration for the purchase of all
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<PAGE>
outstanding MiBridge equity securities, (i) an aggregate $2,000,000 in cash,
payable in quarterly installments for two years, and (ii) an aggregate 1,000
shares of a new series of preferred stock (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock will be convertible into such number of
shares of Common Stock as shall equal $6,250,000 divided by $9.25 (the "MiBridge
Conversion Price"). On the nine-month anniversary of the closing of the MiBridge
acquisition, any unconverted Series D Preferred Stock shall automatically
convert to Common Stock. In either case, the Series D Preferred Stock shall be
converted at the lower of the MiBridge Conversion Price or the average closing
bid price for the five trading days immediately preceding the date the Company
receives notice of conversion or the automatic conversion date, as the case may
be.
The Company and Winter Harbor executed a Securities Purchase Agreement,
dated as of September 30, 1997 and providing for a closing on October 10, 1997,
pursuant to which Winter Harbor will invest $12,100,000 in a new series of the
Company's convertible preferred stock (the "Series M Preferred Stock"). Winter
Harbor will purchase approximately 2,545 shares of Series M Preferred Stock
(convertible into 2,545,000 shares of Common Stock) for an aggregate cash
consideration of approximately $7,000,000 (equivalent to $2.75 per share of
Common Stock). The agreement with Winter Harbor also provides for purchase of
approximately 1,855 additional shares of Series M Preferred Stock (convertible
into 1,855,000 shares of Common Stock). Such additional shares of Series M
Preferred Stock will be paid for by exchanging $5,000,000 outstanding principal
balance plus approximately $100,000 accrued interest due under the Note. As
additional consideration for its equity financing commitments, Winter Harbor
will be issued additional warrants by the Company to acquire (a) 2,500,000
shares of Common Stock at an exercise price of $2.75 per share (the "Series A
Warrants"), (b) 2,500,000 shares of Common Stock at an exercise price of $4.00
per share (the "Series B Warrants") and (c) 5,000,000 shares of Common Stock at
an exercise price of $4.69 per share (the "Series C Warrants"). The respective
exercise prices for the Series A Warrants, the Series B Warrants and the Series
C Warrants (collectively, the "Investment Warrants") shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) will have demand registration
rights and anti-dilution rights and (ii) will contain cashless exercise
provisions.
The Company believes that the transactions set forth above were
exempt from registration with the Commission pursuant to Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
Except as disclosed above, no broker-dealer or underwriter was involved in the
foregoing transactions. All certificates representing such securities have been
or will be appropriately legended. The February, June and September 1996
placements were made in reliance upon a claim of exemption pursuant to Rule 506
of Regulation D. Additionally, the participants in the February, June and
September 1996 private placements were accredited investors.
Item 27. Exhibits.
The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
2(a)/6/ Management Agreement Assignment, effective June 1, 1993 between
Florida Medical Enterprises, Inc. and Waters Edge Scanning
Associates, Inc.
2(b)/6/ Lease Assignment and Asset Purchase Agreement dated as of June
1, 1993 between Waters Edge Scanning Associates, Ltd. and
Medcross, Inc.
2(c)/10/ Joint Venture Interest Purchase Agreement, effective October 1,
1994 between Medcross, Inc. and Urology Ultrasound, Inc.
2(d)/15/ Stock Purchase Agreement, dated February 13, 1996, by and among
Medcross, Inc, I-Link, Ltd., and GNET Enterprises, Inc.
2(e) [reserved]
2(f)/19/ Form of 8% Convertible Promissory Note.
2(g) [reserved]
2(h)/17/ Escrow Agreement dated February 21, 1996, by and among Medcross,
Inc., I-Link, Ltd. and De Martino Finkelstein Rosen & Virga.
2(i)/17/ Form of Promissory Note.
2(j)/21/ Share Exchange Agreement for the Acquisition of Family
Telecommunications Incorporated by Medcross, Inc.
3(a)/20/ Amendment to the Amended and Restated Articles of Incorporation
dated August 16, 1996.
3(b)/20/ Composite copy of the Amended and Restated Articles of
Incorporation incorporating all amendments through the date
hereof.
3(c)/8/ Bylaws of the Company, as amended.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
3(d)/16/ Articles of Incorporation of I-Link Worldwide Inc.
3(e)/16/ Bylaws of I-Link Worldwide Inc.
3(f)/22/ Articles of Incorporation of Family Telecommunications
Incorporated and Articles of Amendment to the Articles of
Incorporation
3(g)/22/ Bylaws of Family Telecommunications Incorporated
4(a)/1/ Specimen Common Stock Certificate.
4(b)/7/ Promissory Note payable to Waters Edge Scanning Associates,
Ltd., in the amount of $600,000, dated June 1, 1993.
4(c)/7/ Promissory Note contingently payable to Waters Edge Scanning
Associates, Ltd., in the amount of $365,000, dated June 1, 1993.
4(d)/7/ Promissory Note contingently payable to Waters Edge Scanning
Associates, Ltd., in the amount of $365,000, dated June 1, 1993.
4(e)/8/ Form of Promissory Note payable to limited partners of Medcross
Imaging, Ltd., in the aggregate amount of $75,000, dated October
1, 1993.
4(f)/11/ Series CS Warrant to Purchase Common Shares of Medcross, Inc.
4(g)/13/ Common Stock Purchase Option to Purchase Common Shares of
Medcross, Inc.
4(h)/15/ Form of 10% Convertible Promissory Note dated February 21, 1996.
4(i)/16/ Non-Negotiable 10% Promissory Note payable to Scott Cook in the
amount of $100,000, dated October 19, 1995.
4(j)/16/ Guaranty by and between Medcross, Inc. and Scott Cook, dated
October 19, 1995.
4(k)/16/ Security Agreement by and between I-Link, Ltd., Scott Cook, and
Medcross, Inc. dated October 19, 1995.
4(l)/16/ Common Stock Purchase Option to Purchase Common Shares of
Medcross, Inc. issued to Scott Cook.
4(m)/23/ Form of Convertible Promissory Note issued September 6, 1996.
4(n)/22/ Placement Agent's Common Stock Warrant Agreement and
Certificate.
4(o)/22/ Consultant's Common Stock Warrant Agreement and Certificate.
4(p)/23/ Option to purchase 7,500 shares of Class B Convertible Preferred
Stock of Medcross, Inc., granted by R. Huston Babcock to
Benchmark Equity Group, Inc., dated February 14, 1996.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
4(q)/23/ Option to purchase 160,000 shares of Class A Convertible
Preferred Stock of Medcross, Inc., granted by Four M
International, Ltd. to Commonwealth Associates, dated February
21, 1996.
4(r)/23/ Non-Negotiable 10% Convertible Promissory Note (Series II)
payable to Joseph Wong, in the principal amount of $50,000,
dated February 9, 1996.
4(s)/23/ Non-Negotiable 10% Convertible Promissory Note (Series III)
payable to Trident I, L.L.C., in the principal amount of
$50,000, dated February 21, 1996.
4(t) Form of Hardy Group Warrant to purchase 175,000 shares of Common
Stock.
4(u)/26/ Securities Purchase Agreement by and between the Company and
Winter Harbor, L.L.C., dated as of September 31, 1997 (the
"Purchase Agreement").
4(v)/26/ Form of Registration Rights Agreement by and between the Company
and Winter Harbor, L.L.C., which constitutes Exhibit C to the
Purchase Agreement.
4(w)/26/ Form of Shareholders Agreement by and among the Company, Winter
Harbor, L.L.C. and certain holders of the Company's securities,
which constitutes Exhibit D to the Purchase Agreement.
4(x)/26/ Form of Warrant Agreement by and between Medcross, Inc. and
Winter Harbor, L.L.C., which constitutes Exhibit F to the
Purchase Agreement.
4(y)/26/ Form of Articles of Amendment to the Amended and Restated
Articles of Incorporation of the Company, relating to Series M
Preferred Stock, which constitutes Exhibit A to the Purchase
Agreement.
4(z) Form of Articles of Amendment to the Amended and Restated
Articles of Incorporation of the Company, relating to Series D
Preferred Stock.
5(a)/25/ Opinion of Counsel.
9(a)/4/ Shareholder's Agreement dated February 19, 1992 among Four M
International, Inc., Walnut Capital Corp., Windy City, Inc., and
Canadian Imperial Bank of Commerce Trust Company (Bahamas)
Limited.
9(b)/10/ First Amendment to Shareholder's Agreement.
*10(a)/9/ Director Stock Option Plan.
*10(b)/2/ Executive Stock Option Plan.
10(c)/2/ MR Service Agreement, dated August 14, 1990, between Medcross
Imaging, Ltd. and HealthTrust, Inc. with respect to Edward White
Hospital.
10(d)/2/ MR Service Agreement, dated August 14, 1990, between Medcross
Imaging, Ltd. and HealthTrust, Inc. with respect to South Bay
Hospital.
10(e)/3/ Stock Purchase Agreement, dated February 9, 1992, between
Medcross, Inc., Four M International Limited, Walnut Capital
Corp., Windy City, Inc., and Canadian Imperial Bank of Commerce
Trust Company.
10(f)/5/ First Amendment to Stock Purchase Agreement, dated May 1, 1992,
between Medcross, Inc., Four M International, Inc., Walnut
Capital Corp., Windy City, Inc., and Canadian Imperial Bank of
Commerce Trust Company (Bahamas) Limited, as trustee.
10(g)/10/ Financial Consulting Agreement and Common Stock Purchase Warrant
dated as of November 3, 1994 between Medcross, Inc. and JW
Charles Financial Services, Inc.
10(h)/11/ Consulting Agreement, dated as of August 6, 1995, between the
Company and Timothy R. Barnes.
10(i)/12/ Consulting Agreement, dated September 1, 1995, by and among
Medcross, Inc., Kalo Acquisitions, LLC, and Jason H. Pollak.
10(j)/13/ Amendment to and Restatement of the Amended and Restated
Consulting Agreement, dated March 4, 1996, by and among
Medcross, Inc., Kalo Acquisitions, LLC, and Jason H. Pollak.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
10(l)/14/ MR Service Agreement effective October 1, 1995, by and between
Medcross Imaging, Ltd. and South Bay Hospital.
10(m)/14/ MR Service Agreement effective October 1, 1995, by and between
Medcross Imaging, Ltd. and Edward White Hospital.
*10(n)/16/ Employment Agreement, dated February 4, 1996, between Medcross,
Inc. and Henry Y.L. Toh.
*10(o)/16/ Employment Agreement, dated January 1, 1996, between Medcross,
Inc. and Dorothy L. Michon.
*10(p)/16/ Employment Agreement, dated January 1, 1996, between Medcross,
Inc. and Stephanie E. Giallourakis.
*10(q)/16/ Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Clay Wilkes.
*10(r)/16/ Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Alex Radulovic.
*10(s)/16/ 1995 Director Stock Option and Appreciation Rights Plan.
*10(t)/16/ 1995 Employee Stock Option and Appreciation Rights Plan.
*10(u)/16/ Employment Agreement, dated April 8, 1996, between I-Link
Worldwide Inc. and John W. Edwards.
10(v)/18/ Consulting Agreement, effective January 1, 1996, by and between
Windy City, Inc. and the Company.
10(w)/20/ Agreement for Terminal Facility Collocation Space, dated June
21, 1996, by and between I-Link Worldwide Inc. and MPS Telecom,
Inc.
10(x)/22/ Consulting Agreement dated August 21, 1996 between the Company
and Commonwealth Associates.
10(y)/22/ Sales Agency Agreement dated July 1, 1996 between the Company
and Commonwealth Associates and Amendment No. 1 thereto.
10(z)/22/ Commercial Lease dated May 21, 1996 between I-Link Worldwide
Inc. and Draper Land Partnership II and First Amendment dated
July 22, 1996.
10(aa) Commercial Lease dated September 11, 1996 between I-Link
Worldwide Inc. and Draper Land Partnership II.
*10(bb) Employment Agreement dated October 15, 1996, between I-Link
Worldwide Inc. and Karl S. Ryser, Jr.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
10(cc)/22/ Second Amendment dated November 22, 1995 to Medcross, Inc.
Shareholders' Agreement.
10(dd)/22/ Third Amendment dated January 31, 1996 to Medcross, Inc.
Shareholders' Agreement.
10(ee)/22/ Term Lease Master Agreement dated May 19, 1996 by and
between IBM Credit Corporation and I-Link Worldwide Inc.
10(ff)/22/ 1997 Recruitment Stock Option Plan
10(gg)/22/ Lease Agreement dated July 1, 1996 between Broadway Associates
and FTI Communications
10(hh)/22/ Lease Between Phoenix City Square Partnership and Robert W.
Edwards and Denise A. Edwards
10(ii)/22/ Carrier Agreement between MCI Telecommunications Corporation and
FTI, Inc.
10(jj)/22/ Strategic Member Reseller Agreement between I-Link Worldwide
Inc. and WealthNet Incorporated
10(kk)/22/ Settlement Agreement between WealthNet Incorporated and Family
Telecommunications Incorporated
10(11)/22/ Agreement Regarding Certificate of Deposit between Draper Land
Partnership and I-Link Worldwide Inc.
*10(mm) Employment Agreement, dated as of September 2, 1997, between
Medcross, Inc. and Dror Nahumi.
10(nn) Plan and Agreement of Merger of MiBridge, Inc. with and into I-
Link Mergerco, Inc., a wholly-owned subsidiary of Medcross,
Inc., dated as of August 12, 1997, by an among Medcross, Inc.,
I-Link Mergerco, Inc., MiBridge, Inc. and the stockholders of
MiBridge, Inc.
21/25/ Subsidiaries of the registrant.
23(a) Consent of De Martino Finkelstein Rosen & Virga (included in
Exhibit 5(a)).
23(b)/25/ Consent of Coopers & Lybrand L.L.P.
99(a)/24/ Loan Agreement dated as of June 6, 1997, by and between the
Company and Winter Harbor, L.L.C. ("Lender or "Investor").
99(b)/24/ Promissory Note dated June 6, 1997, in the principal amount
of $2,000,000, made by Company in favor of Lender.
99(c)/24/ Warrant Agreement dated as of June 6, 1997, by and between
the Company and Lender; and related Warrant Certificate.
99(d)/24/ Pledge Agreement dated as of June 6, 1997, by and between the
Company and Lender.
99(e)/24/ Security Agreement dated as of June 6, 1997, by and among Family
Telecommunications Incorporated ("FTI"), I-Link Communications,
Inc. ("I-Link") and Lender.
99(f)/24/ Subsidiary Guaranty dated as of June 6, 1997, by and between I-
Link and Lender.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
99(g)/24/ Assignment of Security dated as of June 6, 1997, by and between
I-Link and Lender.
99(h)/24/ Letter of Intent dated June 6, 1997, by and between the Company
and Investor.
99(i)/24/ Term Sheet for Proposed Equity Investment by Winter Harbor,
L.L.C., dated June 6, 1997.
99(j)/24/ Letter of Intent dated June 5, 1997, by and among the Company,
MiBridge, Inc. and Dror Nahumi.
99(k)/21/ Press Release dated January 16, 1997.
99(l)/25/ First Amendment to Subsidiary Guaranty, by and among I-Link
Communications, Inc., I-Link Systems, Inc., I-Link Worldwide,
L.L.C. and Winter Harbor, L.L.C., dated as of August 18,
1997.
99(m)/25/ First Amendment to Loan Agreement, by and between Medcross, Inc.
and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(n)/25/ First Amendment Warrant Agreement, by and between Medcross,
Inc. and Winter Harbor, L.L.C., dated as of August 18,
1997.
99(o)/25/ Amended and Restated Security Agreement, by and among I-Link
Systems, Inc., I-Link Communications, Inc., I-Link Worldwide,
L.L.C. and Winter Harbor, L.L.C., dated as of August 18,
1997.
99(p)/25/ Worldwide Pledge Agreement, by and between Medcross, Inc.
and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(q)/25/ Promissory Note dated August 18, 1997, in the principal amount
of $3,000,000, made by Medcross, Inc. in favor of Winter Harbor,
L.L.C.
</TABLE>
------------------------
/1/ Incorporated by reference to the Company's Registration Statement on
Form S-18 file number 33-27978-A.
/2/ Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, file number 0-17973.
/3/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, file number 0-17973.
/4/ Incorporated by reference to the Company's Current Report on
Form 8-K dated March 30, 1992, file number 0-17973.
/5/ Incorporated by reference to the Company's Current Report on
Form 8-K dated May 22, 1992, file number 0-17973.
/6/ Incorporated by reference to the Company's Current Report on
Form 8-K dated June 30, 1993, file number 0-17973.
/7/ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993, file number 0-17973.
/8/ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, file number
0-17973.
II-9
<PAGE>
/9/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, file number 0-17973.
/10/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, file number
0-17973.
/11/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 33-63751.
/12/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 33-63749.
/13/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 333-01525.
/14/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated October 31, 1995, file number 0-17973.
/15/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1995, file number 0-17973.
/16/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the years ended December 31, 1995, filed on
April 15, 1996, file number 0-17973.
/17/ Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996, file number
0-17973.
/18/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1996, file number 0-17973.
/19/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated September 6, 1996, file number 0-17973.
/20/ Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, file number 0-17973.
/21/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated January 13, 1997, file number 0-17973.
/22/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, file number
0-17973.
/23/ Incorporated by reference to the Company's Registration Statement
on Form SB-2 (File No. 333-17861) filed December 13, 1996.
/24/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated June 5, 1997, file number 0-17973.
/25/ Incorporated by reference to the Company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 (File No. 333-17861)
filed September 8, 1997.
/26/ Incorporated by reference to the Company's Current Report on Form
8-K dated September 30,1997, file number 0-17973.
* Indicates a management contract or compensatory plan or
arrangement required to be filed herewith.
Item 28. Undertakings
(a) Rule 415 Offering. The undersigned Registrant will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act treat each
post-effective amendment as a new registration statement of the
Securities offered, and the offering of the Securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the Securities that remain unsold at the end of the offering.
II-10
<PAGE>
(e) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 22 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the Securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(f) Rule 430A. The undersigned Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the Securities offered in the Registration
Statement, and that offering of the Securities at that time as the
initial bona fide offering of those Securities.
II-11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Registration Statement, as amended, to be signed on its behalf by the
undersigned, in the City of Draper, State of Utah, on October 14, 1997.
I-LINK INCORPORATED
By: /s/ John W. Edwards
------------------------------
John W. Edwards, Chairman of the
Board, President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as amended,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John W. Edwards Chairman of the Board, President and October 14, 1997
- ------------------------------ Chief Executive Officer
John W. Edwards
/s/ Karl S. Ryser, Jr. Treasurer and Chief October 14, 1994
- ------------------------------ Financial Officer
Karl S. Ryser, Jr.
/s/ David E. Hardy Secretary October 14, 1997
- ------------------------------
David E. Hardy
/s/ Henry Y.L. Toh Director October 14, 1997
- ------------------------------
Henry Y.L. Toh
/s/ Clay Wilkes Director October 14, 1997
- ------------------------------
Clay Wilkes
/s/ R. Huston Babcock Director October 14, 1997
- ------------------------------
R. Huston Babcock
/s/ Joseph A. Cohen Director October 14, 1997
- ------------------------------
Joseph A. Cohen
</TABLE>
II-12
<PAGE>
Exhibit 4(t)
NEITHER THIS WARRANT NOR THE SECURITIES UNDERLYING THIS WARRANT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT HAS BEEN TAKEN BY THE REGISTERED
OWNER FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TOWARD RESALE OR
DISTRIBUTION HEREOF. THIS WARRANT MAY NOT BE TRANSFERRED OR DISPOSED OF WITHOUT
AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH TRANSFER OR
DISPOSITION DOES NOT VIOLATE THE SECURITIES ACT, THE RULES AND REGULATIONS
THEREUNDER, OR APPLICABLE STATE SECURITIES LAWS. IN CONNECTION WITH COMPLIANCE
WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, NO EXERCISE,
TRANSFER OR DISPOSITION OF THIS WARRANT OR THE SECURITIES UNDERLYING THIS
WARRANT SHALL BE MADE UNLESS THE CONDITIONS SPECIFIED HEREIN ARE SATISFIED.
No. Hardy Group- Number of Shares Purchasable Upon
Issue Date: As of April 29, 1997 Exercise of Warrant:
Void after 5:00 p.m. New York Time on April 29, 2002
COMMON STOCK PURCHASE WARRANT
OF
MEDCROSS, INC.
This is to certify that, subject to the provisions of this Common Stock
Purchase Warrant (the "Warrant") and for value received, (the "Holder")
is entitled to purchase ( ) shares of common stock, $.007 par
value per share (the "Common Stock") subject to adjustment as set forth herein
of Medcross, Inc., a Florida corporation (the "Company"), at an exercise price
of Two and 50/100 Dollars ($2.50) per share (the "Exercise Price"), at any time
during the period ending April 29, 2002 (the "Expiration Date"), but not later
than 5:00 p.m. Eastern Standard Time on the Expiration Date.
1. EXERCISE OF WARRANT. Subject to the provisions of Section 8 below, this
Warrant may be exercised in whole or in part at any time or from time to time on
or after the issue date and until the Expiration Date; provided, however, that
if either of such days is a day on which banking institutions are authorized by
law to close (a "Bank Holiday"), then on the next
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<PAGE>
succeeding day which shall not be a Bank Holiday. This Warrant may be exercised
by presentation and surrender hereof to the Company at its principal office or
at the office of its transfer agent, if any (the "Transfer Agent"). The
presentation and surrender of this Warrant for exercise must be accompanied by:
(a) the form of subscription which is attached hereto in Annex A (the "Form of
Subscription") duly executed with signature guaranteed, and (b) payment of the
aggregate Exercise Price for the number of shares specified in such form. If
this Warrant should be exercised in part only, upon presentation and surrender
of this Warrant to the Company or the Transfer Agent for cancellation, the
Company shall execute and deliver a new warrant evidencing the rights of the
Holder to purchase the balance of the shares purchasable hereunder. Upon receipt
of this Warrant by the Company at its office or by the Transfer Agent at its
office, in proper form for exercise, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise; provided,
however, that if at the date of surrender of such Warrant and payment of the
aggregate Exercise Price, the transfer books for the Common Stock shall be
closed, the certificates representing the shares of Common Stock or other
securities subject to issuance upon such exercise shall be issuable as of the
date on which the Company's transfer books shall next be opened. Until such
date, the Company shall be under no duty to deliver any certificate representing
such shares of Common Stock or other securities and the Holder shall not be
deemed to have become a holder of record or owner of such shares of Common Stock
or such other securities. The Company reserves the right to pay any broker-
dealer registered under the Securities Exchange Act of 1934, as amended, a fee
not to exceed ten percent of the Exercise Price upon the exercise of this
Warrant in accordance with applicable federal and state securities laws and
applicable regulations of the National Association of Securities Dealers, Inc.
2. RESERVATION OF SHARES. There shall at all times be reserved for issuance
upon exercise of this Warrant such number of shares of Common Stock as shall be
subject hereto.
3. FRACTIONAL SHARES. Notwithstanding any other provision hereof, the
Company shall not be required to issue fractional shares of Common Stock upon
the exercise of this Warrant. If any fraction of a share would, except for the
provisions hereof, be issuable upon the exercise of this Warrant, then: (a) if
the fraction of a share otherwise issuable is equal to or less than one-half,
the Company shall round down and issue only the largest whole number of shares
of Common Stock to which the Holder is otherwise entitled, or (b) if the
fraction of a share otherwise issuable is greater than one-half, the Company
shall round up and issue one additional share of Common Stock in addition to the
largest whole number of shares of Common Stock to which the Holder is otherwise
entitled.
4. EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANT. Subject to the provisions
of this section and of Section 9 below, this Warrant is exchangeable, without
expense, at the option of the Holder, upon presentation and surrender hereof to
the Company or the Transfer Agent, for other warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable hereunder. Subject to the provisions of this
section and of Section 9 below, upon surrender of this Warrant
2
<PAGE>
to the Company or the Transfer Agent accompanied by: (a) the form of assignment
which is attached hereto as Annex B (the "Form of Assignment") duly executed;
and (b) funds sufficient to pay any transfer tax, the Company shall, without
charge, execute and deliver a new warrant in the name of the assignee named in
the Form of Assignment and this Warrant shall promptly be canceled. This Warrant
may be divided or combined with other warrants which carry the same rights upon
presentation hereof at the office of the Company or the Transfer Agent,
accompanied by a written notice signed by the Holder hereof specifying the names
and denominations in which new warrants are to be issued.
Notwithstanding anything herein to the contrary, the Company may, without
any obligation to do so, at its option, at any time and from time to time prior
to the Expiration Date require that the Holder surrender this Warrant to the
Company or the Transfer Agent in exchange for a warrant certificate in engraved
or other form as may be approved by the Board of Directors representing this
Warrant, bearing such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Board of Directors may deem appropriate, having terms
and conditions substantially similar to those contained in this Warrant or
which, in the reasonable judgment of the Board of Directors, afford the Holder
or Holders of the outstanding Warrants issued by the Company as a class a net
benefit when considered under the totality of the circumstances or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage; it being understood and agreed,
however, that the terms and conditions of this Warrant may be modified, amended
or superseded by the Company at any time hereafter as set forth herein. The term
"Warrant" as defined above shall hereafter include any warrant into which this
Warrant may be divided, exchanged or combined, and any Warrant as the same may
be hereafter modified or amended from time to time.
5. THEFT, DESTRUCTION, LOSS OR MUTILATION OF WARRANT. Subject to the
provisions of Section 4, in the event of the theft, destruction, loss or
mutilation of this Warrant, upon receipt by the Company of evidence satisfactory
to it of such theft, destruction, loss or mutilation and, in the case of loss,
theft or destruction, of such indemnification as the Company may in its
discretion impose, and in the case of mutilation, upon surrender and
cancellation of this Warrant, the Company shall execute and deliver a new
warrant of like tenor and date.
6. RIGHTS OF THE HOLDER. Prior to the exercise of any Warrant represented
hereby, the Holder shall not be entitled by virtue hereof to any rights of a
stockholder in the Company, either at law or equity. The rights of the Holder
are limited to those expressed in this Warrant and are enforceable against the
Company only to the extent set forth herein.
7. ANTI-DILUTION PROVISIONS. The Exercise Price and the number and kind of
securities purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time as hereinafter provided:
3
<PAGE>
(a) In case the Company shall issue Common Stock as a dividend upon Common
Stock or in payment of a dividend thereon, or shall subdivide the number of
outstanding shares of its Common Stock into a greater number of shares or shall
contract the number of outstanding shares of its Common Stock into a lesser
number of shares, the Exercise Price then in effect shall be adjusted, effective
at the close of business on the record date for the determination of
stockholders entitled to receive the same, to the price (computed to the nearest
cent) determined by dividing (A) the product obtained by multiplying the
Exercise Price in effect immediately prior to the close of business on such
record date by the number of shares of Common Stock outstanding prior to such
dividend, subdivision or contraction, by (B) the number of shares of Common
Stock outstanding immediately after such dividend, subdivision, or contraction.
(b) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with or into another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented by this Warrant, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock immediately theretofore purchasable
and receivable upon the exercise of the rights represented by this Warrant had
such reorganization, reclassification, consolidation, merger or sale not taken
place, and in any such case appropriate provision shall be made with respect to
the rights and interests of the Holder to the end that the provisions of this
Warrant (including, without limitation, provisions for adjustment of the
Exercise Price and of the number of shares of Common Stock or other securities
issuable upon the exercise of this Warrant) shall thereafter be applicable as
nearly as may be practicable in relation to any shares of stock, securities, or
assets thereafter deliverable upon exercise of this Warrant. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume, by written instrument, the
obligation to deliver to the Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the Holder may be entitled to
purchase.
(c) Upon each adjustment of the Exercise Price pursuant hereto, the number
of shares of Common Stock specified in this Warrant shall thereupon evidence the
right to purchase that number of shares of Common Stock (calculated to the
nearest hundredth of a share of Common Stock) obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Common Stock purchasable immediately prior to such adjustment upon
exercise of this Warrant and dividing the product so obtained by the Exercise
Price in effect after such adjustment.
4
<PAGE>
(d) Irrespective of any adjustments of the number or kind of securities
issuable upon exercise of this Warrant or the Exercise Price, any warrants
theretofore or thereafter issued may continue to express the same number of
shares of Common Stock and Exercise Price as are stated in similar warrants
previously issued.
(e) The Company may, at its sole option, retain the independent public
accounting firm regularly retained by the Company, or another firm of
independent public accountants of recognized standing selected by the Company's
board of directors (the "Board of Directors"), to make any computation required
under this section and a certificate signed by such firm shall be conclusive
evidence of any computation made under this section.
(f) Whenever there is an adjustment in the Exercise Price and/or in the
number or kind of securities issuable upon exercise of this Warrant, as provided
herein, the Company shall: (i) promptly file in the custody of its Secretary or
Assistant Secretary a certificate signed by the Chairman of the Board of
Directors or the President or an Executive Vice President of the Company and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, showing in detail the facts requiring such adjustment
and the number and kind of securities issuable upon exercise of this Warrant
after such adjustment; and (ii) cause a notice to be sent to the Holder stating
that such adjustment has been effected and stating the Exercise Price then in
effect and the number and kind of securities issuable upon exercise of this
Warrant.
(g) Notwithstanding any other provision of this Warrant, the Exercise Price
shall never be less than the Conversion Price, as adjusted, of the Class C
Convertible Cumulative Redeemable Preferred Stock, computed in accordance with
the Articles of Amendment to the Amended and Restated Articles of Incorporation
of the Company dated August 15, 1996.
(h) The Exercise Price and the number of shares issuable upon exercise of
this Warrant shall only be adjusted in the manner and upon the conditions
heretofore specifically referred to in this Section 7.
8. REGISTRATION RIGHTS. The Company hereby covenants and agrees as follows:
a. Definitions. As used in this section, the following terms shall have
the meanings set forth below:
(i) The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of the effectiveness of such registration statement or
document.
(ii) The term "Registrable Securities" shall mean: (A) this Warrant;
5
<PAGE>
(B) the Common Stock issued or issuable upon exercise of this Warrant; and (C)
any warrant or Common Stock or other securities of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, in
exchange for or in replacement of such Warrant or Common Stock referenced in
subsections (A) or (B) immediately above, excluding in all cases, however, any
Registrable Securities sold to the public pursuant to a registration under the
Securities Act or an applicable exemption therefrom.
(b) Demand Registration Rights. At any time commencing December 31, 1997
and through the period ending on the Expiration Date, upon the written request
of the Holders of at least a majority of the outstanding Registerable Securities
(the "Initiating Holders"), the Company shall, on not more than one occasion,
afford all of the Holders of Registrable Securities (as reflected in the records
of the Company) the opportunity to effect the registration of the offer and sale
of the Registerable Securities.
(c) Piggy-back Registration Rights. If (but without any obligation to do
so) the Company, at any time through the period ending on April 29, 2002,
proposes to register (including for this purpose a registration effected by the
Company for securityholders other than the Holder) any of its securities under
the Securities Act in connection with the public offering of such securities
solely for cash (other than a registration on Form S-4, Form S-8 or any form
which does not include substantially the same information as would be required
to be included in a registration statement covering the sale of the Registrable
Securities), the Company shall, each such time, promptly give the Holder written
notice of such registration. Upon the written request of the Holder given within
twenty (20) days after receipt of such written notice from the Company, the
Company shall, subject to the provisions of this section, cause to be registered
under the Securities Act all of the Registrable Securities that the Holder has
requested to be registered; provided, however, that the Company shall have no
such obligation if, in the good faith judgment of the Company's Board of
Directors, it would be seriously detrimental to the Company and its
securityholders to include any Registrable Securities in the subject
registration statement or offering or if the managing underwriter of the subject
proposed offering objects in writing addressed to the Company to the inclusion
of any Registrable Securities in the subject registration statement or offering;
and provided further, however, that the Registrable Securities shall be subject
to restrictions on transfer for ninety (90) days after the effective date of the
subject registration statement. The inclusion of any of the Holder's Registrable
Securities in a registration statement filed by the Company and declared
effective by the Securities and Exchange Commission ("SEC") shall be deemed to
be the exercise by such Holder of the piggy-back registration rights granted
herein to such Holder.
(d) Obligations of the Company. Whenever required hereunder to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
6
<PAGE>
(i) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for at least four (4) months.
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(iii) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(iv) Use its best efforts to register and qualify the securities covered
by such registration statement under the securities laws of such jurisdictions
as shall be reasonably requested by the Holders for the distribution of the
securities covered by the registration statement, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such jurisdiction.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with terms generally
satisfactory to the managing underwriter of such offering.
(vi) Notify the Holders, promptly after the Company shall have received
notice thereof, of the time when the registration statement becomes effective or
any supplement to any prospectus forming a part of the registration statement
has been filed.
(vii) Notify the Holders of any stop order suspending the effectiveness of
the registration statement and use its reasonable best efforts to remove such
stop order.
e. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant hereto that the Holder,
having chosen to have its Registrable Securities included for registration,
shall furnish to the Company such information regarding the Holder, its
Registrable Securities and the intended method of disposition of such securities
as shall be required to effect the registration thereof. The Holder shall be
required to represent to the Company that all such information which is given is
complete and accurate in all material respects. The Holder shall deliver to the
Company a statement in writing from the beneficial owners of such securities
that such beneficial owners bona fide intend to sell, transfer or otherwise
dispose of such securities.
7
<PAGE>
f. Expenses.
(i) Registration Expenses. All expenses incurred by the Company in
complying with this section, including without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for the
Company, "Blue Sky" fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company) shall be borne by the Company.
(ii) Selling Expenses. All underwriting discounts, underwriters'
expense allowance, and selling commissions applicable to the sale of Registrable
Securities by the Holders and all fees and disbursements of any special counsel
(other than the Company's regular counsel) shall be borne by the Holders of the
Registrable Securities so registered pro rata on the basis of the number of
Registrable Securities so registered.
g. Underwriting Requirements. All Holders proposing to distribute their
Registrable Securities through an underwriting in which the Company has proposed
or is proposing to participate, shall (together with the Company and any other
Holders distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other subsection
of this section, at the request of the managing underwriter, the Holder shall
delay the sale of Registrable Securities which such Holder has requested be
registered hereunder for up to ninety (90) days following the effective date of
the registration statement. If any Holder disapproves of the terms of any such
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company and the underwriter. Any Registrable Securities excluded or
withdrawn from such underwriting shall not be withdrawn from such registration
except at the election of the Holder.
h. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this section.
i. Indemnification. In the event that any Registrable Securities are
included in a registration statement pursuant hereto:
(i) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors and partners of each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations
8
<PAGE>
(collectively, a "Violation"): (A) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto; (B) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading; or (C) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any applicable state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any applicable state securities law; and the Company will
reimburse the Holder for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
the Holder; and further provided, however, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any untrue
statement, alleged untrue statement, omission or alleged omission made in any
preliminary prospectus but eliminated or remedied in the prospectus, such
indemnity agreement shall not inure to the benefit of any underwriter or broker,
if a copy of the prospectus was not sent or given to such person with or prior
to the confirmation of the sale of such securities to such person.
(ii) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, its directors, its officers, any person
who controls the Company within the meaning of the Securities Act or the
Exchange Act, any underwriter (within the meaning of the Securities Act) for the
Company and any person who controls such underwriter against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, or underwriter or controlling person may
become subject, under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by the Holder expressly for
use in connection with such registration; and the Holder will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or controlling person thereof, in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld.
(iii) Promptly after receipt by an indemnified party of notice of the
commencement of any action (including any governmental action), such indemnified
party will, if a claim in respect thereof is to be made against any indemnifying
party hereunder, notify the
9
<PAGE>
indemnifying party in writing of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to notify an
indemnifying party within a reasonable time of the commencement of any such
action, to the extent prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party
hereunder, but the omission so to notify the indemnifying party will not relieve
it of any liability that it may have to any indemnified party otherwise than
under this subsection.
j. Reports Under Exchange Act. Following registration of the
Company's securities under the Exchange Act and with a view of making available
to the Holders the benefits of Rule 144 under the Securities Act and any other
rule or regulation promulgated by the SEC that may at any time permit a Holder
to sell securities of the Company to the public without registration, the
Company agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times;
and
(ii) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act.
k. Termination of the Company's Obligations.
(i) The Company shall have no obligations pursuant to
Subsection 8(b) or 8(c) with respect to any request made by the Holder after
April 29, 2002.
(ii) Notwithstanding any provision hereof to the contrary, the
Company shall not be required to effect any registration under the Securities
Act or under any state securities laws on behalf of any Holder or Holders if, in
the opinion of counsel for the Company, the offering or transfer by such Holder
or Holders in the manner proposed (including without limitation, the number of
shares proposed to be offered or transferred and the method of offering or
transfer) is exempt from the registration requirements of the Securities Act and
the securities or "Blue Sky" laws of applicable states.
l. Holder's Acceptance of Obligations. Acceptance of this Warrant by its
Holder(s) shall be deemed to constitute the unqualified acceptance by the Holder
of all of the terms and conditions set forth herein.
10
<PAGE>
9. TRANSFER TO COMPLY WITH THE SECURITIES ACT AND OTHER APPLICABLE
SECURITIES LAWS. Neither this Warrant nor the shares of Common Stock (or other
securities) issuable upon exercise hereof have been registered under the
Securities Act or under state securities laws. Except as provided in Section 4
above: (a) this Warrant may not be transferred, assigned, pledged, sold, or
otherwise disposed of, and (b) the shares of Common Stock (or other securities)
issuable upon exercise of this Warrant may not be transferred, assigned,
pledged, sold or otherwise disposed of in the absence of registration under or
exemption from the applicable provisions of the Securities Act, unless the
Holder provides the Company with an opinion of counsel in form and substance
satisfactory to the Company (together with such other representations and
warranties as the Company may request) that the shares of Common Stock issued or
issuable, as applicable, upon exercise of this Warrant may be legally
transferred without violating the Securities Act, and any other applicable
securities law and then only against receipt of an agreement of the transferee
(in form and substance satisfactory to the Company) to comply with the
provisions of this section with respect to any resale or other disposition of
such securities.
10. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed by first class mail, postage prepaid, as follows: If to the
Holder of this Warrant, at the address of the Holder as shown on the registry
books maintained by the Company, its transfer agent or the Warrant Agent; and if
to the Company, at 13751 S. Wadsworth Park Drive, Suite 200, Draper, Utah 84020,
Attention: President, with a copy by like means to De Martino Finkelstein Rosen
& Virga, 1818 N Street, N.W., Suite 400, Washington, D.C. 20036, Attention:
Ralph V. De Martino, Esq.
11. SURVIVAL. All agreements, covenants, representations and warranties set
forth herein shall survive the execution and delivery of this Warrant and any
investigation at any time made by or on behalf of any parties hereto and the
exercise and purchase of this Warrant.
12. AMENDMENTS. The Company may, in its sole discretion, by supplemental
agreement or pursuant to an amended warrant certificate issued in exchange for
this Warrant make any changes or corrections to the terms and conditions hereof
which it deems appropriate in order to: (a) reduce the Exercise Price; (b)
extend the Expiration Date of this Warrant; (c) cure any ambiguity or to correct
any defective or inconsistent provision or manifest mistake or error herein
contained; (d) modify such other terms and conditions hereof which modification,
in the judgment of the Board of Directors, provides, when considered under the
totality of the circumstances a net benefit to or which, in the exercise of such
judgment, the Board of Directors determines would not be contrary to the
interests of the Holder of this Warrant and/or to all of the Holders of the then
outstanding Warrants of like tenor; provided, however, that no adverse change in
the number or nature of the securities purchasable upon the exercise of this
Warrant, or the Purchase Price therefor, or the acceleration of the Warrant
Expiration Date, shall be made without the consent in writing of the Holder of
this Warrant. In addition, the Company may at any time hereafter enter into an
agreement with a qualified warrant agent (a "Warrant Agent") chosen by it in its
sole
11
<PAGE>
discretion to act on behalf of the Company in connection with the issuance,
registration, transfer, exchange and redemption of the Warrants, the issuance of
certificates representing the Warrants, the exercise of the Warrants and the
rights of the Holders thereof (a "Warrant Agreement"). The registration rights
contained in Section 8 hereof shall survive any such modification or replacement
of this Warrant.
13. AGREEMENT OF WARRANT HOLDER. The Holder of this Warrant, by his
acceptance hereof, consents and agrees with the Company, any Warrant Agent, any
Transfer Agent that:
(a) The Warrants are transferable only on the registry books of the
Company, the Transfer Agent or the Warrant Agent by the Holder thereof in person
or by his attorney duly authorized in writing and only if the warrant
certificates representing such Warrants are surrendered at the office of the
Company or the Warrant Agent, if any, duly endorsed or accompanied by a proper
instrument of transfer satisfactory to the Company and the Warrant Agent, if
any, in their sole discretion, together with payment of any applicable transfer
taxes;
(b) The Company and any Warrant Agent may deem and treat the person
in whose name the warrant certificate is registered as the Holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and none of the Company, the Transfer Agent or the Warrant Agent shall
be affected by any notice or knowledge to the contrary, except as otherwise
expressly provided in Section 4 hereof;
(c) Each Warrant shall be subject in all respects to the terms and
conditions set forth in any amended warrant certificate upon the issuance
thereof or in any Warrant Agreement entered into by the Company as permitted
pursuant to Section 4 hereof upon the execution thereof and, in either such
case, upon the mailing by the Company of notice of the amendment of the terms
and conditions of this Warrant. In the event of the execution of any such
Warrant Agreement, a true copy thereof such be promptly mailed by the Company to
the Holder;
(d) He shall execute all such further instruments and documents and
take such further action as the Company may reasonably require in order to
effectuate the terms and purposes of this Warrant.
14. SEVERABILITY. The provisions of this Warrant shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
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<PAGE>
15. ENTIRE AGREEMENT. This Warrant is intended to and does contain and
embody the entire understanding and agreement of the Company and the Holder with
respect to the subject matter hereof and there exists no oral agreement or
understanding, express or implied whereby the absolute, final and unconditional
character and nature of this Warrant shall be in any way invalidated,
unempowered or affected.
16. HEADINGS. The headings in this Warrant are for convenience of reference
only and are not part of this Warrant.
17. GOVERNING LAW. This Warrant shall be governed by and construed and
interpreted in accordance with the laws of the State of Florida without
reference to principles of conflict of laws.
IN WITNESS WHEREOF, Medcross, Inc. has caused this Warrant to be signed in
its name and on its behalf and its corporate seal to be affixed hereon by its
duly authorized officers as of the date of issuance first above written.
MEDCROSS, INC.
[SEAL] By:
----------------------------
Authorized Officer
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<PAGE>
Annex A to Common Stock Purchase Warrant
FORM OF SUBSCRIPTION
(Complete and sign only upon exercise of the Common Stock Purchase Warrant in
whole or in part.)
TO: Medcross, Inc.
The undersigned, the holder of the attached Common Stock Purchase Warrant
to which this Form of Subscription applies, hereby irrevocably elects to
exercise the purchase rights represented by such warrant for and to purchase
thereunder shares of common stock, par value $.007 per share (the "Common
Stock") of Medcross, Inc. (or such other securities issuable pursuant to the
terms of the Common Stock Purchase Warrant) and herewith makes payment of
$ in cash or by certified or official bank check. The undersigned hereby
requests that the certificate(s) representing such securities be issued in the
name(s) and delivered to the address(es) as follows:
Name:
Address:
Social Security Number:
Deliver to:
Address:
If the foregoing subscription evidences an exercise of the Common Stock
Purchase Warrant to purchase fewer than all of the shares of Common Stock (or
other securities issuable pursuant to the terms of the Common Stock Purchase
Warrant) to which the undersigned is entitled under such warrant, please issue a
new warrant, of like tenor, relating to the remaining portion of the securities
issuable upon exercise of such warrant (or other securities issuable pursuant to
the terms of such warrant) in the name(s), and deliver the same to the
address(es), as follows:
Name:
Address:
Dated:
- ------------------------------ -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
- ------------------------------
(Signature of Holder or Authorized Signatory)
Signature Guaranteed:
<PAGE>
Annex B to Common Stock Purchase Warrant
FORM OF ASSIGNMENT
(To be executed upon transfer of Common Stock Purchase Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to
the right represented by the Common Stock Purchase Warrant to which this Form of
Assignment applies, No. , together with all rights, title and interest
therein, and does hereby irrevocably constitute and appoint attorney to
transfer such Common Stock Purchase Warrant on the warrant register of Medcross,
Inc., the issuer of the Common Stock Purchase Warrant, with full power of
substitution.
DATED:
Signature:
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
Signature Guaranteed:
<PAGE>
Exhibit 4(z)
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
MEDCROSS, INC.
Pursuant to Article III(b) of the Amended and Restated Articles of
Incorporation of Medcross, Inc. (the "Company"), and the provisions of the
Florida Business Corporation Act, the Board of Directors of the Company has
resolved to amend Article III of the Articles of Incorporation as set forth
herein.
A. The name of the corporation is MEDCROSS, INC.
B. Article III of the Articles of Incorporation is hereby amended
by adding a new Section III(h), which shall read in its entirety as follows:
(h) Of the 500,000 shares of Preferred Stock authorized hereunder,
1,000 shares of Preferred Stock shall be designated as a new Series D
Preferred Stock (the "Series D Preferred Stock"), which shall have a
par value of $10.00 per share, and which shall have the following
rights and preferences:
1. Dividends. If and when dividends are declared by the Board
of Directors on the shares of Common Stock, the holders of
Series D Preferred Stock shall be entitled to receive the same
dividend as declared on the shares of Common Stock based on
the number of shares of Common Stock which would have been
held by the holder of each issued and outstanding share of
Series D Preferred Stock if that share of Series D Preferred
Stock had been converted in accordance with Section III(g)(3)
below to shares of Common Stock immediately prior to the
record date for the dividend.
2. Voting Rights. Except as otherwise required by applicable
law, the Series D Preferred Stock shall have no voting rights.
3. Conversion Into Common Stock.
(i) Subject to the terms and conditions of this Section
III(g)(3), each issued and outstanding share of Series D
Preferred Stock may be converted, at the option of the
holder at any time within the nine (9) month period
beginning September 2, 1997 and ending on June 1, 1998
(the "Conversion Period") into such number of shares of
Common Stock (the "Conversion Shares") as shall equal 6250
divided by the lower of (a) $9.25, or (b) the average
closing bid price of the Common Stock for the five (5)
<PAGE>
consecutive trading days immediately preceding the
Conversion Date as established in Sub-section (iii)
below.
(ii) Each issued and outstanding share of Series D
Preferred Stock which has not been converted to
Common Stock at the election of the holder thereof
during the Conversion Period pursuant to Sub-section
(i) above, shall be automatically converted to Common
Stock effective on the last day of the Conversion
Period on the same basis as calculated and
established for that date in Sub-section (i) above.
(iii) The holder may exercise this right of conversion only
by delivering written notice to the Company that the
holder elects to convert a stated number of shares of
Series D Preferred Stock into shares of Common Stock
("Conversion Date") and surrendering to the Company a
certificate or certificates for the shares of the
Series D Preferred Stock to be converted, at the
principal office of the Company, at any time during
its usual business hours on the Conversion Date.
(iv) Promptly after the receipt of certificates
representing Series D Preferred Stock and surrender
of Series D Preferred Stock, the Company shall issue
and deliver, or cause to be issued and delivered, to
the holder a certificate or certificates for the
number of whole shares of Common Stock issuable upon
the conversion of such Series D Preferred Stock. No
fractional shares shall be issued upon conversion of
the Series D Preferred Stock into shares of Common
Stock. To the extent permitted by law, the conversion
shall be deemed to have been effected as of the close
of business on the Conversion Date (or on the next
preceding business day if the Conversion Date is not
a business day) and at that time the rights of the
holder of Series D Preferred Stock, as such holder,
shall cease, and the holder of the Series D Preferred
Stock shall become the holder of record of shares of
Common Stock.
4. Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
affairs of the Company, each share of Series D Preferred Stock
shall have a liquidation preference of $6,250.00 per share.
This liquidation preference shall be subordinate to the
liquidation preferences attached to any issued and outstanding
shares of Class A, Class B and Class C Preferred Stock, but
shall rank senior to the shares of Common Stock of the
Company.
<PAGE>
C. The foregoing Articles of Amendment were duly adopted by the Board
of Directors without the requirement of shareholder action by meeting held on
July 29, 1997, pursuant to the provisions of the Florida Business Corporation
Act.
IN WITNESS WHEREOF, Medcross, Inc. has caused these Articles of
Amendment to the Articles of Incorporation to be executed by its President and
attested to by its Secretary this 2nd day of September, 1997.
MEDCROSS, INC.
By: /s/ John W. Edwards
-------------------------------
John W. Edwards, President
ATTEST:
/s/ David E. Hardy
- --------------------------
David E. Hardy, Secretary
<PAGE>
Exhibit 10(aa)
COMMERCIAL LEASE
THIS LEASE (the "Lease") dated this 11th day of September, 1996, is entered
into by and between DRAPER LAND PARTNERSHIP II, a Utah Limited Partnership
("Landlord"), and I-LINK, INC., a Corporation ("Tenant").
1. PREMISES.
(a) Description. Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, for the term and subject to the terms and conditions hereinafter
set forth, to each and all of which Landlord and Tenant hereby mutually agree,
those certain premises (the "Premises"), highlighted on Exhibit A attached
hereto, which include approximately 13,984 Rentable square feet of office space
as per space plan to be approved by Landlord and Tenant (the exact Rentable
square footage and location on the second floor to be determined by final space
plan). The location of the Premises is commonly known as: Building "D" at 13751
South Wadsworth Park Drive, Draper, UT, 84020 (the "Building").
(b) Additional Use. In addition, the Premises shall include the appurtenant
right to use, in common with others, the site, parking and landscaped areas.
Landlord shall provide Tenant, at no additional charge, the use of 56 non-
reserved parking stalls in the adjacent parking lot.
(c) Acceptance of Premises. Unless otherwise notified by Tenant within
thirty (30) days of taking possession, by entry hereunder Tenant accepts the
Premises as being in the condition in which Landlord is obligated to deliver the
Premises. Tenant shall at the end of the term and any extension herein surrender
to Landlord the Premises and all alterations, additions and improvements thereto
in the same condition as when received; ordinary wear and tear, damage by fire,
earthquake, or act of God excepted. Landlord has no liability and has made no
representation to alter, improve, repair, or paint the Premises or any part
thereof, except as specified in Article 2(c), 2(d) & 6 herein.
2. TERM, OPTION, TENANT IMPROVEMENTS.
(a) Lease Term. The initial Lease Term shall be seven (7) years and shall
commence November 5, 1996 ("Commencement Date"), which Commencement Date is
subject to substantial completion of Tenant Improvements. If Landlord is solely
responsible for not delivering possession of the Premises to Tenant within
forty-five (45) days of the Commencement Date, Tenant may upon ten (10) days
written notice terminate the Lease. In the event of Tenant's termination due to
late delivery, Landlord shall not be liable to Tenant for any damage of any kind
resulting from such late delivery or failure to deliver possession of the
Premises.
(b) Option. Provided that Tenant is not in default under the Lease, Tenant
may by written notice to Landlord, not later than one hundred eighty (180) days
prior to the expiration of the Lease, extend the Lease by exercising a (one-
time) 5-year option on a timely basis. Tenant shall possess the Premises during
the Option period upon the same terms and conditions of the Lease, except that
Base Rent under Article 4(a) herein will be adjusted
<PAGE>
for the Option period to the then fair market rate for similar space in similar
condition in the surrounding area, whichever is less.
(c) Base Building Improvements. At Landlord's sole cost and expense,
Landlord shall design, construct and install the Building's roof and structural
elements ("Shell"), shall provide basis utility access to and an initial HVAC
unit for the Premises, and shall design and construct the common areas of the
Premises and Building, as more specifically outlined in Exhibit B -Base Building
Improvements (collectively "Base Building Improvements").
(d) Tenant Improvements. At execution of the Lease, Landlord shall commence
the building design, construction and installation of agreed-upon Tenant
Improvements requested by Tenant. Tenant is responsible for any costs of Tenant
Improvements above $ 16.00 per Useable square feet. Tenant Improvements' shall
include all improvements to the Premises, but exclude the Base Building
Improvements.
(e) Substantial Completion of Tenant Improvements. The Premises shall be
deemed complete when Landlord has substantially completed Tenant improvements.
"Substantial Completion" shall mean when (i) installation of Tenant Improvements
has occurred, (ii) Basic utility services are available to the Premises, (iii)
Landlord's Architect/Contractor shall have issued a Certificate of Substantial
Completion with respect to Premises or that portion of the Building within which
they are contained, whether or not Substantial Completion of the entire Building
itself shall have occurred, and (iv) issuance of a temporary Certificate of
Occupancy. Substantial Completion shall be deemed to have occurred
notwithstanding a requirement to complete "punch-list" work, which shall be
completed within a reasonable time by Landlord. Landlord shall use its best
efforts to advise Tenant of Substantial Completion at least thirty (30) days
prior to such date, but the failure to give such notice shall not constitute a
default hereunder by Landlord.
3. NON-OCCUPANCY OF IMPROVED SPACE.
In the event Tenant does not occupy the Premises and fails to pay Rents as
required in Article 4 of the Lease, all costs for Tenant Improvements become due
and payable upon invoicing by Landlord, subject to reasonable mitigation by
Landlord for use with next tenant. Further, such invoicing by Landlord does not
waive any other rights or remedies Landlord may have against Tenant for failure
to occupy.
4. RENT.
(a) Base Rent. Total Base Rent shall be $9.75 per Rentable square foot X
13,984( square feet X 7 years ($954,408(, subject to an annual increase as
provided below), payable as follows: $11,362( per month payable in advance on or
before the 1st day of each month during the duration of the Lease, with the
first such monthly rental payments being due upon the execution of the Lease.
This Base Rent is estimated herein since the square footage is approximated. The
exact Base Rent will be determined according to the square footage stated in the
final space plan. Any partial months shall be prorated accordingly. Base Rent
under this Article shall be increased four (4%) percent per year during the
Lease Term and during any Option period (after adjustment to fair market value
at beginning of any Option period). Base Rent during the Term of the Lease shall
never decrease. All Base Rent and Additional Rent (collectively "Rents") shall
be paid as follows, unless
2
<PAGE>
otherwise directed in writing: Draper Land Partnership II; Attn: Kip Wadsworth;
71 East Wadsworth Park Dr., Draper, UT 84020.
(b) Additional Rent. All obligations payable by Tenant under the Lease
other than Base Rent are called "Additional Rent". Additional Rent shall be paid
monthly with Base Rent pursuant to the Lease, unless otherwise invoiced by
Landlord.
(c) Interest, Late Charges, Costs and Attorneys' Fees. If Tenant fails to
pay within fifteen (15) days of the date due any Rents which Tenant is obligated
to pay under the Lease, the unpaid amount shall bear interest at fifteen (15%)
percent per annum. Tenant acknowledges that any late payments of Rents shall
cause Landlord to lose the use of that money and incur costs and expenses not
contemplated under the Lease, including without limitation administrative,
collection and accounting costs, the exact amount of which is difficult to
ascertain. Further, as Additional Rent, Tenant shall be liable to Landlord for
costs and attorneys' fees incurred as a result of late payments or non-payments.
Acceptance of any interest, late charge, costs or attorneys' fees shall not
constitute a waiver of any default by Tenant nor prevent Landlord from
exercising any other rights or remedies under the Lease or at law.
5. USE.
(a) The Premises shall be used for general office use, and any other lawful
purpose incidental to Tenant's business, and no other, unless consented to in
writing by Landlord. Tenant shall not do or permit to be done in or about the
Premises or Building anything which is prohibited by or in any way in conflict
with any and all laws, statutes, ordinances, rules and regulations now in force
or which may hereafter be enacted or promulgated or which is prohibited by the
standard form of fire insurance policy, or which will increase the existing rate
of or affect any fire or other insurance upon the Premises or Building or any of
its contents, or cause a cancellation of any insurance policy covering the
Premises or Building or any part thereof or any of its contents. Tenant shall
not handle, use, store or otherwise put any hazardous material on the Premises,
without first notifying Landlord of its intention to do so and identifying the
hazardous material and safety plan which shall ensure that any such hazardous
material is properly controlled, safeguarded, and disposed of, and obtaining
Landlord's prior written consent, which consent may be reasonably withheld and
may be conditioned upon absolute indemnification by Tenant and accompanying
bond. Tenant shall not do or permit anything to be done in or about the Premises
or Building which will in any way violate Rules or Regulations reasonably
promulgated by Landlord throughout the Lease, obstruct or interfere with the
rights of other tenants, or injure them, or use or allow the Premises or
Building to be used for any improper, immoral, or unlawful purpose, nor shall
Tenant cause, maintain or permit any nuisance, in, on or about the Premises or
Building or commit or suffer to be committed any waste in, on or about the
Premises or Building.
(b) Tenant shall not use the name of the Building in which the Premises are
located, in connection with any business carried on in said Premises (except as
Tenant's address) without written consent of Landlord.
(c) Tenant shall not manufacture, assemble or store materials inside the
common areas outside of Building.
3
<PAGE>
6. LANDLORD'S SERVICES.
Landlord, at its sole cost and expense, is responsible to maintain only the
roof and structural elements ("Shell") of the Premises and Building. All
Operating Expenses, including but not limited to repairs, maintenance, common
area utilities, common area janitorial, sewer and garbage, insurance, taxes, and
property management on the Premises, Building, and common areas shall be
coordinated by Landlord, but are the financial responsibility of the Tenant
through prorated billings as more fully outlined in Article 7 herein.
7. OPERATING EXPENSES - REPAIRS, MAINTENANCE, INSURANCE, TAXES AND
PROPERTY MANAGEMENT (Excludes Electric, Gas and Office Janitorial).
Since the Premises is part of a Building or group of buildings, Tenant is
responsible for a prorated share of Operating Expenses, including but not
limited to repairs, maintenance, common area utilities, common area janitorial
(not specific tenant janitorial), water, sewer and garbage, insurance, taxes,
and property management incurred in the operation and management of the
Premises, Building, and common areas as shall be reasonably determined by the
Landlord. For purposes of the Lease, Operating Expenses specifically exclude
electric, gas, and janitorial expenses for the office space portion (excludes
common areas) of Tenant's Premises which are separately billed to Tenant and
which are the sole responsibility of Tenant. Proration shall be on a square
footage basis with all other tenants and Tenant's proration shall be calculated
by multiplying the Operating Expenses by an equation, the numerator being the
Rentable square feet of the Premises and the denominator being the total
Rentable square feet of the Building. The Operating Expenses shall be prorated
to Tenant and be payable by Tenant as Additional Rent on a monthly basis, and
subject to the following terms and conditions:
(a) Prorated Share. Tenant's prorated share of the Operating Expenses shall
be computed and paid in twelve (12) equal monthly estimated payments as
determined in the Landlord's reasonable discretion. Such Additional Rent shall
be paid by Tenant on or before the 1st day of each month with the Base Rent. As
soon as is reasonably possible, but in any event within ninety (90) days
following the end of each calendar year, Landlord shall furnish to Tenant a
statement showing the Premises' and Building's actual Operating Expenses for the
preceding calendar year. In the case of a deficiency, Tenant shall promptly
remit its prorated share of such deficiency to Landlord. In the case of a
surplus, Landlord shall apply said surplus to the next Additional Rent due from
Tenant.
(b) Right to Review. Tenant may review at his sole cost and expense any
Operating Expenses prorated to Tenant by Landlord, including assessed Real
Estate Taxes as may be statutorily allowed. Landlord shall make available the
applicable Operating Expenses' invoices and statements. However, any such review
must be requested and completed within sixty (60) days of receipt of the annual
statement. On any expenses for alterations, additions or improvements for which
Tenant's pro rata share exceeds One Thousand Dollars ($1,000), Landlord shall
consult with Tenant and use its best efforts to meet the reasonable needs of
Tenant.
8. ALTERATIONS.
(a) Tenant will not make or suffer to be made any alterations, additions or
improvements in excess of $1,000, excluding the initial Tenant
4
<PAGE>
Improvements, (collectively "Alterations") to or upon the Premises, Building, or
any part thereof, or attach any fixtures or equipment thereto, without first
obtaining Landlord's written approval, which shall not be unreasonably withheld
or delayed. Any Alterations to or upon the Premises shall be made by Tenant at
Tenant's sole cost and expense and any contractor selected by Tenant to make the
same shall be subject to Landlord's reasonable prior written approval. All such
Alterations permanent in character, made in or upon the Premises either by
Tenant or Landlord, may at the option of Landlord, become Landlord's property
and, at the end of the term or any extension hereof, shall remain on the
Premises without compensation to Tenant unless Landlord requests that Tenant
remove any such Alterations. Notwithstanding the above, Tenant's work stations
and other items of personal property shall remain Tenant's property.
(b) Any Alterations shall, when completed, be of such a character as not to
lessen the value of the Premises or such improvements as may be then located
thereon. Any Alterations shall be made promptly and in a good workmanlike manner
and in compliance with all applicable permits and authorizations and building
and zoning laws and with all other laws, ordinances, orders, rules, regulations
and requirements of all federal, state and municipal governments, departments,
commissions, boards and offices. The costs of any such Alterations shall be paid
by Tenant, so that the Premises be free of liens for services performed, labor
and material supplied or claimed to have been supplied. Before any Alterations
shall be commenced, Tenant shall pay any increase in premiums on insurance
policies (provided for herein) or ensure adequate coverage is in place for all
risks related to the construction of such Alterations and the increased value of
the Premises.
9. PERSONAL PROPERTY & SIGNAGE.
Placement of signs on a monument, if any, including the type, size and
lighting of the signs, must be approved in writing by Landlord prior to their
installation. Such personal property must be removed at the end of the Lease
Term, any Option period herein, if applicable, or upon Tenant's failing to have
possession of the Premises. It is understood that Tenant shall have signage
rights on the west and/or south sides of the building, subject to Landlord's
approval prior to installation. Such signs shall conform to all applicable
Draper City and Salt Lake County ordinances.
10. LIENS.
Tenant shall keep the Premises and the Building free from any mechanics'
and/or materialmen's liens or other liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Tenant shall notify
Landlord in writing at least seventy-two (72) hours before any work or activity
is to commence on the Premises which may give rise to such liens to allow
Landlord to post and keep posted on the Premises any notices which Landlord may
deem to be proper for the protection of Landlord and the Premises from such
liens.
11. DESTRUCTION OR DAMAGE.
(a) If the Premises is partially damaged by fire, earthquake, or other Act
of God, Landlord shall repair the same at Landlord's expense, subject to the
provisions of this Article and provided such repairs can, in Landlord's
reasonable opinion, be made within sixty (60) days. During such repairs, the
Lease shall remain in full force and effect, except that if
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there shall be damage to the Premises and such damage is not the result of the
negligence or willful misconduct of Tenant, Tenant's employees, agents, or
invitees, an abatement of Rents shall be allowed Tenant for such portion of
Premises and period of time as the Premises was unusable by Tenant.
(b) If in Landlord's reasonable opinion the partially damaged Premises can
be repaired, but not within sixty (60) days, the Landlord may elect, upon
written notice to Tenant within thirty (30) days of such damages, to repair such
damages over a longer time period and continue the Lease in full force and
effect, but with Rents partially abated as provided in Article 11(a). In the
event such repairs cannot be made within sixty (60) days, Tenant shall have the
option to terminate the Lease provided that written notice is given to Landlord
within thirty (30) days of receipt of Landlord's notice stated in this
paragraph.
(c) If the partially damaged Premises is to be repaired under this Article,
Landlord shall repair such damages to the Premises itself, and to the Tenant
Improvements supplied by Landlord herein. Except in the event of Landlord's
gross negligence or willful misconduct, Tenant shall be responsible for Tenant's
equipment, furniture and fixtures, and other alterations, additions and
improvements made by Tenant to the Premises and Building.
(d) If in Landlord's reasonable opinion, the Premises is totally or
substantially destroyed by fire or other casualty, the Lease shall terminate
upon notice by Landlord.
12. SUBROGATION.
Landlord and Tenant shall each, prior to Tenant's taking possession or
immediately after the execution of the Lease, procure from each of the insurers
under all policies of fire, theft, public liability, workmen's compensation and
other insurance now or hereafter existing during the term and any extension
hereof and purchased by either of them insuring or covering the Premises and/or
Building or any portion thereof or operations therein, a waiver of all rights of
subrogation which the insurer might otherwise, if at all, have against the
other.
13. INDEMNIFICATION.
Tenant and Landlord hereby agree to indemnify and hold the other party
harmless from any damage to any property, including the release of any hazardous
materials, or injury to or death of any person arising from the use of the
Premises, Building, or common areas by Tenant or the ownership, management or
maintenance of the Premises, Building, or common areas by Landlord, except such
as is caused by reason of the negligent or willful act of the other party, its
agents, employees or contractors. The foregoing indemnity obligation of Tenant
and Landlord shall include reasonable fees, investigation costs and all other
reasonable costs and expenses incurred by Landlord or Tenant from the first
notice that any claim or demand is made, except in the event of the other
party's negligence or willful misconduct. The provisions of this Article shall
survive the Lease's termination with respect to any damage, injury or death
occurring prior to such termination.
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14. COMPLIANCE WITH LEGAL REQUIREMENTS
Tenant shall, at its sole cost and expense, promptly comply with all laws,
statutes, ordinances and governmental rules, regulations or requirements now in
force or which may hereafter by in force, the requirements of any board of fire
underwriters or other similar body now or hereafter constituted, any direction
or occupancy certificate issued pursuant to any law by any public officer or
officers, as well as the provisions of all recorded documents affecting the
Premises, (collectively the "Applicable Laws"), insofar as any thereof relate to
or affect the use or occupancy of the Premises, Building, or common areas,
excluding requirements of structural changes now related to or affected by
improvements made by or for Tenant.
Landlord shall, at its sole cost and expense, promptly comply with all
Applicable Laws, including the American with Disabilities Act ("ADA"), insofar
as any thereof relate to or affect Landlord's obligations under the Lease, or
its ownership of the Premises, Building, or common areas, except for Tenant's
requirements in the immediately preceding paragraph herein.
15. INSURANCE.
(a) Commercial General Liability. Tenant shall maintain a Commercial
General Liability policy including all coverages normally provided therein. Such
policies shall specifically name Landlord as an additional insured, with a
cancellation period of thirty (30) days prior written notice of an cancellation.
A Certificate of Insurance shall be provided to Landlord. All polices of
insurance shall be issued by responsible insurance companies licensed to do
business in the State of Utah.
The minimum limits of coverage acceptable are:
(i) $1,000,000 Each Occurrence Combined Single Limit for Bodily
Injury and Property Damage and
(ii) $2,000,000 Annual Aggregate.
(b) Premises and Building Insurance. Landlord shall insure the Premises and
Building, including Landlord supplied Core and Shell and Tenant Improvements as
deemed necessary in Landlord's reasonable discretion. Tenant shall pay its
prorata share for such insurance as outlined in Article 7 herein, involving
Tenant's prorated share of Operating Expenses. All policies of insurance shall
be issued by responsible insurance companies licensed to do business in the
State of Utah.
(c) Tenant's Additional Insurance. Tenant may, at its sole cost and
expense, cause all equipment, machinery, furniture and fixtures, personal
property, and Tenant Improvements supplied by Tenant from time to time used or
intended to be used in connection with the operation and maintenance of the
Premises, to be insured by Tenant against loss or damage. Except for losses
caused by Landlord's gross negligence or willful misconduct, Landlord is in no
way liable for any uninsured Tenant's property.
16. ASSIGNMENT AND SUBLETTING.
In the event Tenant should desire to assign the Lease or sublet the
Premises, Tenant shall give Landlord written notice of such desire at least
ninety (90) days in advance of the date on which Tenant desires to make such
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assignment or sublease. Landlord shall then have a period of thirty (30) days
following receipt of such notice within which to notify Tenant in writing that
Landlord elects either (i) to terminate the Lease as of the date so specified by
Tenant, in which event Tenant will be relieved of all further obligations
hereunder, or (ii) to permit Tenant to assign or sublet such space, subject to
prior written approval of the proposed assignee by Landlord, such consent not to
be unreasonably withheld or delayed, so long as the use of the Premises by the
proposed assignee would be a permitted use and the proposed assignee is of sound
financial condition as determined in Landlord's reasonable discretion. If
Landlord should fail to notify Tenant in writing of such election within said
thirty (30) day period, Landlord shall have deemed to have waived option (i)
above, but written approval by Landlord of the proposed assignee shall still be
required. Failure by Landlord to approve a proposed assignee shall not cause a
termination of the Lease. Any rents or other consideration realized by Tenant
under any such sublease and assignment in excess of the Rents hereunder, after
amortization of the reasonable costs of extra tenant improvements for which
Tenant has paid and reasonable subletting and assignment costs, shall be divided
and paid fifty (50%) percent to Landlord and fifty (50%) percent to Tenant.
Notwithstanding the above, Tenant shall have the right to sublease or assign all
or any portion of the Premises during the Term or any Option period to any
related entity, subsidiary, or affiliate of Tenant, having at least fifty-one
(51%) percent direct common ownership, without having to receive Landlord's
consent, but still requiring written notice to Landlord on or before such
sublease or assignment. No assignment or subletting by Tenant shall relieve
Tenant of any obligation under the Lease. Any assignment or subletting which
conflicts with the provisions hereof shall be void.
17. RULES.
Tenant shall faithfully observe and comply with all Rules and Regulations
reasonably promulgated by Landlord, in writing and after reasonable notice,
during the Term or any Option period herein. Landlord must apply rules
equitably against all Tenants, but shall not be responsible to Tenant for the
non-performance by other Building tenants, or adjacent buildings' tenants, of
any of said Rules and Regulations.
18. ENTRY BY LANDLORD.
The Landlord may enter the Premises or Building at reasonable hours and
upon reasonable written notice to Tenant to (a) inspect the same, (b) show the
same to prospective purchasers, lenders or tenants, (c) determine whether Tenant
is complying with all of Tenant's obligations hereunder, (d) post notices of
non-responsibility or (e) make repairs required of Landlord under the Lease,
repairs to adjoining space or utility service, or make repairs, alterations or
improvements to the Building, provided that all such work shall be done as
promptly as possible and with as little interference to Tenant as reasonably
possible. Tenant hereby waives any claim for damages for any inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises occasioned by such entry. Landlord shall at all times have and
retain a key to unlock all doors in, on or about the Premises (excluding
Tenant's vaults, safes and similar areas designated in writing by Tenant). In
the event of an emergency, Landlord shall have the right to use any and all
means which Landlord may deem proper to enter the Premises, without notice, for
the limited purpose of abating as possible said emergency. Such emergency
entrance shall not be construed or deemed to be a forcible or unlawful entry
into or a detainer of the Premises
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or an eviction, actual or constructive, of Tenant from the Premises, or any
portion thereof.
19. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of the Lease by Tenant: (a) if Tenant fails
to pay Rents when and as the same becomes due and payable and such failure
continues for more than fifteen (15) days after written notice thereof, or (b)
if Tenant fails to pay any other sum when and as the same becomes due and
payable and such failure continues for more than fifteen (15) days after written
notice thereof; or (c) if Tenant fails to perform or observe any material term
or condition of the Lease, such failure continues for more than thirty (30) days
after written notice from Landlord, and Tenant does not within such period begin
with due diligence and dispatch the curing of such default, or, having so began,
thereafter fails or neglects to complete with due diligence and dispatch the
curing of such default; or (d) if Tenant shall make a general assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
as they become due or shall file a petition in bankruptcy, or shall be
adjudicated as bankrupt or insolvent, or shall file a petition seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, or
shall file any answer admitting or shall fail timely to contest the material
allegations of a petition filed against it in any such proceeding, or shall seek
or consent to or acquiesce in the appointment of any trustee, receiver or
liquidator of Tenant or any material part of its properties; or (e) if within
sixty (60) days after the commencement of any proceeding against Tenant seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceeding shall not have been dismissed, or if, within sixty
(60) days after the appointment without the consent or acquiescence of Tenant,
of any trustee, receiver or liquidator of Tenant or of any material part of its
properties, such appointment shall not have been vacated; or (f) vacation or
abandonment of the Premises for a continuous period in excess of fifteen (15)
days after initial occupancy, or (g) if the Lease or any estate of Tenant
hereunder shall be levied upon under any attachment or execution and such
attachment or execution is not vacated within thirty (30) days of receipt
thereof by Tenant.
20. TERMINATION UPON TENANT'S DEFAULT.
If an Event of Default shall occur, Landlord at any time thereafter may
give a written termination notice to Tenant, and on the date specified in such
notice (which shall not be less than three (3) days after service) Tenant's
right to possession shall terminate and the Lease shall terminate, unless on or
before such date all Rents, arrearages and other sums due by Tenant under the
Lease, including reasonable costs and attorneys' fees incurred by or on behalf
of Landlord, shall have been paid by Tenant and all other Events of Default by
Tenant shall have been fully cured to the satisfaction of Landlord. Upon such
termination, Landlord may recover from Tenant:
(a) the worth at the time of award of the unpaid Rents which had been
earned at the time of termination; plus
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(b) the worth at the time of award of the amount by which the unpaid Rents
which would have been earned after termination until the time of award exceeds
the amount of such Rents loss that Tenant proves could have been reasonably
avoided; plus
(c) the worth at the time of award of the amount by which the unpaid Rents
for the balance of the term of the Lease after the time of award exceeds the
amount of such Rents loss that Tenant proves could be reasonably avoided; and
plus
(d) any other amount reasonably necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under the Lease or which in the ordinary course of things would be likely to
result therefrom; and/or
(e) At Landlord's elections, such other amounts in addition or in lieu of
the foregoing as may be permitted from time to time herein or by applicable law.
The "worth at the time of award" of the amounts referred to in clauses (a)
and (b) above is computed by allowing interest at the rate of 10% per annum. The
"worth at the time of award" of the amount referred to in clause (c) above means
the monthly sum of the Rents under the Lease. Failure of Landlord to declare any
default immediately upon occurrence thereof, or delay in taking any action in
connection therewith, shall not waive such default, but Landlord shall have the
right to declare any such default at any time thereafter.
21. CONTINUATION AFTER DEFAULT.
Even though Tenant has defaulted the Lease and abandoned the Premises, the
Lease shall continue in effect as long as Landlord does not terminate Tenant's
right to possession, and Landlord may enforce all of its rights and remedies
under the Lease, including the right to recover the Rents as they become due
under the Lease. Acts of maintenance or preservation or efforts to relet the
Premises or the appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under the Lease shall not constitute a termination of
Tenant's right to possession. If any fixture, equipment, improvement,
installation or appurtenance shall be required to be removed from the Premises
and/or Building by Tenant, then Landlord (in addition to all other rights and
remedies) may, at its election by written notice to Tenant, deem that the same
has been abandoned by Tenant to Landlord, or Landlord may remove and store the
same and restore the Premises to its original condition at the reasonable
expense of Tenant, as Additional Rent to be paid within fifteen (15) days after
written notice to Tenant of such expense.
22. LANDLORD'S DEFAULT.
If Landlord fails to perform or observe any of its material Lease
obligations herein and such failure continues for thirty (30) days after written
notice from Tenant, or such additional time, if any, that is reasonably
necessary to promptly and diligently cure such failure after receiving written
notice, Landlord shall be in breach of the Lease (a "Default"). If Landlord
commits a Default, Tenant may pursue any remedies given in the Lease or under
law.
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23. LANDLORD'S RIGHT TO CURE DEFAULTS.
All terms and provisions to be performed by Tenant under the Lease shall be
at Tenant's sole cost and expense and without any abatement of Rents. If Tenant
fails to pay any sum of money, other than Rents, required hereunder or fails to
perform any other act required hereunder and such failure continues for thirty
(30) days after notice by Landlord, Landlord may, but shall not be obligated,
and without waiving or releasing Tenant from any obligations of Tenant, make any
such payment or perform any such act on Tenant's part to be made or performed as
provided in the Lease. All sums paid by Landlord and all incidental costs shall
be deemed Additional Rent hereunder and shall be payable within ten (10) days of
written notice of such sums paid.
24. OTHER RELIEF.
The remedies provided for in the Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
25. ATTORNEYS' FEES.
In the event either party places the enforcement of the Lease, or any part
thereof, or the collection of any Rents, or recovery of the possession of the
Premises, or files suit upon the same, then the prevailing party shall recover
its reasonable attorneys' fees and costs.
26. EMINENT DOMAIN.
If all or any part of the Premises shall be taken or conveyed as a result
of the exercise of the power of eminent domain, the Lease shall terminate as to
the part so taken as of the date of taking, and, in the case of a partial
taking, either Landlord or Tenant shall have the right to terminate the Lease as
to the balance of the Premises by written notice to the other within thirty (30)
days after such date; provided, however, that a condition to the exercise by
Tenant of such right to terminate shall be that the portion of the Premises
taken or conveyed shall be of such extent and nature as substantially to
handicap, impede or impair Tenant's use of the balance of the Premises. In the
event of any taking, Landlord shall be entitled to any and all compensation,
damages, income, rent awards or any interest therein whatsoever which may be
paid or made in connection therewith, and Tenant shall have no claim against
Landlord for the value of any unexpired term of the Lease or otherwise, provided
that Tenant shall be entitled to any and all compensation, damages, income, rent
or awards paid for or on account of Tenant's moving expenses, trade fixtures,
equipment and any leasehold improvements in the Premises, the cost of which was
borne by Tenant, to the extent of the then unamortized value of such
improvements for the remaining term of the Lease. In the event of a taking of
the Premises which does not result in a termination of the Lease, the monthly
rental herein shall be apportioned as of the date of such taking so that
thereafter the rent to be paid by Tenant shall be in the ratio that the area of
the Premises not so taken bears to the total area of the Premises prior to such
taking.
27. SUBORDINATION, ATTORNMENT & NONDISTURBANCE; AND ESTOPPEL CERTIFICATE.
At Landlord's request, Tenant agrees to execute, acknowledge, and deliver
within ten (10) days to Landlord a Subordination, Attornment &
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Nondisturbance Agreement ("Subordination Agreement"), subject to Landlord's
reasonably proposed form(s). Such Subordination Agreement shall subordinate the
Lease to any ground lease, mortgage, deed of trust, or any other hypothecation
for security now or hereafter placed upon the Premises, Building or common
areas, or any part thereof, to any and all advances made on the security, and to
all renewals, modification, consolidations, replacements and extensions thereof,
whether the Lease is dated prior or subsequent to the date of said ground lease,
mortgage, deed of trust or other hypothecation or the date of recording thereof.
Further, at Landlord's request, Tenant agrees to execute, acknowledge, and
deliver within ten (10) days to Landlord an Estoppel Certificate, subject to
Landlord's reasonably proposed form(s). Such Subordination Agreement and
Estoppel Certificate may be relied upon by any prospective purchaser, mortgagee,
or beneficiary under any ground lease, mortgage, deed of trust, or any other
hypothecation of the Premises, Building, or common areas, or any part thereof.
Notwithstanding such Subordination Agreement, Tenant's right to quiet possession
of the Premises shall not be disturbed so long as Tenant is not in default under
the Lease, unless the Lease is otherwise terminated pursuant to its terms.
In the event that Tenant fails to execute, acknowledge, and deliver to
Landlord such Subordination Agreement and Estoppel Certificate within ten (10)
days of Landlord's request, the parties herein expressly agree that Tenant shall
be deemed in default of the Lease without further notice. In such event, the
parties herein further expressly agree that the Subordination Agreement and
Estoppel Certificate are deemed to have been executed by Tenant.
28. NO MERGER.
The voluntary or other surrender of the Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord terminate all or any existing subleases or subtenancies, or may, at the
option of Landlord, operate as an assignment to it of any or all such subleases
or subtenancies.
29. SALE.
In the event the original Landlord hereunder, or any successor owner of the
Premises, Building, and common areas shall sell or convey the Premises,
Building, and common areas, and the purchaser assumes the obligations of
Landlord under the Lease, all liabilities and obligation on the part of the
original Landlord, or such successor owner, under the Lease accruing after such
Sale shall terminate, and thereupon all such liabilities and obligations shall
be binding upon the new owner. Tenant agrees to attorn to such new owner.
30. NO LIGHT OR VIEW EASEMENT.
Any diminution or shutting off of light or view by any structure erected on
lands adjacent to the Building shall in no way affect the Lease or impose any
liability on Landlord.
31. HOLDING OVER.
If, without objection by Landlord, Tenant holds possession of the Premises
after expiration of the Term or any Option period of the Lease, Tenant shall
become a tenant from month to month upon the terms herein
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specified, but at a monthly Base Rent equivalent to 125% of the Base Rent at the
end of the term or extension period pursuant to Article 4, payable in advance on
or before the 1st day of each month. All Additional Rent shall also apply. Each
party shall give the other notice at least one month prior to the date of
termination of such monthly tenancy of its intention to terminate such tenancy.
32. ABANDONMENT.
If Tenant shall abandon or surrender the Premises, or be dispossessed by
process of law or otherwise, any personal property belonging to Tenant and left
on the Premises shall be deemed to be abandoned, at the option of Landlord,
except such property as may be mortgaged to Landlord.
33. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon execution of the Lease as a
security deposit in the form of a Certificate of Deposit in an amount and under
the terms and conditions more specifically set out in Exhibit C the Agreement
Regarding Certificate of Deposit ("Security Deposit"). The Security Deposit
shall be held by Landlord as security for the faithful performance by Tenant of
all of the provisions of the Lease to be performed or observed by Tenant. In the
event Tenant fails to perform or observe any of the provisions of the Lease to
be performed or observed by it, then, at the option of the Landlord, Landlord
may (but shall not be obligated to do so) apply the Security Deposit, or so much
thereof as may be necessary to remedy such default or to repair damages to the
Premises caused by Tenant. In the event Landlord applies any portion of the
Security Deposit to remedy any such default or to repair damages to the Premises
caused by Tenant, Tenant shall pay to Landlord, within thirty (30) days after
written demand for such payment by Landlord, all monies necessary to restore the
Security Deposit up to the original amount. Any portions of the Security Deposit
remaining upon termination of the Lease shall be returned.
34. WAIVER.
All waivers by either party herein must be in writing and signed by such
party. The waiver of any term or conditions herein shall not be deemed to be a
waiver of any subsequent breach of the same or any other agreement, condition or
provision herein contained, nor shall any custom or practice which may grow upon
between the parties in the administration of the terms hereof be construed to
waive or to lessen the right of either party to insist upon the performance by
the other party in strict accordance with said terms. The subsequent acceptance
of Rents hereunder by Landlord shall not be deemed to be a waiver of any breach
by Tenant of any term or condition of the Lease, regardless of Landlord's
knowledge of such breach at the time of acceptance of such Rents.
35. NOTICES.
All notices and demands which may or are required to be given by either
party to the other under the Lease shall be in writing and shall be deemed to
have been fully given when deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: to Tenant at 65 East
Wadsworth Park Drive, Suite 200, Draper, UT 84020, Attn: Clay Wilkes, or to such
other place as Tenant may from time to time designate in a notice to Landlord;
to Landlord at Draper Land Partnership II; Attn: Kip Wadsworth;
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71 East Wadsworth Park Dr., Draper, UT 84020 or to such other place as Landlord
may from time to time designate in a notice to Tenant, or in the case of Tenant,
delivered to Tenant at the Premises. Tenant hereby appoints as its agent to
receive the service of all dispossessory or distraint proceedings and notices
hereunder the person in charge of or occupying the Premises at the time, and if
no person shall be in charge of or occupying the same, then service may be made
by attaching same on the main entrance of the Premises.
36. COMPLETE AGREEMENT.
There are no oral agreements between Landlord and Tenant affecting the
Lease, and the Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant with respect to the subject matter of the Lease. The Lease may not be
altered, changed or amended, except by an instrument in writing signed by both
parties hereto.
37. CORPORATE AUTHORITY.
The person(s) executing the Lease on behalf of the parties herein hereby
covenants and warrants that (a) such party is a duly authorized and validly
existing entity under the laws in which it was formed, (b) such party has and is
qualified to do business in Utah, (c) such entity has full right and authority
to enter into the Lease, and (d) each person executing the Lease on behalf of
such entity is authorized to do so.
38. GUARANTEE OF LEASE.
Tenant guarantees, upon execution of the Lease, to occupy the Premises. Any
failure to occupy the Premises does not release the Tenant from the obligation
of paying Rents or any other terms set forth herein.
39. MISCELLANEOUS.
(a) The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several.
(b) Time is of the essence on the Lease and each and all of its terms and
conditions.
(c) The terms and conditions herein shall apply to and bind the heirs,
executors, administrators, successors and assigns of the parties hereto.
(d) The captions of the Lease are solely to assist the parties and are not
a part of the terms or conditions of the Lease.
(e) The Lease shall be governed by and construed in accordance with the
laws of the State of Utah, and is deemed to be executed within the State of
Utah.
40. SEVERABILITY.
If any term provision of the Lease, or the application thereof to any
person or circumstance, shall to any extent be invalid or unenforceable, the
remainder of the Lease, or the application of such provision to persons or
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circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each provision of the Lease shall be valid and
shall be enforceable to the extent permitted by law.
41. BROKERS.
Landlord is represented by Prime Commercial, Inc.; Tenant is represented by
Coldwell Banker West Realty. Agreed-upon commissions shall be due and payable by
Landlord upon execution.
42. PERFORMANCE DELIVERY
In the event the Landlord does not deliver the premises substantially
complete on or before November 5, 1996, the Landlord will provide the Tenant two
(2) days free base rent for each day of delayed delivery. The Tenant agrees to
cooperate completely with the Landlord and agrees to make all necessary
decisions relating to the space completion promptly.
43. FIRST RIGHT OF OPPORTUNITY
The entering into this agreement is not an exercise of the opportunity in
paragraph 42 of the Lease dated this 21st day of May, 1996, and entered into by
and between DRAPER LAND PARTNERSHIP II, a Utah Limited Partnership, and I-LINK
WORLDWIDE, INC., a Corporation.
IN WITNESS WHEREOF, the parties have executed the Lease dated the day and
year first above written.
TENANT, LANDLORD,
I-LINK WORLDWIDE, INC. DRAPER LAND PARTNERSHIP II
By: /s/ John Edwards By: /s/
---------------- ----------------------
Its: CEO Its: Partner
---------------- ----------------------
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EXHIBIT A
FINAL SPACE PLAN
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EXHIBIT B
BASE BUILDING IMPROVEMENTS
The Base Building Improvements and systems as described below shall be
furnished by Landlord at Landlord's sole cost and expense. These include:
1. The Building structure will be designed for a minimum floor load of 50 lb.
Live load plus a 20 lb. partition dead load.
2. The Building shell will include a core consisting of: 1 elevator with
equipment room, 2 stairwell enclosures, 1 men's and 1 women's rest-room on
each floor, finished lobbies and exterior perimeter walls and windows and
all building columns.
3. A Concrete floor will be installed with a smoothed trowel finish for
installation of glued-down carpet. The Floor will be poured level and
finished in accordance with current ACI Standard Specifications 117.
4. A Life Safety system will be installed in accordance with the more
stringent of applicable national, state and local codes or the Americans
with Disabilities Act, throughout the Building, including all corridors,
stairwells and rest-rooms (strobes).
5. Electrical distribution will be provided to the main panel boxes in the
electrical closet on each floor. The electrical system shall be sized for
seven (7) watts per usable square foot (120-208-3 Phase) for Tenant's
consumption, over and above base building electrical requirements.
6. The Building will be equipped with a packaged-unit heating, ventilation and
air conditioning system sufficient for Tenant's anticipated occupancy
requirements. The system will be designed to maintain a space temperature
between 70-78 degrees F on a year-round basis, based on a maximum average
occupancy of one (1) person for each 150 square feet of usable area. The
requirements for ventilation shall comply with present ASHRAE (American
Society of Heating, Refrigeration and Air-Conditioning Engineers) standard
62-1989 as a minimum requirement. Tenant shall be furnished with a price
per ton for package unit if additional air conditioning is required. All
distribution and controls of HVAC, within tenant space, shall be subject to
Tenant Improvement allowance.
7. Telephone service, as provided by the local utility, will be brought to
Tenant's or Building's main telephone room.
8. Common corridor walls and walls between tenant suites will be provided with
the side finished only to the common areas.
9. All roadways necessary for Tenant's access to and egress from the Building
will be completed, along with parking, landscaping and sprinklers for
irrigation.
10. Fiber optics are essential to I-Link's business. Landlord agrees to give
Tenants access to a "clean sweep" conduit for fiber between all buildings
in the park.
17
<PAGE>
EXHIBIT C
AGREEMENT REGARDING CERTIFICATE OF DEPOSIT
This Agreement Regarding Certificate of Deposit ("Agreement") is entered
into by and between Draper Land Partnership II, a Utah limited partnership
("Landlord"), and I-Link Worldwide, Inc., a Utah corporation ("Tenant").
I. RECITALS.
A. Tenant and Landlord are parties to a Commercial Lease dated the 11 day
of September, 1996 (the "Lease"), pursuant to which Tenant will lease certain
real property located in Draper, Utah (the "Property") from Landlord for office
use.
B. The Lease requires Tenant to make a Security Deposit to ensure the
faithful performance by Tenant of all of the provisions of the Lease.
C. In view of the fact that Tenant is a newly formed business enterprise
with no performance history, Landlord and Landlord's lender ("Lender") desire a
substantial Security Deposit with provision for future reduction in amount
consistent with the terms and conditions hereof.
II. AGREEMENT.
1. Tenant will obtain and deliver to Landlord as the Security Deposit
required under the Lease four separate Certificates of Deposit each in the same
amount and totaling in the aggregate Two Hundred Fifteen Thousand Dollars
($215,000.00) (the "CDs"), which Landlord shall be entitled to redeem for cash
pursuant to the terms of the Lease and this Agreement.
2. Notwithstanding anything to the contrary Tenant shall be entitled to all
interest earned on the CDs.
3. The CDs are held by Landlord as the Security Deposit securing the
faithful performance by Tenant of all of the provisions of the Lease to be
performed or observed by Tenant, including, without limitation, the payment of
any and all payments owing of any kind by Tenant under the Lease. In the event
Tenant fails to perform or observe any of the provisions of the Lease to be
performed or observed by it, then, at the option of the Landlord, Landlord may
(but shall not be obligated to do so) apply the Security Deposit, or so much
thereof as may be necessary to remedy such default or to repair damages to the
Premises caused by Tenant. In the event Landlord applies any portion of the
Security Deposit to remedy any such default or to repair damages to the Premises
caused by Tenant, Tenant shall pay to Landlord, within thirty (30) days after
written demand for such payment by Landlord, all monies necessary to restore the
Security Deposit up to the original amount. Any portions of the Security Deposit
remaining upon termination of the Lease shall be returned.
4. After the second anniversary of this Agreement, and provided that Tenant
is in good standing and not in default under the terms and conditions of the
Lease, and provided further that Tenant has achieved a level of performance that
satisfies Lender, the CDs may be returned to the Tenant at the rate of one per
year over the next four years, provided further that at the beginning of the
sixth year Tenant then deposits with Landlord the final month's base rent
($11,362 plus the applicable 4% annual increases calculated
18
<PAGE>
in accordance with paragraph 4 of the Lease) to be held by Landlord as the
Security Deposit for the remainder of the Lease Term.
5. Landlord may without the further permission of Tenant deliver the CDs
over to Lender who shall hold the same for the benefit of Landlord hereunder
such that Landlord's security interest therein shall be deemed perfected by
possession under (S)70A-9-304 of the Utah Code Annotated (1953), as amended,
provided only that Lender shall hold the CDs under the terms and conditions of
this Agreement.
6. Should Landlord or Lender request that Tenant execute a UCC-1 form for
filing consistent with the terms and conditions of this Agreement, or any other
document necessary to carry out the intent of the parties hereunder, Tenant
agrees to execute the same.
7. This Agreement contains the entire agreement between the parties
relating to the transactions contemplated hereby, and all prior or
contemporaneous agreements, understandings, representations and statements, oral
or written, are merged herein. Notwithstanding the foregoing, the Lease shall
remain in full force and effect except to the extent it is inconsistent with
this Agreement, which shall govern in the event of a conflict between the two
instruments.
8. No modification, waiver, amendment, discharge or change of this
Agreement shall be valid unless the same is in writing and signed by the party
against which the enforcement or such modification, waiver, amendment, discharge
or change is or may be sought.
9. This Agreement may be executed in counterparts, all of which when taken
together shall be deemed fully executed originals.
10. In the event either party commences litigation for the judicial
interpretation, enforcement, termination, cancellation or rescission hereof, or
for damages for the breach hereof, then, in addition to any or all other relief
awarded in such litigation, the prevailing party therein shall be entitled to a
judgment against the other for an amount equal to reasonable attorneys' fees and
court and other costs incurred.
11. Tenant or Landlord shall not, by virtue of this Agreement, in any way
or for any reason be deemed to have become a partner of the other in the conduct
of business or otherwise, or a joint venturer.
12. This Agreement shall be construed and enforced in accordance with the
laws of the State of Utah.
13. In the event any term, covenant, condition, provision or agreement
herein contained is held to be invalid, void or otherwise unenforceable by any
court of competent jurisdiction, the fact that such term, covenant, condition,
provision or agreement is invalid, void or otherwise unenforceable shall in no
way affect the validity or enforceability of any other term, covenant,
condition, provision or agreement herein contained.
14. All terms of the Agreement shall be binding upon, inure to the benefit
of, and be enforceable by the parties hereto and their respective legal
representatives, successors and assigns.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date and year first written above.
TENANT, LANDLORD,
I-Link Worldwide, Inc. Draper Land Partnership II
By: /s/ John Edwards By:
---------------- ---------------------
Its: Its:
---------------- ---------------------
20
<PAGE>
Exhibit 10(bb)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of this 15th
day of October, 1996 between I-Link Worldwide Inc., a Utah Corporation (the
"Company") and Karl S Ryser Jr., an individual resident of the State of Utah
(the "Employee"), and shall be effective upon execution.
WITNESSETH:
WHEREAS, the Employee is desirous of becoming an employee of the Company;
WHEREAS, it is the desire of the Company to offer the Employee employment
with the Company upon the terms and subject to the conditions set forth herein;
and
WHEREAS, it is the desire of the Employee to accept the Company's offer of
employment with the Company upon the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, in consideration of the Premises and mutual Covenants,
conditions and agreements contained herein and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, each intending to be legally bound hereby, agree as follows:
1. Employment. The Company hereby agrees to employ the Employee and
----------
the Employee hereby agrees to be employed by the Company upon the terms and
subject to the conditions set forth herein for the period of employment as set
forth in Section 2 hereof (the "Period of Employment).
2. Period of Employment. Subject to termination as hereinafter Provided,
--------------------
the period of employment shall be three (3) years from the effective date. Such
period of employment may be extended for such period and upon such terms as the
parties hereto may hereafter mutually agree.
3. Office and Duties. During the Period of Employment:
-----------------
(a) the Company shall employ the Employee as Chief Financial Officer
with the responsibilities reasonably prescribed for such position by the Board
of Directors of the Company; and
(b) the Employee shall devote all of his working time to the business
and affairs of the Company; except (1) for vacations of three (3) weeks per
year, (ii) illness or (iii) incapacity. Employee may also devote time to the
following Companies in the following positions:
<PAGE>
Cannon Industries, Inc., Director
Rise Financial, Owner
4. Compensation and Benefits. In exchange for the services rendered by the
-------------------------
Employee, the Employee shall be compensated as follows:
(a) Compensation. The Company shall pay the Employee one hundred and
------------
twenty five thousand ($125,000) per annum at a rate of ten thousand four hundred
sixteen ($10,416.00) per month. Employee's compensation shall be reviewed after
six months and adjustments may be made based on good faith negotiations.
(b) Profitability Bonus. The Company may pay the Employee a bonus if,
-------------------
in the sole judgment of the Chief Executive Officer, the earnings of the Company
or the services of the Employee merit such a bonus.
(c) Withholding and Employment Tax. Payment of all compensation
------------------------------
hereunder shall be subject to customary withholding tax and other employment
taxes as may be required to be withheld or otherwise imposed pursuant to
applicable laws, rules or regulations to which the Company as an employer is
subject with respect to compensation paid by an employer/corporation to an
employee.
(d) Options. The Company hereby grants to employee options to
-------
Purchase two hundred fifty thousand (250,000) shares of the common stock of I-
Link at an exercise price equal to the closing bid price as of the date hereof.
Options as to twenty-five thousand shares shall vest and become exercisable
immediately upon the execution of this Agreement by Employee. Thereafter, the
remaining options shall vest and become exercisable over a three-year period in
eleven calendar quarterly increments of 20,455 each, with the first such vesting
occurring on January 1, 1997, and the remaining vesting events occurring on the
first day of each following calendar quarter. In addition, in the event that the
Company undergoes a "change of control" as that term is generally understood,
whether by acquisition through an asset purchase, by merger, or by the
acquisition of a majority of the outstanding stock, the vesting of all then
unvested options granted Employee hereunder shall accelerate, and all such
options shall thereupon be fully vested and immediately exercisable.
5. Business Expenses. The Company shall pay or reimburse the Employee for
-----------------
all reasonable travel or other expenses incurred by the Employee in connection
with the performance of his duties under this Agreement, provided that the same
are incurred, in accordance with such procedures as the Company may from time to
time establish for employees and as required to preserve any deductions for
federal income taxation purposes to which the Company may be entitled.
6. Other Benefits. The Company shall provide the Employee health insurance
--------------
for the Employee and his dependents, life insurance, and disability insurance
benefits and such other benefits as are generally provided to executive officers
of the Company. The Employee shall
2
<PAGE>
have the right to participate in any and all Company stock option, stock
purchase and similar plans currently in effect or hereafter adopted for which he
is eligible.
7. Termination of Employment. This Agreement may be terminated as follows:
-------------------------
(a) The Company and the Employee may terminate this Agreement at any
time upon mutual consent evidenced in writing and signed by both parties.
(b) The Company may terminate this Agreement for cause at any time if
Employee: (i) breaches any provision of the Agreement; (ii) is convicted of a
felony; (iii) substantially and material fails to perform properly the duties
and responsibilities assigned to him; or (iv) engages in serious misconduct
which substantially and materially harms or damages the Company. No discharge
for cause shall occur unless the chief executive officer of the Company first
gives written notice to Employee, specifying the aspect in which the Company
claims that Employee has given the Company cause, and Employee is unable or
unwilling within 30 days to remedy the situation to the satisfaction of the
Company.
(c) This Agreement shall immediately terminate upon the Employee's death
and Employee's legal representative shall be entitled to receive Employee's
salary compensation through the last day of the calendar month in which
Employee's death occurred as well as any earned but unpaid bonus compensation.
(d) The Company may terminate Employee's employment at any time without
cause or notice, provided that in such event the Company shall be obligated upon
such termination to pay Employee all salary and bonuses then accrued and owing,
together with a one-time, lump-sum severance payment equal to one year's salary.
Additionally, all then unvested options granted to Employee under Section 4(e)
of this Agreement shall immediately and fully vest, and Employee shall be
entitled to hold or exercise all such options, together with all options vested
prior to such termination, in accordance with 4(e).
8. Non-Competition. Notwithstanding any earlier termination, during the
---------------
period of employment and for one (1) year thereafter:
(a) The Employee shall not, anywhere in North America or in any other
place or venue where the Company or any affiliate, subsidiary or division
thereof now conducts or operates, or may conduct or operate its business in the
future, directly or indirectly, individually or as a member of any partnership
or joint venture, or as an officer, director, stockholder, employee or agent of
any other person, firm, corporation, business organization or other entity,
participate in, engage in, solicit or have any financial or other interest in
any activity or any business or other enterprise in the field of marketing,
distribution, sale, production, research or development of Internet related
access services or any services or products primarily using the Internet as a
means of delivery, or in any other field which is or may be reasonably expected
to become competitive with the current or contemplated business of the Company
or any affiliate, subsidiary or division thereof (unless the Board of Directors
shall have authorized such activity and the Company shall have consented thereto
in writing),
3
<PAGE>
as an individual or as a member of any partnership or joint venture, or as an
officer, director, stockholder, investor, employee or agent of any other person,
firm, corporation, business organization or other entity; and
(b) The Employee shall not: (i) solicit or induce any employee of the
Company to terminate his employment or otherwise leave the Company's employ or
hire any such employee (unless the Board of Directors shall have authorized such
employment and the Company shall have consented thereto in writing); or (ii)
contact, service or solicit any clients, customers, vendors, suppliers or other
accounts of the Company, either as an individual or as a member of any
partnership or joint venture, or as an officer, director, stockholder, investor,
employee or agent of any other person, firm, corporation, business organization
or other entity with respect to any business, matter, service or product related
to similar, comparable to or otherwise competitive with that which is provided
by the Company.
9. Confidential Information. The parties hereto recognize that it is
------------------------
fundamental to the business and operation of the Company, its affiliates,
subsidiaries and divisions thereof to preserve the specialized knowledge, trade
secrets, and confidential information of the foregoing concerning the Internet
services industry. The strength and good will of the Company is derived from the
specialized knowledge, trade secrets, and confidential information generated
from experience through the activities undertaken by the Company, its
affiliates, subsidiaries and divisions thereof. The disclosure of any of such
information and the knowledge thereof on the part of competitors would be
beneficial to such competitors and detrimental to the Company, its affiliates,
subsidiaries and divisions thereof, as would the disclosure of information about
the marketing practices, pricing practices, costs, profit margins, design
specifications, analytical techniques, concepts, ideas, process developments
(whether or not patentable), customer and client agreements, vendor and supplier
agreements and similar items or technology. By reason of his being an employee
of the Company, in the course of his employment, the Employee has or shall have
access to, and has obtained or shall obtain, specialized knowledge, trade
secrets and confidential information such as that described herein about the
business and operation of the Company, its affiliates, subsidiaries and
divisions thereof. Therefore, the Employee hereby agrees as follows, recognizing
and acknowledging that the Company is relying on the following in entering into
this Agreement:
(a) The Employee hereby sells, transfers and assigns to the Company, or
to any person or entity designated by the Company, any and all right, title and
interest of the Employee in and to all inventions, ideas, disclosures and
improvements, whether patented or unpatented, and copyrightable material, made
or conceived by the Employee solely or jointly, in whole or in part, during the
term hereof which: (I) relate to methods, apparatus, designs, products,
processes or devices distributed, sold, leased, used or under construction or
development by the Company or any affiliate, subsidiary or division thereof; or
(ii) otherwise relate to or pertain to. the business, operations or affairs of
the Company or any affiliate, subsidiary or division thereof. The Company shall
acquire all right, title and interest to the Employee's inventions, ideas,
disclosures and improvements whether made or conceived during the term hereof or
before. The Employee shall make adequate written records of all inventions
(which records shall be the Company's property) and shall communicate promptly
and disclose to the Company, in such form as the Company requests, all
information, details
4
<PAGE>
and data pertaining to such inventions, ideas, disclosures and improvements.
Whether during the period of employment or thereafter, the Employee shall
execute and deliver to the Company such formal transfers and assignments and
such other papers and documents as may be required of the Employee to permit the
Company or any person or entity designated by the Company to file, enforce and
prosecute the patent applications relating to any of the foregoing, and, as to
copyrightable material, to obtain copyright thereon; and
(b) Notwithstanding any earlier termination, during the period of
employment and for a period of one (1) year thereafter, the Employee shall keep
secret and retain in strict confidence, and shall not, except in furtherance of
the Company's business, use, disclose to others, or publish any information,
other than information which is in the public domain or becomes publicly
available through no wrongful act on the part of the Employee, which information
shall be deemed not to be confidential information, relating to the business,
operation or other affairs of the Company, its affiliates, subsidiaries and
divisions thereof, including but not limited to confidential information
concerning the marketing practices, pricing practices, costs, profit margins,
products, methods, guidelines, procedures, engineering designs and standards,
design specifications, analytical techniques, technical information, customer,
client, vendor or supplier information, employee information, and any and all
other confidential information acquired by him in the course of his past or
future services for the Company or any affiliate, subsidiary or division
thereof. The Employee shall hold as the Company's property all notes, memoranda,
books, records, papers, letters, formulas and other data and all copies thereof
and therefrom in any way relating to the business, operation or other affairs of
the Company, its affiliates, subsidiaries and divisions thereof, whether made by
him or otherwise coming into his possession. Upon termination of his employment
or upon the demand of the Company, at any time, the Employee shall deliver the
same to the Company within twenty-four (24) hours of such termination or demand.
10. Reformation. In the event that a court of competent jurisdiction
-----------
determines that the non-compete or the confidentiality provisions hereof are
unreasonably broad or otherwise unenforceable because of the length of their
respective terms or the breadth of their territorial scope, or for any other
reason, the parties hereto agree that such court may reform the terms and/or
scope of such covenants so that the same are reasonable and, as reformed, shall
be enforceable.
12. Remedies. Subject to Section 18 below, in the event of a breach of any
--------
of the provisions of this Agreement, the non-breaching party shall provide
written notice of such breach to the breaching party. The breaching party shall
have thirty (30) days after receipt of such notice in which to cure its breach.
If, on the thirty-first (31st) day after receipt of such notice, the breaching
party shall have failed to cure such breach, the non-breaching party thereafter
shall be entitled to seek damages. It is acknowledged that this Agreement is of
a unique nature and of extraordinary value and of such a character that a breach
hereof by the Employee shall result in irreparable damage and injury to the
Company for which the Company may not have any adequate remedy at law.
Therefore, if, on the thirty-first (31st) day after receipt of such notice, the
breaching party shall have failed to cure such breach, the non-breaching party
shall also be entitled to seek a decree of specific performance against the
5
<PAGE>
breaching party, or such other relief by way of restraining order, injunction or
otherwise as may be appropriate to ensure compliance with this Agreement. The
remedies provided by this Section 13 are non-exclusive and the pursuit of such
remedies shall not in any way limit any other remedy available to the parties
with respect to this Agreement, including, without limitation, any remedy
available at law or equity with respect to any anticipatory or threatened breach
of the provisions hereof.
13. Certain Provisions, Specific Performance. In the event of a breach by
----------------------------------------
the Employee of the non-competition or confidentiality provisions hereof, such
breach shall not be subject to the cure provision of Section 12 above and the
Company shall be entitled to seek immediate injunctive relief and a decree of
specific performance against the Employee, such remedy is non-exclusive and
shall be in addition to any other remedy to which the Company or any affiliate,
subsidiary or division thereof may be entitled. Monetary breaches by the Company
shall not be subject to the notice and cure provisions hereunder.
14. Consolidation; Merger; Sale of Assets. Nothing in this Agreement shall
-------------------------------------
preclude the Company from combining, consolidating or merging with or into,
transferring an or substantially all of its assets to, or entering into a
partnership or joint venture with, another corporation or other entity, or
effecting any other kind of corporate combination, provided that, the
corporation resulting from or surviving such combination, consolidation or
merger, or to which such assets are transferred, or such partnership or joint
venture assumes this Agreement and all obligations and undertakings of the
Company hereunder. Upon such a consolidation, merger, transfer of assets or
formation of such partnership or joint venture, this Agreement shall inure to
the benefit of, be assumed by, and be binding upon such resulting or surviving
transferee corporation or such partnership or joint venture, and the term
"Company," as used in this Agreement, shall mean such corporation, partnership
or joint venture, or other entity and subject to the provisions of this
Agreement relating to the Change of Control this Agreement shall continue in
full force and effect and shall entitle the Employee and his heirs,
beneficiaries and representatives to exactly the same compensation, benefits,
perquisites, payments and other rights as would have been their entitlement had
such combination, consolidation, merger, transfer of assets or formation of such
partnership or joint venture not occurred.
15. Survival. Sections 8 through 14 shall survive the termination for any
--------
reason of this Agreement (whether such termination is by the Company, by the
Employee, upon the expiration of this Agreement by its terms or otherwise);
provided, however, that in the event that the Company ceases to exist and
neither an affiliate, subsidiary or division thereof has assumed, at its option,
the obligations of the Company hereunder, the Employee shall no longer be bound
by the non-competition provision set forth in Section 8 hereof.
16. Severability. The provisions of this Agreement shall be considered
------------
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as Possible in term and intent to those provisions deemed to be invalid,
void or
6
<PAGE>
otherwise unenforceable. Notwithstanding the foregoing, the remaining provisions
hereof shall remain enforceable to the fullest extent permitted by law.
17. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement between the Company and the Employee with respect to the subject
matter hereof and thereof. This Agreement may not be amended, changed, modified
or discharged, nor may any provision hereof be waived, except by an instrument
in writing executed by or on behalf of the party against whom enforcement of any
amendment, waiver, change, codification or discharge is sought. No course of
conduct or dealing shall be construed to modify, amend or otherwise affect any
of the provisions hereof.
18. Notices. All notices, request, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered, delivered by express mail or other expedited service or
upon receipt if mailed, postage prepaid, via first class mail as follows:
(a) To the Company:
I-Link Worldwide Inc.
65 E. Wadsworth Park Dr.
Suite 200
Draper, Utah
(b) With an additional Copy by like means to:
David B. Thomas
1417 N. 1450
Provo, Utah 84604
(c) To the Employee:
Karl S. Ryser Jr.
1458 Ute Drive
Salt Lake City, Utah 84108
and/or to such other persons and addresses as any party hereto shall have
specified in writing to the other.
19. Assignability. This Agreement shall be assignable by the Employee with
-------------
the prior written Consent of the Company and shall be binding upon and shall
inure to the benefit of, his heirs, executors, administrators, legal
representatives and any permitted assignee. This Agreement shall be assignable
by the Company to any affiliate, subsidiary or division thereof and to any
successor in interest, subject to the Employee's right to terminate employment
hereunder Pursuant to Section 7 above.
7
<PAGE>
20. Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of Utah, without regard to the principles of conflicts of
laws thereof.
21. Waiver and Further Agreement. Any waiver of any breach of any terms or
----------------------------
conditions of this Agreement shall not operate as a waiver of any other breach
of such terms or conditions or any other term or condition hereof, nor shall any
failure to enforce any provision hereof operate as a waiver of such Provision or
of any other provision hereof. Each of the parties hereto agrees to execute all
such further instruments and documents and to take all such further action as
the other party may reasonably require in order to effectuate the terms and
purposes of this Agreement.
22. Headings of No Effect. The paragraph headings contained in this
---------------------
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
23. Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts each of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
I-Link Worldwide Inc.
By: /s/ John W. Edwards
-------------------------
John W. Edwards
Its: President
Karl S. Ryser, Jr.
/s/ Karl S. Ryser, Jr.
- ----------------------------
8
<PAGE>
Exhibit 10(mm)
MEDCROSS, INC.
EMPLOYMENT AGREEMENT
(Dror Nahumi)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into by and between
MEDCROSS, INC., a Florida corporation with its principal place of business at
13751 South Wadsworth Park Drive, Suite 200, Salt Lake City, Utah 84020 (the
"Company"), and DROR NAHUMI ("Employee"), effective this 2nd day of September,
1997;
RECITALS
WHEREAS, the Company is in the business of developing, marketing and
providing telephony and communications technology, products and services; and
WHEREAS, Employee has acknowledged skills and experience in the development
of telephony and communications technology, products and services; and
WHEREAS, the Company desires to obtain the benefit of Employee's knowledge,
skills, and experience and assure itself of the ongoing right to Employee's
services from and after the date hereof, and is willing to do so on the terms
and conditions set forth in this Agreement; and
WHEREAS, Employee is willing and able to render services to the Company,
from and after the date hereof, on the terms and conditions set forth in this
Agreement; and
WHEREAS, this Employment Agreement is entered into contemporaneously with
the sale by Employee to the Company of all of Employee's stock in MiBridge, Inc.
(which will be held and operated as a subsidiary of the Company);
A G R E E M E N T S
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
provisions, and covenants contained in this Agreement, the Company and Employee
hereby agree as follows:
1. Employment.
(a) Title and Duties of Employee. Subject to all of the terms and
conditions herein provided, the Company hereby employs Employee in the position
of Vice President of Emerging Technologies, and Employee hereby accepts such
employment with the Company. Employee's duties shall consist of those generally
associated with his title, as well as those duties assigned to him from time-to-
time by the Company, consistent with Employee's position and qualifications and
the best interests of the Company. Specifically, Employee shall be employed to
manage the operations of MiBridge, Inc., subsequent to the acquisition of
MiBridge, Inc., by the Company. Employee shall at
<PAGE>
all times be subject to and shall observe and carry out such reasonable rules,
regulations, policies, directions, and restrictions as may be established from
time-to-time by the Company. Employee agrees that the Company shall be entitled,
at its option and cost, to obtain "key man" life insurance on Employee, and that
Employee will submit to such reasonable physical examinations as may be required
to obtain such insurance.
(b) Performance. Throughout the Employment Term, Employee shall
devote his full business time, attention, knowledge, and skills, faithfully
diligently, and to the best of his ability, to the active performance of his
duties and responsibilities hereunder, and do such traveling as may reasonably
be required in connection with the performance of such duties and
responsibilities.
2. Term of Employment. Unless terminated as provided in Section 5
hereof, the term of this Agreement shall be for a period of two (2) years,
commencing on the date hereof and continuing through and including the day
immediately preceding the second anniversary of the date hereof (the "Initial
Period"), and thereafter shall automatically continue on a year-to-year basis
(including the Initial Period, the "Employment Term") unless either party shall
deliver written notice to the other party not more than sixty (60), nor less
than thirty (30), days preceding the expiration of the Initial Period or any
one-year extension thereof of its intention not to extend the term of this
Agreement.
3. Compensation and Benefits.
(a) Salary. For services rendered by Employee to the Company and upon
the conditions that Employee fully and faithfully performs all of his duties and
obligations owed during the Employment Term under this Agreement, the Company
shall pay Employee an annual base salary equal to $100,000, payable in equal
semi-monthly installments, less income tax withholdings and other normal
employee deductions. This base salary set forth herein shall be reviewed
annually by the Company at the end of each fiscal year of the Company (hereafter
"Fiscal Year") (with the first such review to occur after the Fiscal Year ending
December 31, 1997, with respect to base salary for the Fiscal Year ending
December 31, 1998), or at such other times as deemed appropriate by the Company,
and may at the sole discretion of the Company, be adjusted by an amount which it
deems appropriate, provided that said base salary shall not be less than
$100,000. Employee shall be entitled to receive bonuses during the term of this
Agreement to the extent bonuses are declared by the Company's board of
directors.
(b) Benefits. During the Employment Term, Employee shall Be eligible
to participate in and receive coverage and benefits under all group insurance,
pension, profit-sharing, bonus, stock option, stock ownership, and other
employee benefit plans, programs, and arrangements of the Company/Medcross which
are now or hereafter adopted by the Company/Medcross for the benefit of its
employees (or the employees of any subsidiary or affiliate of the Company),
subject to and on a basis consistent with the terms, conditions, and overall
administration of such plans, programs, and arrangements. Notwithstanding the
foregoing, it is acknowledged by Nahumi that any grant of stock options to
Nahumi shall be at the sole discretion of the Company's board of directors.
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(c) Expense Reimbursement. The Company shall reimburse Employee for
the business expenses reasonably incurred by Employee within the scope of his
employment, pursuant to standard employee expense reimbursement policy and
procedure as established by the Company.
4. Compensation Upon Termination or During Disability.
(a) Compensation Upon Termination. If Employee's employment hereunder
is terminated under Section 5 hereof, the Company shall have no further
liability under this Agreement except (i) to pay Employee within ten days of the
Date of Termination any accrued salary or other compensation due under this
Agreement on the Date of Termination (or in the event of Employee's subsequent
death, to his estate or devisee, legatee, or other designee, as applicable), and
(ii) provide Employee, or his estate, or devisee, legatee, or other designee,
with any benefits payable (including any death benefit, if applicable) under all
employee benefit plans, programs, or arrangements of the Company in which
Employee is a participant on the Date of Termination.
(b) Compensation Upon Disability. During any period that Employee
fails to perform his duties hereunder as a result of incapacity due to a
"disabled condition," as such term is defined in Section 5(c) hereof (the
"disability period"), Employee shall continue to receive his full base salary at
the rate then in effect for the disability period until Employee's employment
hereunder is terminated pursuant to Section 5(c) hereof; provided, however, that
such salary payments so made to Employee during the first 120 days of the
disability period shall be reduced by the sum of the amounts, if any, actually
received by Employee prior to or during this period, as the result of such
incapacity, under any disability benefit plan of the Company in which Employee
participates.
5. Termination.
(a) Cause. This Agreement may be terminated at any time by either the
Company or the Employee for cause. As used herein, the term "cause" shall mean
and be limited to with respect to Employee (i) any felony conviction of
Employee; (ii) Employee's willful misconduct or failure to reasonably perform in
connection with the performance of Employee's duties, responsibilities,
agreements, and covenants hereunder, or Employee's refusal to comply with the
reasonable rules, regulations, policies, directions, and restrictions as may be
established from time-to-time by the Company, which misconduct, non-performance,
or refusal to so comply shall continue after written notice from the Company,
such notice to specify the respects in which Employee is in violation; (iii)
Employee's breach of the provisions of Sections 6 and 8 hereof; (iv) any
illegal use by Employee of narcotics or other controlled substances; or (v)
Employee's inability to perform his duties and responsibilities hereunder due to
the issuance of an injunction or restraining order, which is not rescinded
within 45 days of issuance; and with respect to the Company, any material breach
of the terms of this Agreement which shall continue after written notice from
the Employee, such notice to specify the respects in which the Company is in
breach.
(b) Death. This Agreement shall terminate automatically upon the
death of Employee.
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(c) Disability. In the event Employee becomes mentally or physically
disabled during the Employment Term, Employee's employment hereunder shall
terminate as of the date such disability is "established." As used in this
Subsection, the term "disabled" means suffering from any mental or physical
condition, other than that resulting from the use of alcohol or illegal use of
narcotics or other controlled substances, which renders Employee unable to
substantially perform all of his duties and services under this Agreement in a
satisfactory manner substantially similar to his previous performance (a
"disabled condition") for a period of one hundred twenty (120) consecutive days
or for more than one hundred twenty (120) days in any 12-month period. For
purposes of this Subsection, the date that Employee's disability is
"established" shall be, in the case of a disabled condition which exists for a
period of 120 consecutive days, the 121st day on which such disabled condition
exists, and, in the case of a disabled condition existing for more than 120 days
in any 12-month period, the 121st day on which such disabled condition exists.
(d) Impaired Health. Employee may terminate his employment hereunder
if his health should become impaired to an extent that makes his continued
performance of his duties and obligations hereunder hazardous to his physical or
mental health or his life ("impaired health"), provided that Employee shall have
furnished the Company with a written statement from a qualified doctor to such
effect and, provided further, that, at the Company's request, Employee shall
submit to an examination by a doctor selected by the Company and such doctor
shall have concurred in the conclusion of Employee's doctor.
(e) Reassignment, Relocation. This Agreement may be terminated by
Employee in the event of any of the following (i) without Employee's express
written consent, the assignment to Employee of any duties or the significant
reduction of Employee's duties, authority, or responsibilities, which is
inconsistent with Employee's duties, authority, or responsibilities in effect
immediately prior to such assignment, or the removal of Employee from such
duties, authority, or responsibilities; or (ii) without Employee's express
written consent, the relocation of Employee to a facility or a location more
than forty-five (45) miles from Employee's then-present location.
(f) Notice of Termination. Any termination of Employee's employment
hereunder by the Company or by Employee (other than termination pursuant to
Section 5(b) (death)) shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Employee's employment hereunder under the Section and Subsection so indicated.
(g) Date of Termination. "Date of Termination" shall mean the
following: if Employee's employment hereunder is terminated by (i) Sections
5(a) (cause), 5(c) (disability), or 5(d) (impaired health), the date specified
in the Notice of Termination; (ii) 5(b) (death), the date of Employee's death;
and (iii) Section 5(e) (Reassignment, Relocation) 30 days after delivery of the
Notice of Termination; and (iv) for any other reason, the date on which the
Notice of Termination is given.
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6. Confidential Information.
(a) Disclosure and Use. Employee shall not disclose or use at any
time, either during or subsequent to the Employment Term, any trade secrets or
other confidential information, whether or not patentable or otherwise
protectable, of the Company or any other direct or indirect parent or subsidiary
of the Company (collectively referred to herein as the "Company"), including but
not limited to, information and lists relating to customers, suppliers,
compensation of employees or independent sales representatives, products and
product pricing, technical or non-technical data, programs, devices, methods,
techniques, drawings, processes, or financial data, of which Employee is or
becomes informed or aware during the Employment Term, whether or not developed
by Employee, except (i) as may be required for Employee to perform Employee's
employment duties with the Company, (ii) to the extent such information becomes
generally available to the public through no wrongful act of Employee, (iii)
information which must be disclosed as a result of a subpoena or other legal
process, after the Company has had the opportunity to request a suitable
protective order for such information, or (iv) unless Employee shall first
secure the Company's prior written authorization. This covenant shall survive
the termination of Employee's employment hereunder, and shall remain in effect
and be enforceable against Employee for so long as any such Company secret or
confidential information retains economic value, whether actual or potential,
from not being generally known to other persons who can obtain economic value
from its disclosure or use. Employee shall execute such reasonable further
agreements and/or confirmations of Employee's obligations to the Company
concerning non-disclosure of Company trade secrets and confidential information
as the Company may reasonably require from time-to-time.
(b) Return of Materials. Upon termination of Employee's employment
hereunder, Employee shall promptly deliver to the Company all customers lists,
specifications, drawings, listings, documentation, manuals, letters, notes,
notebooks, reports, computer programs, computer files, and copies thereof, and
all other materials of a secret or confidential nature relating to the Company's
business, which are in the possession or under the control of Employee.
7. Inventions and Discoveries.
(a) Disclosure of Employment Invention. Employee agrees for himself
and his heirs, executors, and administrators that Employee will, without further
consideration, disclose immediately to a person designated by the Company as its
agent to receive such disclosures each and every discovery, invention, part
thereof or improvement thereon, or works of authorship, as defined below
("Employment Invention") which Employee may conceive, develop, reduce to
practice, or create, either solely or jointly with others, which is:
(i) conceived, developed, reduced to practice or created (a)
within the scope of Employee's employment, or (b) on the Company's time, or
(c) with the aid, assistance, or use of any of the Company's property,
equipment, facilities, supplies, resources, or intellectual property; or
(ii) the result of any work, services, or duties performed by
Employee for the Company; or
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(iii) related to the current or demonstrably anticipated business,
research, or development of the Company.
(b) Assignment of Employee Invention. Employee hereby irrevocably
assigns to the Company all of Employee's entire rights, title, interest, and
Intellectual Property in and to the Employment Inventions referred to in Section
7(a), and will upon request and without further consideration do everything
reasonably necessary or required to vest in the Company Employee's entire right,
title, interest, and Intellectual Property in and to such Employment Inventions
including executing all instruments and documents and performing all acts
reasonably necessary or required for making, filing, or presenting any
applicable for the benefit of the Company for Letters Patent or Copyrights in
the United States or throughout the world for such Employment Inventions and
executing assignments of such patents or applications thereof for the Company.
(c) Definitions. As used herein, "Intellectual Property" means any
and all patents, trade secrets, know-how, technology, confidential information,
ideas, copyrights, trademarks, and service marks and any and all rights,
applications, and registrations relating to them. "Works of authorship" mean
any original work of authorship within the purview of the copyright laws of the
United States, and both parties agree that all works of authorship created by
Employee under Section 7(a) shall be works for hire within the meaning and
purview of such copyright laws.
(d) Exclusions. The foregoing provisions of Sections 7(a) and 8(b) do
not apply to any invention not included in Section 7(a) as an Employment
Invention and created by Employee entirely on his own time and with his own
resources.
(e) Recordkeeping. Employee agrees to keep and maintain, or assist in
keeping and maintaining, such records (such as laboratory notebooks properly and
periodically witnessed and understood) as will show the conception, reduction to
practice and operation of all Employment Inventions, as well as such other
records as the Company may request, which records shall be and remain the
property of and available to, the Company.
8. Restrictive Covenant.
(a) Restriction on Competition During Employment Term. So long as
Employee is employed by the Company, Employee shall not, without the prior
written authorization of the Company, directly or indirectly render services of
a business, professional or commercial nature (whether for compensation or
otherwise) to any person or entity engaged in any business which competes either
directly or indirectly with the Company (a "Competitive Business") during the
Employment Term, or engage in any activity whether alone, as a partner, or as an
officer, director, employee, consultant independent contractor, or stockholder
in any Competitive Business. Notwithstanding the foregoing, this section shall
not prevent Employee from purchasing an equity interest in any Competitive
Business as a strictly passive investment and which does not comprise more than
Five Percent (5%) of such Competitive Business's then-outstanding stock.
(b) Restriction on Competition Following Termination. During the one-
year period following the applicable Date of Termination (the "Non-Compete
Period"), Employee shall not:
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(i) engage in business as, or own an interest in, directly or
indirectly, any individual proprietorship, partnership, corporation,
limited liability company, joint venture, trust, or any other form of
business entity, whether as an individual proprietor, partner, shareholder,
joint venturer, officer, director, consultant, finder, broker, employee,
trustee, or in any other manner whatsoever if such entity, within any
state, province, country or other jurisdiction in which the Company markets
and sells and/or licenses its technologies, products and services, markets
products and/or services performing substantially the same functions as the
Company's technologies, products and/or services, or any other
technologies, products and/or services that are being developed, designed,
manufactured, or sold by the Company as of the commencement of the Non-
Compete Period; or
(ii) attempt in any manner to solicit from any customer business
of the type performed by the Company or to persuade any customer of the
Company to cease doing business or to reduce the amount of business which
any such customer has customarily done or contemplates doing with the
Company, whether or not the relationship between the Company and such
customer was originally established in whole or in part through Employee's
efforts; or
(iii) employ or attempt to employ or assist anyone else to employ
any person who is at such time, or at any time during the preceding six
months was, an employee or consultant to the Company, provided that this
clause shall not restrict Employee from employing a third-party vendor who
supplies generic services to the industry.
As used in this Section 8, the verb "employ" shall include its variations, for
example, retain, engage, or conduct business with; the term the "Company" shall
include subsidiaries, a parent, or affiliates, if any, of the Company; and the
term "customer" shall mean anyone who is a customer of the Company as of the
date immediately prior to or at any time during the Non-Compete Period. The
term "solicit" shall not be deemed to include general solicitations not
specifically directed toward customers of the Company. Notwithstanding the
foregoing, nothing in this Section 8 shall limit Employee's ability during the
Non-Compete Period to seek employment by a Competitive Business if Employee
refrains from providing services of any kind to said Competitive Business until
the expiration of the Non-Compete Period, at all times subject to the duty of
confidentiality set forth in Section 6 above.
(c) Acknowledgment. The parties acknowledge that the time, scope,
geographic area, and other provisions of this Agreement have been specifically
negotiated by the parties and agree that all such provisions are reasonable
under the circumstances and are given as an integral and essential part of
Employee's employment hereunder. In the event that any covenant contained in
this Agreement shall be determined by any court of competent jurisdiction to be
unenforceable by reason of its extending for too great a period of time or over
too great a geographical area or by reason of its being too extensive in any
other respect, it shall be interpreted to extend only over a maximum period of
time for which it may be enforceable and/or over the maximum geographical area
as to which it may be enforceable and/or to the maximum intent in all other
respects as to which it may be enforceable, all as determined by such court in
such action.
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9. Severability. If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render same valid, or not applicable to given
circumstances, or excised from this Agreement, as the situation may require, and
this Agreement shall be construed and enforced as if such provision had been
included herein as so modified in scope or application, or had not been included
herein, as the case may be. Should this Agreement, or any one or more of its
provisions hereof, be held to be invalid, illegal, or unenforceable within any
governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal, or unenforceable in any other governmental jurisdiction or
subdivision thereof.
10. Enforcement. Except for the injunctive relief provided for
immediately below, any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three arbitrators sitting in a location selected by the party
bringing the claim, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrators' award in
any court having jurisdiction. Notwithstanding the foregoing, Employee hereby
acknowledges that the Company would suffer irreparable injury if the provisions
of Sections 6 through 8 above, which shall survive the termination of the
Agreement, were breached and that the Company's remedies at law would be
inadequate in the event of such breach. Accordingly, Employee hereby agrees that
any such breach or threatened breach may, in addition to any and all other
available remedies, be preliminarily enjoined by the Company.
11. Legal Fees and Expenses. In the event of litigation under this
Agreement, each of the Company and Employee shall pay its own attorneys' fees
and expenses.
12. Non-Assignability. In light of the unique personal services to be
performed by Employee hereunder, it is acknowledged and agreed that any
purported or attempted assignment or transfer by either party of this Agreement
or any of Employee's duties, responsibilities, or obligations hereunder shall be
void, and if purported or attempted by Employer other than pursuant to Section
14(e) below, shall be considered a termination without cause by Employer under
Paragraph 5(e).
13. Notices. Any notice, request, demand, or other communication required
or permitted under this Agreement shall be in writing and shall be deemed to
have been given when delivered personally or when mailed by certified mail,
return-receipt requested, addressed as follows:
To the Company: I-Link Worldwide, L.L.C.
13751 So. Wadsworth Park Drive
Draper, UT 84020
Attn: Karl S. Ryser, Jr., CFO
With copy to: David E. Hardy, Esq.
Hardy & Allen
60 East South Temple, Suite 2200
Salt Lake City, UT 84111
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To Employee: Dror Nahumi
1 Main Street, Suite 510
Eatontown, New Jersey 07724
or to such other address or addresses as may be specified from time-to-time by
notice; provided, however, that any notice of change of address shall not be
effective until its receipt by the party to be charged therewith.
14. General.
(a) Amendments. neither this Agreement nor any of the terms or
conditions hereof may be waived, amended, or modified except by means of a
written instrument duly executed by the party to be charged therewith.
(b) Captions and Headings. The captions and paragraph headings used
in this Agreement are for convenience of reference only, and shall not affect
the construction or interpretation of this Agreement or any of the provisions
hereof.
(c) Successors and Assigns. This Agreement and Employee's duties and
rights hereunder shall not be assignable by Employee. This Agreement and the
Company's duties and rights hereunder shall not be assignable except in the
event of a merger, acquisition, sale of substantially all of the assets of the
Company, or other bona fide business reorganization to which the Company is a
party. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
personal representatives, successors, and permitted assigns.
(d) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original hereof, but all of
which together shall constitute one and the same instrument.
(e) Entire Agreement. Except as otherwise set forth or referred to in
this Agreement, this Agreement constitutes the sole and entire agreement and
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior discussions, agreements, and understandings of every kind
and nature between them as to such subject matter.
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(f) Reliance by Third Parties. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors, and permitted
assigns, and no other person or entity shall have any right to rely on this
Agreement or to claim or derive any benefit therefrom absent the express written
consent of the party to be charged with such reliance or benefit.
(g) Governing Law. This Agreement shall be construed in accordance
with governed by the laws of the State of Utah.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the date first set forth above.
MEDCROSS, INC.
By: /s/ John W. Edwards
-----------------------------------------
John W. Edwards, President
/s/ Dror Nahumi
---------------------------------------------
DROR NAHUMI
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Exhibit 10(nn)
Plan and Agreement of Merger of
MiBridge, Inc. with and into
I-Link Mergerco, Inc., a wholly-owned subsidiary of
Medcross, Inc. (to be renamed I-Link Incorporated)
This Plan and Agreement of Merger ("Agreement") is effective as of August
12, 1997, by and among MEDCROSS, INC. (to be renamed I-LINK INCORPORATED), a
corporation organized and existing under the laws of the State of Florida
(hereafter "Medcross/I-Link"), and its wholly-owned subsidiary I-LINK MERGERCO,
INC., a corporation organized and existing under the laws of the State of Utah
(hereafter "Mergerco"), both with their principal place of business at 13751
South Wadsworth Park Drive, Suite 200, Draper, Utah 84020, MIBRIDGE, INC., a
corporation organized and existing under the laws of the State of New Jersey
with its principal place of business at 1 Main Street, Suite 510 Eatontown, New
Jersey 07724 (hereafter "MiBridge"), DROR NAHUMI ("Nahumi"), and BEN CHAN, ERAN
CHESNER, and YARON CUDKEVICH (together with Nahumi the "MIBridge Shareholders").
W I T N E S S E T H:
WHEREAS, Medcross/I-Link is a publicly-held corporation in the
telecommunications services business, and Mergerco is its wholly-owned
subsidiary; and
WHEREAS, MiBridge is a privately-held corporation in the business of
developing and licensing audio-conferencing, speech encoding and compression
technology for the telecommunications industry, all of the issued and
outstanding capital stock of which is owned by the MiBridge Shareholders; and
WHEREAS, the parties intend by this Agreement to provide for the merger of
MiBridge with and into Mergerco pursuant to an exchange with the MiBridge
Shareholders of all of MiBridge's outstanding shares for preferred shares of
Medcross/I-Link that are convertible into common shares of Medcross/I-Link,
together the payment by Medcross/I-Link to the MiBridge Shareholders of certain
cash evidenced by the promissory note described herein.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
set forth herein, it is agreed as follows:
1. The Merger. Subject to the terms and conditions contained herein, the
parties agree to effect upon the Closing (as defined in Section 6 below) the
merger of MiBridge with and into Mergerco, pursuant to the statutory merger laws
of the States of Utah and New Jersey, with Mergerco to be the surviving entity
and to be immediately renamed "MiBridge, Inc." (the "Merger").
<PAGE>
In order to effect the Merger, the MiBridge Shareholders agree to surrender all
of their shares in MiBridge, constituting all of the issued and outstanding
shares of capital stock of MiBridge (the "MiBridge Shares"), to Medcross/I-Link
and Mergerco in exchange for the shares and other consideration described in
Section 2 below.
2. Consideration. As consideration for the surrender of the MiBridge
Shares and the Merger, Medcross/I-Link shall deliver to the MiBridge
Shareholders at Closing the following:
(a) At the Closing, and at such time as all of the contingencies set
forth in this Section 2(a) are met, Medcross/I-Link shall issue and deliver
to the MiBridge Shareholders an aggregate of One Thousand (1,000) Medcross
Series D Preferred shares (the "Preferred Shares"), divided between the
MiBridge Shareholders according to the schedule set forth on Exhibit 2(a)
attached hereto and made a part hereof. The Preferred Shares shall be
convertible in whole or in part at the option of each of the MiBridge
Shareholders at any time during the nine months following the Closing of
the Acquisition ("Closing") into such aggregate number of Medcross/I-Link
common shares (the "Conversion Shares") as shall equal the sum of the
percent of the Preferred Shares being converted multiplied by $6,250,000
divided by $9.25 (the "Conversion Price"). Unless earlier converted by the
MiBridge Shareholders, the Preferred Shares shall automatically convert
nine (9) months following the Closing (the "Automatic Conversion Date").
Notwithstanding the foregoing, the Preferred Shares shall be converted at
the lower of (a) the Conversion Price, or (b) the average closing bid price
of Medcross/I-Link Common Stock for the five consecutive trading days
immediately preceding the date Medcross/I-Link shall receive notice of
conversion from each of the MiBridge Shareholders, or the Automatic
Conversion Date, whichever the case may be. The Preferred Shares shall be
entitled to receive dividends if and when dividends are declared on
Medcross/I-Link's outstanding common shares, and in an amount proportionate
to the underlying Conversion Shares. The Conversion Shares shall carry
piggyback registration rights (more fully described in Section 3 below)
permitting the holder(s) to include the Conversion Shares in any
registration of securities with the U.S. Securities and Exchange Commission
that Medcross/I-Link shall undertake after the first anniversary of the
Closing (excluding S-8 registration of employee stock options). Conversion
into common shares is subject to Medcross/I-Link's shareholders approving
the increase of the authorized capital stock of Medcross/I-Link from
20,000,000 common shares to 50,000,000 common shares at Medcross/I-Link's
next shareholders' meeting. In the event such contingency is not fulfilled
by the Automatic Conversion Date, the MiBridge Shareholders' right to
convert and the Automatic Conversion Date shall be extended to that date
which is ten (10) days following the fulfillment of such contingency.
(b) At the Closing, Medcross/I-Link shall deliver to the MiBridge
Shareholders promissory notes in the aggregate principal amount of Two
Million Dollars ($2,000,000), payable in equal quarterly installments over
the two-year period following Closing (with the first installment due at
Closing), in the form of those attached hereto as Exhibit 2(b) and made
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a part hereof (the "Notes"). The Notes shall bear simple interest, payable
quarterly, at the minimum applicable federal interest rate, which interest
shall be convertible, at the option of Medcross/I-Link, into shares of its
common stock at the rate of $9.25 per common share, or the average closing
bid price for the five trading days immediately preceding the date of such
conversion, whichever is lower. Until such time as the Notes are paid in
full, the MiBridge Shareholders shall each be granted a security interest
in all of the issued and outstanding shares of Mergerco, proportionate to
each such shareholder's ownership interest in MiBridge. Medcross/I-Link
shall execute and deliver to the MiBridge Shareholders at Closing all
instruments and documentation necessary to create and perfect such security
interests.
(c) Until the Medcross/I-Link Articles of Incorporation have been duly
amended providing for creation of the Conversion Shares, and until one/half
the aggregate principal amount of the Notes has been paid, and except as
may be first approved in writing by Nahumi, or as otherwise permitted or
contemplated by this Agreement, (i) the business of Mergerco shall be
conducted only in the course that is historically usual and ordinary to
MiBridge without the creation of indebtedness for money borrowed, except in
the ordinary course of business, (ii) no change shall be made in the
Articles of Incorporation or Bylaws of Mergerco, (iii) no shares of stock
of Mergerco shall be authorized for issuance or issued or delivered from
treasury and no agreement for such issuance or delivery thereof shall be
entered into, (iv) no dividend or other distribution in respect of and no
redemption of any shares of stock of any class of Mergerco shall be made by
Mergerco, (v) no contract or commitment shall be entered into by or on
behalf of Mergerco except in the ordinary course of what was MiBridge's
historic business, (vi) Mergerco will continue in effect the insurance
coverage currently existing on MiBridge and its properties, assets,
business and personnel, and (ix) Medcross/I-Link shall not cause Mergerco
to subject any of its property or assets to any material lien, claim,
charge, option or encumbrance nor will it do or omit to do any act which
will cause a material breach in any contract, agreement, lease, commitment
or obligation to which it is a party or by which it is bound. In the event
the Medcross/I-Link Articles of Incorporation have not been duly amended
providing for creation of the Conversion Shares by March 31, 1998, the
MiBridge Shareholders, acting in unison, shall have the option of
terminating this Agreement and receiving all of the Mergerco Shares,
surrendering all Medcross/I-Link shares acquired under this Agreement, and
retaining all sums paid to them under the Notes prior to such termination
as liquidated damages.
(d) Until the Medcross/I-Link Articles of Incorporation have been duly
amended providing for creation of the Conversion Shares, and until the
Notes have been paid in full, the MiBridge Shareholders shall each have,
and Medcross/I-Link hereby grants to the MiBridge Shareholders, a security
interest in such portion of the Mergerco shares as represents his ownership
interest in MiBridge prior to the Closing. In order to perfect such
security interests, the parties agree that so long as such security
interests shall remain in force, certificate(s) representing the Mergerco
shares shall be held by the law firm of Luse Lehman Gorman Pomerenk &
Schick of Washington, D.C. Medcross/I-Link shall execute such instruments
and documents as may reasonably be necessary to create, perfect and
maintain such security interests.
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(e) At the Closing Medcross/I-Link shall enter into an employment
contract with Nahumi in the form of Exhibit 2(e) attached hereto and made a
part hereof. At the Closing all currently existing employment agreements
between any of the MiBridge Shareholders and MiBridge shall be deemed
assumed by Mergerco, and deemed amended to delete any reference to the
employee's right to receive any ownership/equity interest in MiBridge, and
the MiBridge Shareholders shall be deemed to have fully released MiBridge,
Mergerco and Medcross/I-Link from any obligation with respect to such right
to receive an ownership/equity interest in MiBridge or its successor.
Neither the existence of any separate agreement(s) between Nahumi and any
of the individual MiBridge Shareholders, nor the performance or non-
performance of any party to any such agreement(s), shall have any effect on
this Agreement or the parties rights, duties and obligations hereunder.
3. Registration Rights. Neither the Preferred Shares nor the Conversion
Shares have been registered under the Securities Act of 1933, as amended (the
"Act"); accordingly, the certificates representing the Preferred Shares and the
Conversion Shares shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
Rule 144 under the Act (or any similar rule under such Act relating to
the disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to the
issuer, that an exemption from registration under such Act is
available.
If, at any time following the one-year anniversary of the Closing, Medcross/I-
Link proposes to register any of its securities under the Act (other than in
connection with a merger, pursuant to Form S-8, or pursuant to the SB-2
registration statement filed with the SEC on December 16, 1996) it will give
written notice by registered mail, at least thirty (30) days prior to the filing
of each such registration statement, to each of the MiBridge Shareholders of its
intention to do so. If any of the MiBridge Shareholders representing in excess
of fifty percent (50%) of the Conversion Shares notify Medcross/I-Link within
twenty (20) days after receipt of any such notice of their desire to include any
of the Conversion Shares in such proposed registration statement, Medcross/I-
Link shall afford all of the MiBridge Shareholders the opportunity to have any
of the Conversion Shares registered under such registration statement at the
expense of Medcross/I-Link, subject to customary underwriter's cutbacks and
lock-ups. Notwithstanding the foregoing, Medcross/I-Link shall have the right
at any time after it shall have given written notice pursuant to this Section 3
(irrespective of whether a written request for inclusion of any of the
Conversions Shares shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
4
<PAGE>
4. Representations, Warranties and Agreements of MiBridge and the
MiBridge Shareholders. MiBridge and the MiBridge Shareholders, jointly and
severally represent and warrant to and agree with Medcross/I-Link and Mergerco
with respect to the affairs of MiBridge that:
(a) MiBridge is duly organized and existing under the laws of the
State of New Jersey and is authorized and qualified to own and operate its
properties and assets and conduct its business as, and in all jurisdictions
where, such properties and assets are owned and operated and such business
conducted. MiBridge has duly filed any and all certificates and reports
required to be filed to date by the laws of New Jersey and the laws of any
other jurisdiction where it is required to be qualified and registered as a
foreign corporation.
(b) MiBridge has authorized 10,000,000 shares of common stock, no par
value, of which 6,00,000 shares are validly issued and outstanding to the
MiBridge Shareholders. There are no outstanding options, warrants, or other
rights to acquire any stock, ownership interest, or other securities of
MiBridge.
(c) Neither the MiBridge Shareholders, MiBridge nor its directors,
officers, fiduciaries, agents or employees, is in violation in any material
respect of any applicable law, rule, regulation or requirement of any
governmental authority in any way relating to MiBridge's business.
Consummation of the transactions contemplated hereby, and continuation by
Medcross/I-Link and Mergerco of MiBridge's business in the same manner as
heretofore conducted by it will be in compliance with all presently
applicable laws, rules, regulations and requirements of all governmental
authorities without the necessity for any license or permit or other action
or permission in the nature thereof, or any registration with, or consent
of, any governmental authority.
(d) Consummation of this transaction will not have any adverse effect
on approvals, licenses and/or permits previously granted MiBridge by any
federal, state or local regulatory authority empowered to regulate the
business of MiBridge, which are necessary for MiBridge to conduct its
business, nor will the consummation of this transaction cause any such
approvals, licenses and/or permits to become in any way invalid.
(e) MiBridge is not in default in any material respect under or in
violation of any provisions of its Articles of Incorporation or Bylaws and
neither the MiBridge Shareholders nor MiBridge is in default in any
material respect under or in violation of any restriction, lien,
encumbrance, indenture, contract, lease, sublease, loan agreement, note or
other obligation or liability relating to MiBridge's business to which any
of the MiBridge Shareholders or MiBridge is a party or by which any of the
MiBridge Shareholders or it is bound, or to which any of their or its
assets are subject. Neither the execution and delivery of this Agreement
nor consummation of the transactions contemplated hereby will conflict with
or result in a breach of or constitute a default under any provision of the
Articles of Incorporation or Bylaws of MiBridge or in any material respect
any restriction, lien, encumbrance, indenture, contract, lease, sublease,
loan agreement, note or other obligation or liability to which any of the
5
<PAGE>
MiBridge Shareholders or MiBridge is a party or by which any of them are
bound, or to which any of their or its assets are subject, or result in the
creation of any encumbrance upon said assets. No other party has any right
to acquire any ownership interest in or asset of MiBridge, nor does any
party have any rights to license, market or sell the products of MiBridge
except as set forth on Exhibit 4(e) attached hereto and made a part hereof.
(f) The financial statements for the fiscal year ended December 31,
1996, which are attached hereto as Exhibit 4(f) and made a part hereof, are
correct and complete in all material respects and fairly present the
financial condition of MiBridge at the dates described therein. The
financial statements have not been prepared according to generally accepted
accounting principles (GAAP).
(g) Other than those reflected in Exhibit 4(g), MiBridge does not have
any written or oral material obligation, liability, contract, agreement,
lease, sublease, commitment or understanding of any kind, nature or
description, fixed or contingent, due or to become due, existing or
inchoate. MiBridge has no tax liabilities.
(h) The accounts receivable of MiBridge shown on Exhibit 4(h) are
proper and to the best of MiBridge's knowledge collectible at the aggregate
recorded amounts thereof.
(i) MiBridge has good title to and possession of all its properties
and assets free and clear of all restrictions, liens, encumbrances, rights,
title and interests in others, except as set forth on Exhibit 4(i). No one
other than MiBridge has any right, title, interest, restriction, lien or
encumbrance in, on or to the businesses conducted by MiBridge.
(j) MiBridge owns no real property other than leasehold improvements.
All leasehold improvements, buildings, fixtures, and equipment owned or
used by MiBridge are in reasonably good and sound condition and are in all
material respects in compliance with all laws, rules, regulations and
requirements of governmental authorities, including, but not limited to
those dealing with the usage, storage and disposal of hazardous wastes.
There are no fuel storage tanks located on or around any real property
leased or used by MiBridge. MiBridge has never received any notification
from any local, state or federal authority of a violation of any rule, law
or ordinance dealing with the usage, storage and disposal of hazardous
wastes. MiBridge enjoys exclusive, peaceful and undisturbed possession
under all leases to which it is a party. All such leases are valid, freely
assignable and enforceable in accordance with their terms, and no party
thereto is in default thereunder. The Lease Agreements (hereafter
"Leases") attached hereto as Exhibit 4(j) are true and correct copies of
the Leases entered into by MiBridge for all of the premises occupied by
MiBridge, which Leases are presently in full force and effect, without
amendment.
(k) There are no suits or proceedings at law or in equity, or before
or by any governmental agency or arbitrator, pending, threatened,
anticipated or contemplated, which
6
<PAGE>
in any way affect MiBridge, and there are no unsatisfied or outstanding
judgments, orders, decrees or stipulations affecting the MiBridge
Shareholders, MiBridge or their assets or to which any of them is or may
become a party which in any way affect them. There are no claims against
the MiBridge Shareholders or MiBridge pending, threatened, anticipated, or
contemplated which, if valid, would constitute or result in a breach of any
representation, warranty or agreement set forth herein. For purposes of
this representation, no suits or proceedings shall be deemed to be pending,
no order or stop order shall be deemed to be issued, and no action shall be
deemed to be instituted unless, in each case, a director or executive
officer of MiBridge shall have received a copy of such proceeding, order,
stop order or action; and no action, suit or proceeding shall be deemed
threatened unless overtly threatened by a written communication.
(l) Since the date of the December 31, 1996 financial statement of
MiBridge, there has not been:
(i) any material adverse change in the properties, assets,
business, affairs or prospects of MiBridge nor, to the best of the
knowledge of MiBridge and the MiBridge Shareholders, are any such
changes threatened, anticipated, or contemplated;
(ii) any actual or threatened, anticipated, or contemplated
damage, destruction, loss, conversion, termination, cancellation,
default or taking by eminent domain or other action by governmental
authority which has affected or may hereafter affect the properties,
assets, business, affairs or prospects of MiBridge or;
(iii) any material and adverse dispute pending or threatened, of
any kind with any customer, supplier, source of financing, employee,
landlord, subtenant or licensee of MiBridge or any pending or
threatened, occurrence or situation of any kind, nature or description
which is reasonably likely to result in any reduction in the amount,
or any change in the terms or conditions, of business with any
substantial customer, supplier, or source of financing;
(iv) any pending or threatened, anticipated or contemplated
occurrence or situation of any kind, nature or description peculiar to
the business of MiBridge and materially and adversely affecting its
properties, assets, business, affairs or prospects; or
(v) any reduction of capital, redemption of stock or dividend
or distribution with respect to stock, by MiBridge.
(m) MiBridge's Board of Directors has authorized the execution,
delivery and performance of this Agreement. All present and previous
stockholders, directors and officers of MiBridge will at any time or from
time to time hereafter execute whatever minutes of
7
<PAGE>
meetings or other instruments and take whatever action Medcross/I-Link may
deem reasonably necessary or desirable to effect, perfect or confirm of
record or otherwise in Mergerco, full right, title and interest in and to
the business, properties and assets of MiBridge, or to carry out the intent
and purposes of the transactions contemplated hereby.
(n) The corporate record books of MiBridge are in good order,
complete, accurate, up to date, with all necessary signatures and set forth
all meetings and actions taken by the stockholders and directors, including
all actions set forth in all certificates of votes of stockholders or
directors furnished to anyone at any time. The copies of MiBridge's
Articles of Incorporation and Bylaws which have been delivered to
Medcross/I-Link are complete and correct.
(o) The stock transfer books and stock ledgers of MiBridge are in good
order, complete, accurate and up to date, and with all necessary
signatures, and set forth all stock and securities issued, transferred and
surrendered. No duplicate certificate has been issued at any time
heretofore. No transfer has been made without surrender of the proper
certificate duly endorsed. All certificates so surrendered have been duly
cancelled and are attached to the proper stubs with all necessary stock
powers attached thereto.
(p) Except as set forth on Exhibit 4(p) attached hereto, MiBridge owns
all copyrights, rights of reproduction, trademarks, trade names, trademark
applications, service marks, patent applications, patents, and patent
license rights, all whether registered or unregistered, U.S. or foreign,
inventions, franchises, discoveries, ideas, research, engineering, methods,
practices, processes, systems, formulae, designs, drawings, products,
projects, improvements, developments, know-how, and trade secrets which are
used in or necessary for the conduct of its business, without conflict or
infringement of any, and subject to no restriction, lien, encumbrance,
right, title or interest in others. All of the foregoing stand solely in
the name of MiBridge and not in the name of any stockholder, director,
officer, agent, partner or employee or anyone else known to the MiBridge
Shareholders, and none of the same have any right, title, interest,
restriction, lien or encumbrance therein, or thereon or thereto.
MiBridge's patents and patent applications are identified on Exhibit 4(p).
(q) Each of the MiBridge Shareholders is the owner, free and clear of
any claim, lien, charge, or encumbrance or restriction, of the number of
Shares of MiBridge stock to be sold by him/her pursuant to paragraph 1
above, and the MiBridge Shareholders collectively are the owners of all of
the issued and outstanding shares of common stock of MiBridge and each
MiBridge Shareholder now has and will have, at the Closing, full power and
authority and the legal right to deliver such shares to Medcross/I-Link and
Mergerco pursuant to this Agreement.
(r) MiBridge and the MiBridge Shareholders have not made any material
misstatement of fact or omitted to state any material fact necessary or
desirable to make complete, accurate and not misleading every
representation, warranty and agreement set forth herein.
8
<PAGE>
(s) Other than those listed on Exhibit 4(s), MiBridge has no written
contracts of employment with any of its shareholders, employees, agents, or
sales representatives; and it has no verbal contracts of employment which
cannot be terminated without default by MiBridge on thirty (30) days
notice. Copies of the employment agreements listed on Exhibit 4(s) are
attached as part of Exhibit 4(s).
(t) Except as set forth on Exhibit 4(t) attached hereto, MiBridge is
not a party to nor subject to any collective bargaining agreement, any
employee bonus plan, any deferred compensation plan, or any Pension or
profit-sharing or other type of retirement plan.
(u) MiBridge has filed all tax returns and reports and has paid all of
its tax liabilities, including sales and payroll taxes, both federal and in
all states and foreign countries where it does business; and it is not
presently the subject of any tax audit by any taxing authority. MiBridge
has paid or accrued on its books of account all taxes payable by it
(including penalties and interest) and the amounts reserved for taxes on
its latest financial statements attached hereto are sufficient for the
payment of all taxes due for sales and payroll and/or other activities
through the date of such financial statements. True and correct copies of
all state and federal tax returns filed since MiBridge's inception have
been provided as part of Exhibit 4(u).
(w) Each of the representations, warranties and agreements contained
in this Agreement, whether of MiBridge or any of the MiBridge Shareholders,
is true and correct in every material respect as of the date hereof.
Nahumi shall fully, and the remainder of the MiBridge Shareholders shall
proportionately to their ownership interest in MiBridge, exonerate and
indemnify Medcross/I-Link and Mergerco against all claims, suits,
obligations, liabilities, taxes and damages, including without limitation
of the foregoing, reasonable attorneys' and accounting fees, based upon,
arising out of or resulting from any breach of any of the representations,
warranties or agreements of the MiBridge Shareholders or MiBridge herein or
any Closing Certificate delivered pursuant hereto, provided that such
breach constitutes fraud or a known or wilful misrepresentation by
MiBridge or the MiBridge Shareholders, or material nonfulfillment of any of
its undertakings hereunder. The indemnification provided hereunder in the
aggregate shall be capped at and shall not exceed the sum of the total
consideration received by the MiBridge Shareholders pursuant to this
Agreement. In addition to all other legal remedies available to
Medcross/I-Link and/or Mergerco to enforce the indemnity provisions of this
Section, Medcross/I-Link shall be entitled to offset against amounts
payable under the Note any indemnification to which Medcross/I-Link is
entitled hereunder.
(x) MiBridge has no subsidiaries or investments in other companies,
corporations or business ventures.
9
<PAGE>
(y) Every representation, warranty and agreement of the MiBridge
Shareholders and MiBridge set forth in this Agreement, and any Closing
Certificate delivered pursuant hereto and every one of the rights and
remedies of Medcross/I-Link and Mergerco for any one or more breaches
hereof shall survive and not be deemed waived by the Closing, and shall be
effective regardless of any investigation that may have been made at any
time by or on behalf of Medcross/I-Link or Mergerco.
5. Representations, Warranties and Agreements of Medcross/I-Link and
Mergerco. Medcross/I-Link and Mergerco represent and warrant to and agree with
the MiBridge Shareholders that:
(a) Medcross/I-Link and Mergerco are duly organized and validly
existing under the laws of the States of, respectively, Florida and Utah,
and in good standing, and are authorized and qualified to own and operate
their properties and assets and conduct their business as, and in all
jurisdictions where, such properties and assets are owned and operated and
such business conducted. Medcross\I-Link and Mergerco have duly filed any
and all certificates and reports required to be filed to date by the laws
of Utah and the laws of any other jurisdiction where they are required to
be qualified and registered as foreign corporations.
(b) Medcross/I-Link and Mergerco have full right, power and authority
to execute, deliver and perform the terms of this Agreement. This
Agreement has been duly authorized by Medcross/I-Link and Mergerco, and
constitutes their binding obligation, enforceable in accordance with its
terms.
(c) Neither the execution and delivery of this Agreement nor
consummation of the transactions contemplated hereby will conflict with or
result in a breach of or constitute a default under any provision of
Medcross/I-Link's or Mergerco's Articles of Incorporation or Bylaws or any
indenture, loan agreement, or other material obligation or liability to
which either of them is a party or by which either of them is bound.
Neither Medcross/I-Link nor Mergerco is in default in any material respect
under or in violation of any provisions of its Articles of Incorporation or
Bylaws, nor is it in default in any material respect under or in violation
of any restriction, lien, encumbrance, indenture, contract, lease,
sublease, loan agreement, note or other obligation or liability relating to
its business to which it is a party or by which it is bound, or to which
any of its assets are subject.
(d) Neither Medcross/I-Link, Mergerco, nor their directors, officers,
fiduciaries, agents or employees, is in violation in any material respect
of any applicable law, rule, regulation or requirement of any governmental
authority in any way relating to the business of Medcross/I-Link or
Mergerco. Neither the execution and delivery of this Agreement nor
consummation of the transactions contemplated hereby will conflict with or
result in a breach of or constitute a default under any provision of the
Articles of Incorporation or Bylaws
10
<PAGE>
of Medcross/I-Link or Mergerco, or in any material respect any restriction,
lien, encumbrance, indenture, contract, lease, sublease, loan agreement,
note or other obligation or liability to which Medcross/I-Link or Mergerco
is a party or by which either is bound, or to which any of their assets are
subject, or result in the creation of any encumbrance upon said assets.
Consummation of the transactions contemplated hereby, and continuation by
Medcross/I-Link and Mergerco of MiBridge's business in the same manner as
heretofore conducted by it will be in compliance with all presently
applicable laws, rules, regulations and requirements of all governmental
authorities without the necessity for any license or permit or other action
or permission in the nature thereof, or any registration with, or consent
of, any governmental authority.
(e) Consummation of this transaction will not have any adverse effect
on approvals, licenses and/or permits previously granted Medcross/I-Link by
any federal, state or local regulatory authority empowered to regulate the
business of Medcross/I-Link, which are necessary for Medcross/I-Link to
conduct its business, nor will the consummation of this transaction cause
any such approvals, licenses and/or permits to become in any way invalid.
(f) The financial statements for the fiscal year ended December 31,
1996, and for the quarter ended March 31, 1997, which are included in the
most recent reports on Forms 10-K and 10-Q filed by Medcross/I-Link with
the U.S. Securities and Exchange Commission, are correct and complete in
all material respects and fairly present the financial condition of
Medcross/I-Link at the dates described therein.
(g) Medcross/I-Link has good title to and possession of all such
known properties and assets free and clear of all restrictions, liens,
encumbrances, rights, title and interests in others, except for the
security interest in the shares of its wholly-owned subsidiaries which have
been pledged as security to Winter Harbor, L.L.C. in connection with the
loan from Winter Harbor, L.L.C. to Medcross/I-Link. Other than as set
forth on such, no one other than Medcross/I-Link has any right, title,
interest, restriction, lien or encumbrance in, on or to the businesses
conducted by Medcross/I-Link.
(h) All leasehold improvements, buildings, fixtures, and equipment
owned or used by Medcross/I-Link are in all material respects in compliance
with all laws, rules, regulations and requirements of governmental
authorities, including, but not limited to those dealing with the usage,
storage and disposal of hazardous wastes. There are no fuel storage tanks
located on or around any real property leased or used by Medcross/I-Link.
Medcross/I-Link has never received any notification from any local, state
or federal authority of a violation of any rule, law or ordinance dealing
with the usage, storage and disposal of hazardous wastes.
(i) There are no suits or proceedings at law or in equity, or before
or by any governmental agency or arbitrator, pending, threatened,
anticipated or contemplated, which in any way affect Medcross/I-Link or
Mergerco, and there are no unsatisfied or outstanding judgments, orders,
decrees or stipulations affecting Medcross/I-Link or Mergerco or their
11
<PAGE>
assets or to which they may become a party which in any way affect them or
their assets. There are no claims against Medcross/I-Link or Mergerco
pending, threatened, anticipated, or contemplated which, if valid, would
constitute or result in a breach of any representation, warranty or
agreement set forth herein. For purposes of this representation, no suits
or proceedings shall be deemed to be pending, no order or stop order shall
be deemed to be issued, and no action shall be deemed to be instituted
unless, in each case, a director or executive officer of Medcross/I-Link or
Mergerco shall have received a copy of such proceeding, order, stop order
or action; and no action, suit or proceeding shall be deemed threatened
unless overtly threatened by a written communication.
(j) Except for the debt financings from Winter Harbor, LLC, and the
underlying cash flow issues heretofore disclosed to Nahumi, since the date
of the March 31, 1997 financial statement of Medcross/I-Link, there has not
been:
(i) any material adverse change in the properties, assets,
business, affairs or prospects of Medcross/I-Link nor, to the best of
its knowledge, are any such changes threatened, anticipated, or
contemplated;
(ii) any actual or threatened, anticipated, or contemplated
damage, destruction, loss, conversion, termination, cancellation,
default or taking by eminent domain or other action by governmental
authority which has affected or may hereafter affect the properties,
assets, business, affairs or prospects of Medcross/I-Link or;
(iii) any material and adverse dispute pending or threatened,
of any kind with any customer, supplier, source of financing,
employee, landlord, subtenant or licensee of Medcross/I-Link or any
pending or threatened, occurrence or situation of any kind, nature or
description which is reasonably likely to result in any reduction in
the amount, or any change in the terms or conditions, of business with
any substantial customer, supplier, or source of financing;
(iv) any pending or threatened, anticipated or contemplated
occurrence or situation of any kind, nature or description peculiar to
the business of Medcross/I-Link and materially and adversely affecting
its properties, assets, business, affairs or prospects; or
(v) any reduction of capital, redemption of stock or dividend
(other than the normal accrual of dividend on its Class C Preferred
Shares) or distribution with respect to stock, by Medcross/I-Link.
(k) Medcross/I-Link's and Mergerco's Boards of Directors have
authorized the execution, delivery and performance of this Agreement.
(l) Medcross/I-Link owns all copyrights, rights of reproduction,
trademarks, trade
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<PAGE>
names, trademark applications, service marks, patent applications, patents,
and patent license rights, all whether registered or unregistered, U.S. or
foreign, inventions, franchises, discoveries, ideas, research, engineering,
methods, practices, processes, systems, formulae, designs, drawings,
products, projects, improvements, developments, know-how, and trade secrets
which are used in or necessary for the conduct of its business, without
conflict or infringement of any, and subject to no restriction, lien,
encumbrance, right, title or interest in others. All of the foregoing stand
solely in the name of Medcross/I-Link (or its wholly-owned subsidiaries)
and not in the name of any stockholder, director, officer, agent, partner
or employee or anyone else known to Medcross/I-Link, and none of the same
have any right, title, interest, restriction, lien or encumbrance therein,
or thereon or thereto. Medcross/I-Link's patents and patent applications
are identified in its filings heretofore made with the U.S. Securities and
Exchange Commission.
(m) Except as set forth on Exhibit 5(m) attached hereto, Medcross/I-
Link and Mergerco have filed all tax returns and reports and have paid all
of their tax liabilities, including sales and payroll taxes, both federal
and in all states and foreign countries where they do business; and they
are not presently the subject of any tax audit by any taxing authority.
Medcross/I-Link and Mergerco have paid or accrued on their books of account
all taxes payable by them (including penalties and interest) and the
amounts reserved for taxes on the latest financial statements attached
hereto are sufficient for the payment of all taxes due for sales and
payroll and/or other activities through the date of such financial
statements.
(n) Each of the representations, warranties and agreements contained
in this Agreement is true and correct in every respect as of the date
hereof. Medcross/I-Link will exonerate and indemnify MiBridge and the
MiBridge Shareholders against all claims, suits, obligations, liabilities,
taxes and damages, including without limitation of the foregoing,
reasonable attorneys' and accounting fees, based upon, arising out of or
resulting from any breach of any of the representations, warranties or
agreements of Medcross/I-Link and/or Mergerco herein or any Closing
Certificate delivered pursuant hereto, provided that such breach
constitutes fraud or a misrepresentation that was either known or should
have been known at the time it was made through the exercise of reasonable
diligence by Medcross/I-Link and/or Mergerco, or nonfulfillment of any of
their undertakings hereunder. The indemnification provided hereunder shall
be capped at and shall not exceed the value of the MiBridge shares acquired
pursuant to the terms of this Agreement.
(o) Every representation, warranty and agreement of Medcross/I-Link
and Mergerco set forth in this Agreement, and any Closing Certificate
delivered pursuant hereto and every one of the rights and remedies of the
MiBridge Shareholders for any one or more breaches hereof shall survive and
not be deemed waived by the Closing, and shall be effective regardless of
any investigation that may have been made at any time by or on behalf of
MiBridge or the MiBridge Shareholders.
(p) The information concerning Medcross/I-Link heretofore furnished
to the
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<PAGE>
MiBridge Shareholders, including all filings made by Medcross/I-Link with
the U.S. Securities and Exchange Commission, does not include any material
misstatement or fact, nor does it omit to state any material fact necessary
to make such information not misleading.
6. The Closing. The closing of the transaction contemplated hereunder
shall take place at the offices of Medcross/I-Link in Salt Lake City, Utah, not
later than August 31, 1997, at such time or place as shall be fixed by the
mutual consent of the parties. Said date of conveyance is herein called the
"Closing". At the Closing (i) the MiBridge Shareholders shall deliver to
Medcross/I-Link certificates evidencing not less than 100% of the issued and
outstanding shares of MiBridge, in each case duly endorsed for transfer in blank
or accompanied by a blank stock power or with such other endorsements or
instruments of transfer as Medcross/I-Link may reasonably request, together with
the Closing Certificate and other documents and matters referred to in
subparagraphs (ii), (iii), (iv), (vii), (ix), (x), and (xi) of subparagraph
8(a) below; (ii) Medcross/I-Link shall deliver to the MiBridge Shareholders the
Preferred Shares, the Note, and the employment agreement described in Section 2,
Medcross/I-Link shall deliver to Luse Lehman Gorman Pomerenk & Schick, as escrow
agent to hold pursuant to the security interests granted herein, a certificate
representing not less than 100% of the issued and outstanding shares of Mergerco
duly endorsed for transfer in blank or accompanied by a blank stock power or
with such other endorsements or instruments of transfer as the MiBridge
Shareholders may reasonably request, and the Closing Certificate referred to in
subparagraph 8(b) below; and (iii) the parties shall execute such certificate(s)
and other instruments as shall be required pursuant to the laws of the State of
Utah and New Jersey to effect the Merger of MiBridge with and into Mergerco, and
change of the name of Mergerco to "MiBridge, Inc."
7. Actions Prior to Closing. Prior to the Closing, and except as may be
first approved in writing by Medcross/I-Link, or as otherwise permitted or
contemplated by this Agreement, (i) the business of MiBridge shall be conducted
only in the usual and ordinary course without the creation of indebtedness for
money borrowed, except in the ordinary course of business, (ii) no change shall
be made in the Articles of Incorporation or Bylaws of MiBridge, (iii) no shares
of stock of MiBridge or its Affiliates shall be authorized for issuance or
issued or delivered from treasury and no agreement for such issuance or delivery
thereof shall be entered into, (iv) no dividend or other distribution in respect
of and no redemption of any shares of stock of any class of MiBridge or its
Affiliates shall be made by MiBridge, (v) other than disclosed on Exhibit 4(t)
no increases shall be made in the compensation (including any commissions or
bonuses) payable or to become payable by MiBridge or its Affiliates to any
employee, (vi) no contract or commitment shall be entered into by or on behalf
of MiBridge or its Affiliates except in the ordinary course of business, (vii)
MiBridge will continue in effect its existing insurance coverage on all its
properties, assets, business and personnel, (viii) no general increases shall be
made in wages or benefits of any group of employees as a result of collective
bargaining or otherwise and (ix) MiBridge will not subject any of its property
or assets to any material lien, claim, charge, option or encumbrance nor will it
do or omit to do any act which will cause a material breach in any contract,
agreement, lease, commitment or obligation to which it is a party or by which it
is bound.
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<PAGE>
MiBridge and the MiBridge Shareholders shall also provide Medcross/I-Link
with information, including financial information for the period from MiBridge's
inception through the Closing, in form reasonably acceptable to Medcross/I-Link,
and shall fully cooperate with Medcross/I-Link's auditors and legal counsel, in
order to enable Medcross/I-Link to prepare and make all necessary state and
federal filings. MiBridge and the MiBridge Shareholders shall afford to the
officers, directors, and/or the authorized representatives of Medcross/I-Link
free access to their facilities, properties and records in order that
Medcross/I-Link may have the full opportunity to undertake such reasonable due
diligence as Medcross/I-Link shall deem prudent in confirming the
representations and warranties of MiBridge and in preparing said filing
materials.
8. Conditions of Medcross/I-Link and the MiBridge Shareholders' Performance.
(a) The obligation of Medcross/I-Link and Mergerco to consummate this
Agreement is subject to the satisfaction at the Closing, or waiver by
Medcross/I-Link in writing, of each of the following conditions:
(i) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to Hardy & Allen, legal counsel for Medcross/I-Link.
(ii) Except as to any representation or warranty (A) which
specifically relates to an earlier date or (B) where the breach of the
representation or warranty would not, either individually or in the
aggregate, constitute a material adverse effect with respect to
Medcross/I-Link, the representations and warranties of MiBridge and
the MiBridge Shareholders contained in this Agreement or in any
Closing Certificate or other document delivered to Medcross/I-Link
pursuant hereto shall be deemed to have been made again at the Closing
and shall then be true in all material respects; the MiBridge
Shareholders and MiBridge shall have performed and complied with all
agreements and conditions required by this Agreement to be performed
or complied with by them prior to or at the Closing; the MiBridge
Shareholders and MiBridge shall not be in default under any of the
provisions of this Agreement; and Medcross/I-Link shall have been
furnished with Closing Certificates of the MiBridge Shareholders dated
the Closing date, certifying to the fulfillment of the foregoing
conditions and the due performance of such covenants and agreements
and further certifying that neither MiBridge or the MiBridge
Shareholders are a party to any litigation or has knowledge of any
claim, brought or threatened, seeking to recover damages or to prevent
MiBridge or the MiBridge Shareholders from continuing to use
MiBridge's assets or to conduct its business in the manner as the same
were used or conducted prior thereto, and which litigation or claim is
likely to result in any judgment, order, decree or settlement which
will materially and adversely affect the financial condition or
business of MiBridge;
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(iii) Medcross/I-Link shall have received a copy of a consent
resolution executed by all of the directors of MiBridge approving this
Plan and Agreement of Merger;
(iv) Owners of not less than 100% of the issued and outstanding
shares of MiBridge shall have executed this Agreement;
(v) At the Closing date, no governmental agency or body, or
other person or entity, shall have instituted or threatened any action
to restrain or prohibit any of the transactions contemplated by this
Agreement;
(vi) Nahumi shall have entered into the Employment Agreement in
substantially the same form as set forth in the attached Exhibit 2(e);
(vii) The business of MiBridge as a going concern shall not have
been adversely affected in any material way as the result of any Act
of God, fire, flood, explosion, war, labor disturbance or other
casualty or any other occurrence;
(viii) Medcross/I-Link shall have received, with respect to all
material contracts, agreements and licenses of MiBridge, written
confirmation reasonably satisfactory to Medcross/I-Link that no such
contract, agreement or license shall be in default by virtue of any
deemed assignment from MiBridge to Mergerco by operation of law
pursuant to the Merger.
(ix) Medcross/I-Link shall have received from legal counsel to
MiBridge and the MiBridge Shareholders the opinion in the form
attached hereto as Exhibit 8(a)(ix).
(x) Winter Harbor, L.L.C., shall have given its written
consent to this Agreement and the transaction contemplated herein.
(b) The obligation of the MiBridge Shareholders to consummate this
Agreement is subject to the satisfaction at the Closing, or waiver by the
MiBridge Shareholders in writing, of each of the following conditions:
(i) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to Luse Lehman Gorman Pomerenk & Schick, legal counsel for the
MiBridge Shareholders.
(ii) The MiBridge Shareholders shall have received a copy of
consent resolutions executed by all of the directors of Medcross/I-
Link and Mergerco approving this Plan and Agreement of Merger;
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(iii) Except as to any representation or warranty (A) which
specifically relates to an earlier date or (B) where the breach of the
representation or warranty would not, either individually or in the
aggregate, constitute a material adverse effect with respect to
Medcross/I-Link or to MiBridge or the MiBridge Shareholders, the
representations and warranties of Medcross/I-Link and Mergerco
contained in this Agreement or in any Closing Certificate or other
document delivered to the MiBridge Shareholders pursuant hereto shall
be deemed to have been made again at the Closing and shall then be
true in all material respects;
(iv) Medcross/I-Link and Mergerco shall have performed and
complied with all agreements and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing;
(v) The MiBridge Shareholders shall have been furnished with a
Closing Certificate of appropriate officers of Medcross/I-Link and
Mergerco dated as of the Closing date, certifying to the fulfillment
of the foregoing conditions; and
(vi) At the Closing date, no governmental agency or body, or
other person or entity, shall have instituted or threatened any action
to restrain or prohibit any of the transactions contemplated by this
Agreement;
(vii) The business of Medcross/I-Link as a going concern shall
not have been adversely affected in any material way as the result of
any Act of God, fire, flood, explosion, war, labor disturbance or
other casualty or any other occurrence;
(viii) The MiBridge Shareholders shall have received from Hardy
& Allen, legal counsel to Medcross/I-Link and Mergerco, the opinion in
the form attached hereto as Exhibit 8(b)(viii).
(ix) Winter Harbor, L.L.C., shall have given its written
consent to this Agreement and the transaction contemplated herein.
9. Non-Competition and Non-Disclosure Covenants. Each of the MiBridge
Shareholders and MiBridge agrees not to disclose to any person or entity,
without the prior written consent of Medcross/I-Link, (i) any of the terms of
this Agreement, or (ii) any proprietary or confidential information of MiBridge
at any time hereafter.
10. Termination and Amendment.
(a) This Agreement may be terminated by any party upon written notice
if the Closing referred to in Section 6 hereof shall not have occurred on
or prior to August 31, 1997.
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(b) This Agreement may be terminated by any party at any time prior
to the time fixed for Closing in paragraph 6 hereof upon written notice to
the other parties:
(i) If, subject to the provisions of Sections 8(a)(ii)(B) and
8(b)(ii)(B) hereof, the representations, warranties and agreements or
conditions of this Agreement to be complied with or performed by
MiBridge or the MiBridge Shareholders (in the case of Medcross/I-Link)
or Medcross/I-Link (in the case of the MiBridge Shareholders) on or
before the Closing shall not have then been complied with or performed
in some material respect and such material noncompliance or
nonperformance shall not have been waived by the party giving notice
of termination or shall not have been cured by the defaulting party,
or cure thereof commenced and diligently prosecuted thereafter by such
party within 10 days after written notice of such material
noncompliance or nonperformance is given by the non-defaulting party;
(ii) If any governmental action is commenced to prevent the
consummation of the transactions contemplated hereby; or
(iii) By mutual consent of the parties.
(c) Any representations, warranties, agreements or conditions of this
Agreement may be waived at any time by the party entitled to the benefit
thereof by action taken and evidenced by a written waiver executed by any
such party.
11. Commissions and Fees. Each of the parties hereto represents and
warrants that it has dealt with no broker or finder in connection with any of
the transactions contemplated by this Agreement. In the event that any finder's
fee or broker's commission shall become payable by any party hereto as a result
of such party's misrepresentation or breach of warranty such fee and commission
shall be the sole and exclusive responsibility and liability of such party with
no right of contribution by any other party. In the event that any finder's fee
or broker's commission shall become payable by any party, other than as set
forth herein, as a result of such party's misrepresentation or breach of
warranty, the breaching party shall indemnify, defend and hold all other parties
harmless in respect of all claims, losses, expenses and obligations (including
reasonable attorney's fees) to the extent that the same arise or result from
such finder's fee or broker's commission. Each of the parties hereto will bear
its own legal fees in connection with the transactions contemplated by this
Agreement.
12. Tax-Free Reorganization. It is the intent of the parties that the
transaction contemplated by this Agreement qualify as a tax-free reorganization
under Sections 368(a)(2)(D) and 368(a)(1)(A) of the Internal Revenue Code;
however, other than the representations and warranties
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made in this Section 12, no representation or warranty is made by any party with
respect to the tax treatment of the transaction, nor shall the ultimate tax
treatment of the transaction with respect to any party operate as a condition to
Closing or have any effect on this Agreement or the parties' rights, duties and
obligations hereunder. The parties represent that they have been advised by
their own professional tax and legal advisors with respect to the tax
implications of this Agreement and the transaction contemplated hereunder.
Nahumi represents and warrants to Medcross/I-Link and Mergerco as follows:
(a) Since the inception of MiBridge (March 18, 1996), there have been
no distributions of cash or property from MiBridge to or on behalf of their
respective shareholders; there have been no other transfers of property
from MiBridge to or on behalf of their respective shareholders for less
than fair market value; and there have been no transfers of property
directly or indirectly from the shareholders of MiBridge to or on behalf of
MiBridge for a value in excess of fair market value.
(b) He has owned in excess of eighty percent (80%) of the common stock
of MiBridge since the incorporation of MiBridge on March 13, 1996.
(c) He has no plan or intention to sell, transfer, or otherwise
dispose of for tax purposes shares of the Series D Preferred Stock of
Medcross issued to me pursuant to the Merger Agreement (or any common
shares of Medcross into which such stock is convertible) so as to reduce
his ownership of such stock to a number of shares having a value, as of the
closing date of the Merger, of less than 50 percent of the value of all the
MiBridge stock as of the closing date of the Merger for at least five years
following such closing date.
13. Miscellaneous.
(a) Severability. If any term or provision of this Agreement
including the exhibits hereto or the application thereof to any person,
property or circumstances shall to any extent be invalid or unenforceable,
the remainder of this Agreement including the exhibits or the application
of such term or provision to persons, property or circumstances other than
those as to which it is invalid and unenforceable shall not be affected
thereby, and each term and provision of this Agreement and the exhibits
shall be valid and enforced to the fullest extent permitted by law.
(b) Notices. Any notices hereunder shall be deemed given, and any
instrument delivered, upon mailing by registered or certified mail, postage
prepaid, or upon sending of such notice by straight telegram, telegraphic
charges prepaid as follows:
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If to the MiBridge or the MiBridge Shareholders:
c/o Dror Nahumi
1 Main Street, Suite 510
Eatontown, New Jersey 07724
If to Medcross/I-Link or Mergerco:
Medcross, Inc.
Attn: Karl R. Ryser, Jr., CFO
13751 South Wadsworth Park Dr., Suite 200
Draper, UT 84020
With copy to: David E. Hardy
Hardy & Allen
60 East South Temple, Suite 2200
Salt Lake City, UT 84111
except that any of the foregoing may from time to time by written notice to
the others designate another address which shall thereupon become its
effective address for the purposes of this paragraph.
(c) Entire Agreement and Amendments. This Agreement including the
exhibits referred to herein which are a part hereof, contains the entire
understanding of the parties hereto with respect to the subject matter
contained herein and may be amended only by a written instrument executed
by the MiBridge Shareholders and Medcross/I-Link or their respective
successors or assigns. There are no restrictions, promises, warranties,
covenants, or undertakings other than those expressly set forth herein. The
paragraph headings and table of contents contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(d) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
(e) Parties in Interest. This Agreement shall inure to the benefit of
and be binding upon the MiBridge Shareholders and Medcross/I-Link and their
respective successors, heirs and assigns.
(f) Applicable Law and Choice of Forum. This Agreement shall be
governed by the laws of the State of Utah.
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IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective on the date first above written.
MEDCROSS, INC. I-LINK MERGERCO, INC.
By: /s/ John W. Edwards By: /s/ John W. Edwards
-------------------------------- -------------------------------------
John W. Edwards, President John W. Edwards, President
MIBRIDGE, INC.
By: /s/ Dror Nahumi
-------------------------------------
Dror Nahumi, President
MIBRIDGE SHAREHOLDERS:
/s/ Dror Nahumi /s/ Ben Chan
- -------------------------------- -------------------------------------
DROR NAHUMI BEN CHAN
/s/ Eran Chesner /s/ Yaron Cudkevich
- -------------------------------- -------------------------------------
ERAN CHESNER YARON CUDKEVICH
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