UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A#1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17973
MEDCROSS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13751 S. Wadsworth Park Drive, Suite 200, Draper, Utah 84020
(Address of principal executive offices)
(801) 576-5000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at August 15, 1997
Common Stock, par value $0.007 10,627,597
Traditional Small Business Disclosure Format (Check One): Yes No X
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
June 30,
1997
-------------
<S> <C>
ASSETS
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
<PAGE>
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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.
<PAGE>
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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.
<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.
<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:
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
=========
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:
June 30, 1998 $ 432,000
June 30, 1999 2,175,000
---------
Total $ 2,607,000
=========
<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.
Three months ended
June 30, 1997 June 30, 1996
------------- -------------
Revenue $ 3,569,000 $ 1,200,000
Net loss $( 4,843,000) $( 1,486,000)
Loss per share $( 0.48) $( 0.33)
Six months ended
June 30, 1997 June 30, 1996
------------- -------------
Revenue $ 6,315,000 $ 1,809,000
Net loss $( 8,750,000) $( 8,096,000)
Loss per share $( 0.88) $( 2.17)
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
<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:
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
=========
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:
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
=========
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.
<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.
<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.
<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
------------- ------------- -------------
<S> <C> <C> <C>
Assets
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)
Consolidated statement of operations for the
six-month period ended June 30, 1997:
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)
Consolidated statement of operations for the
three-month period ended June 30, 1997:
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)
<PAGE>
Item 2- MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion should be read in conjunction with the
information contained in the financial statements of the Company and
the notes thereto appearing elsewhere herein and in conjunction with
the Management's Discussion and Analysis set forth in the Company's
Form 10-KSB for the year ended December 31, 1996.
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.
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 regional
long-distance telecommunications carrier with nation-wide 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 and sales marketing materials. 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. 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 June 5, 1997 the Company signed a letter of intent (final agreement
signed August 12, 1997) to acquire MiBridge, Inc., a leading provider
of telephone and conferencing software and hardware. The Company
anticipates closing this acquisition in the third quarter of 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.
<PAGE>
Financial Condition, continued
Investing Activities
Effective January 1,1997, the Company entered into an agreement to
acquire all of the outstanding shares of Family Telecommunications,
Inc. (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 June 5, 1997 the Company entered into a letter of intent (the
"MLOI") with MiBridge, Inc., a New Jersey corporation ("MiBridge") and
Mr. Dror Nahumi, the principal shareholder of MiBridge, pursuant to
which the Company entered into negotiations with MiBridge to acquire
all of the issued and outstanding stock of MiBridge (the
"Acquisition"). A final agreement was signed on August 12, 1997 with
closing anticipated in the third quarter of 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 stockholder of MiBridge (the "Selling
Stockholder") 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 will be convertible at the
option of the selling shareholder 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 4, 1997. On the nine-month anniversary
of the closing of the 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
Series D Preferred Stock shall be entitled to participate in any
dividends which may be declared for Common Stock on an as-converted
basis. The Selling Stockholder shall receive piggy-back registration
rights whereby it may participate in any registration of securities the
Company may undertake after the first anniversary of the closing of the
Acquisition (excluding registrations of employee benefit plan
securities). Conversion of the Series D 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 Company intends to enter 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 will devote his
full time to managing the operations of MiBridge under the direction of
the Company.
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.
<PAGE>
Financial Condition, continued
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.
Also on June 6, 1997 the Company executed a letter of intent ("LOI")
with Winter Harbor relating to an equity investment in the Company.
The LOI contemplates that Winter Harbor will invest $12,100,000 in a
series of the Company's convertible preferred stock to be created (the
"Series M Preferred Stock"). Winter Harbor will purchase such number
of shares of Series M Preferred Stock as are convertible into 4,400,000
shares of Common Stock for an aggregate cash consideration of
$12,100,000 (equivalent to $2.75 per share of common Stock, subject to
adjustment). 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 share of Common Stock at an
exercise price of $9.31 (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 Series M Preferred Stock will be 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. The Series M Preferred
Stock will be senior to all other series of the Company's preferred
stock or Common Stock as to liquidation rights, which rights shall be
deemed to include accrued or unpaid dividends relating to the Series M
Preferred 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-to-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 ("Class M
Conversion Price") shall be equal to the lesser 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.
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.
The Company will require the additional equity financing ($12,100,000)
proposed 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 completion of this
equity investment is subject to the approval of an authorization of
additional common shares by the shareholders of the Company. This
<PAGE>
Financial Condition, continued
authorization is to be voted upon by the shareholders of the Company at
the next shareholder meeting currently scheduled for September 1997.
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.
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.
<PAGE>
Results of Operations, continued
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.
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.
<PAGE>
Results of Operations, continued
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.
<PAGE>
Results of Operations, continued
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.
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 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.
<PAGE>
Results of Operations, continued
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
ending 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 has reviewed all 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.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6(a) - Exhibits
None.
Item 6(b) - Reports on Form 8-K
A report on Form 8-K dated June 5, 1997 was filed by the Company
regarding the acquisition of the securities of MiBridge, Inc., and a
term loan agreement and potential equity investment by Winter Harbor.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunder duly authorized.
MEDCROSS, INC.
(Registrant)
Date: September 4, 1997 By: /s/ John W. Edwards
John W. Edwards
President, Chief Executive Officer
By: /s/ Karl S. Ryser, Jr.
Karl S. Ryser, Jr.
Chief Financial Officer, Treasurer
</TABLE>
