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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A#1
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-17973
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MEDCROSS, INC.
(Name of small business issuer in its charter)
Florida 52-2291344
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801/576-5000)
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.007 par value
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 twelve months (or for such
period that the Registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The Registrant's revenues for its most recent fiscal year totaled $2,383,076.
The aggregate market value of Common Stock held by non-affiliates based upon the
closing bid price on March 11, 1997, as reported by NASDAQ, was approximately
$18,000,625.
As of March 11, 1997, there were 11,607,597 shares of Medcross, Inc. Common
Stock, $.007 par value, outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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Item 1. Description of Business.
Business of I-Link Worldwide, Inc.
Overview
I-Link Worldwide Inc. ("I-Link") is a wholly owned subsidiary of Medcross,
Inc.("Medcross" or the "Company") through which the primary business of Medcross
is carried out. 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 existing users of traditional telecommunications services, at
substantial cost savings to its customers 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 for "off-net" (off Intranet) traffic. 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, utilizing the user's existing
telecommunications equipment.
With its acquisition of Family Telecommunications Incorporated ("FTI"), a
regional long-distance telecommunications carrier with nation-wide 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. 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 will be 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 nation-wide deployment of
the I-Link Intranet.
I-Link's primary business communications products are marketed under the
names "Fax4Less(TM)" and "Fone4Less(TM)." Currently, these products are
delivered over the traditional switched telephone network at discounted pricing
levels based upon existing contracts with AT&T and MCI. As the I-Link Intranet
is deployed, these products will be delivered across the I-Link Intranet at
significantly reduced cost levels. The following is a description of how these
products are delivered utilizing the I-Link Intranet and technology.
Fone4Less(TM) and Fax4Less(TM) (the "Products") enable the user to utilize
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 Products 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 will pursue a multi-tiered infrastructure strategy. In some cases,
I-Link will establish its own local site. In others, I-Link will partner with
nationally recognized telephone service resellers and Internet Service
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Providers ("ISPs"), incenting those organizations to provide the needed local
site consistent with I-Link's service requirements. I-Link will establish its
own local sites incrementally as business needs dictate. Installation of the
local site is a 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 utilizes 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 New York wishing to call or send a
fax from New York to Houston simply dials the desired number in Houston. The
call or fax is immediately and transparently routed to a local Communication
Engine located at I-Link's New York site. The New York 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 Houston via the
I-Link Intranet. A local phone call to the recipient telephone or fax machine
is placed by the Houston 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 New York subscriber.
The Methodology. I-Link's Products 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 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).
Technological Advantages. I-Link's fax transmission method provides
several technological advantages over traditional point-to-point transmission.
Some of these advantages are discussed below.
It maximizes fax machine capabilities. In point-to-point fax
methodology, fax transmission speed is limited by the sometimes weak
long-distance connection as well as the slower of the baud rates
between the two fax machines. The Communication Engine allows the
transmitting fax machine to operate at its maximum transmission
speed irrespective of the capabilities of the fax machine receiving
the transmission.
It allows for reporting and archiving. Not all fax machines have
reporting capabilities. Since the Communication Engine handles the
transmission, it creates and sends reports. Also, it can archive
electronic copies of faxes. If desired, faxes can be retrieved to
provide a history of a fax communication.
It provides a base for other services. Once stored, the electronic
data can be sent to a variety of types of (and number of)
recipients.
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Market Opportunities
Virtually every home and business in the United States today utilizes 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 intends to target the residential customer and businesses
for its "I-Link" branded Products by means of a nationwide, multi-level
marketing and sales program. Marketing and sales of the "I-Link" branded
products to business users will be carried out by traditional sales agents. I-
Link will wholesale its products 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.
I-Link believes there are an estimated 3.5 million fax machines in use in
the United States today, the users of which incur long-distance charges of an
average of $500 or more per machine per month, 3.5 million fax machines that
average $200 per month in long-distance charges and 11 million fax machines that
average $100 or less per month. Those users represent I-Link's initial target
market. The long-distance fax market has been estimated to be a $30 billion
market in the United States alone.
Opportunity to Provide Substantial Savings to Users. Utilization of the
products 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 utilized 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 utilized 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
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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.
The Residential Market
I-Link 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 Products to their neighbors and acquaintances. A large amount
of interest in I-Link and its Products 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. Currently, I-Link
is organizing its multi-level sales operation and expects to commence actively
marketing in this channel in the spring of 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. 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. Ultimately, per-fax
costs are typically higher for smaller businesses. 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. Large businesses and
high-end national accounts (Fortune 2000) have significant fax traffic. These
businesses may utilize equipment and technologies that counter long-distance
costs. However, I-Link expects to profit from targeting such businesses. For
example, I-Link believes many of these businesses presently incur monthly land-
line long-distance telephone charges of $800 to $1,200 per fax machine.
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 utilizing 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.
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Multi-Level Marketing and Sales Program. I-Link has targeted all
residential and 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 and its products 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. Currently, I-Link is organizing its
multi-level sales operation and expects to commence actively marketing in this
channel in the spring of 1997.
Direct Sales. I-Link intends to utilize 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.
Acquisition of Smaller Carriers. In January 1997, the Company acquired
FTI, a regional long-distance carrier with an established customer base in
excess of 17,000, in a stock-only transaction. 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 Distribution 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 utilize 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
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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 IXC's with rigorous performance
standards and managed by I-Link. 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.
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 utilizing 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 utilized 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.
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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 Commission is revisiting many of
its past decisions and could impose common carrier regulation on the transport
and 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 no longer 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-
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 Commission sought comment on the request and has not
yet issued its decision.
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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 utilizes 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 Commission 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 Fax4Less and Fone4Less
capabilities available will seek to regulate I-LINK's activities as a tele-
unications 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
Commission for resolution.
BUSINESS OF FAMILY TELECOMMUNICATIONS INCORPORATED
Family Telecommunications Incorporated ("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, FTI provides 1-plus long-distance service, 800/888, 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
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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 is a switchless reseller (having no equipment) in all states but Utah
and Arizona. In Utah and Arizona, FTI provides service through a pair of HARRIS
20-20 switches. This allows FTI to offer additional services 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.
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 bounderies, 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.
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
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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 end user's 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
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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 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 and local regional Bell
Companies and LDDS/WorldCom. With these carriers controlling approximately 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 Communications Act, as amended by the
Telecommunications Act of 1996 (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.
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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 LECs for "access
transport" services. Access transport refers to the connection provided by LECs
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.
Recent Legislation
In February 1996, the Telecommunications Act of 1996 ("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 non-discriminatory 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' 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
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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 Telecommunications 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
Telecommunications Act prohibits telecommunications carriers and cable operators
from acquiring more than ten (10) 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.
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.
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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 MEDCROSS, INC.
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 Medcross Imaging, Ltd. Prior to the acquisitions,
the Company had a 41.5% ownership interest. The Company increased its ownership
of Medcross Imaging, Ltd. 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 Medcross'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. The Company immediately transferred all assets and liabilities
of the partnership, except cash of $115,603, to Urological Ultrasound Services
of Tampa Bay, Inc., a wholly owned subsidiary of the Company, formed for the
purpose of this acquisition. Prior to the acquisition,
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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, introduced by
Representative Fortney "Pete" Stark, passed Congress and 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. (File No. 92-40198-WS). State of
Florida appealed the decision granting the federal court 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
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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.
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 IPL's 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
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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.
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 7 1/2% 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.
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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. Medcross 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.
Item 2. Description of Property.
In September 1996, I-Link entered into a lease for 14,000 square feet of
space in Draper, Utah for use as the Company's executive offices, 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 at 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.
19
<PAGE>
Item 3. 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 was issued a Common Stock Purchase Warrant ("JW Charles
Warrant") on or about November 3, 1994 by the Company. The alleged terms of the
JW Charles 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 "JW
Charles 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 JW
Charles Shares registered pursuant to the terms of the JW Charles Warrant. The
Complaint alleges that the Company breached the terms of the JW Charles Warrant
by failing to prepare and file with the Commission, a registration statement
covering such shares. JW Charles alleges a breach of contract and requests
specific performance, i.e., registering the shares with the Commission, against
the Company. JW Charles also demands damages in the amount of $2,728,478 plus
interest, reasonable attorneys fees, and forum costs. The Company believes that
it has meritorious defenses to the Complaint. On May 6, 1996, the Company filed
an Answer, Affirmative Defenses and Counterclaim to the Complaint filed by JW
Charles. The Company's Counterclaim seeks damages, cancellation of the JW
Charles Warrant, interest and costs.
On 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 JW Charles in consideration for the purchase of the JW Charles
Warrant. The JW Charles 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 JW Charles 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.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Securityholders.
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq SmallCap Market(SM)
("Nasdaq") tier of the Nasdaq Stock Market(SM) 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 securities on Nasdaq or that such
quotation will otherwise continue.
The range of high and low bid information for the Common Stock for each
full quarterly period during 1996 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
</TABLE>
These quotations reflect interdealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
As of April 11, 1997, there were approximately 224 stockholders of
record and approximately 1350 beneficial owners. In addition, as of the same
date, there were approximately 83 individual participants in security position
listings furnished by Cede & Co., New York, New York, registered clearing agency
and depository.
On March 31, 1997, the closing bid price for a share of Common Stock
was $5.0625.
Item 6. 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.
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 $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 in expenses from 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 for 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 $628,924, 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 top 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.
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 J.W. 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 J.W. 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%. In the first quarter of 1995, the Company's Beijing office completed
the installation of two-CT scanners. On May 31, 1995, the Beijing office was
closed and the 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. 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.
Communication 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 communications
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.
Current Position/Future Requirements
During 1997, the Company plans to utilize available cash to fund the
development and marketing of I-Link products and services. The Company
anticipates that cash requirements in these areas will be at increasingly higher
levels than those experienced in 1996 in preparation for initial market
penetration and deployment of I-Link products. To a large extent, the Company's
ability to develop and market I-Link products and the timing thereof is
dependent on the working capital and financing alternatives available to the
Company. In order to successfully market the I-Link products and to generate
revenue sources sufficient to meet its on-going cash requirements the Company
acquired (a stock for stock acquisition) Family Telecommunications Incorporated
(FTI) effective January 1, 1997. FTI is a long distance telecommunications
carrier that provides long distance service to most states of the United States.
FTI had an established customer base. While FTI operations do not initially
provide sufficient cash flow to meet the operating needs of the Company, it is
anticipated that FTI operations coupled with the products of I-Link will
generate sufficient cash to meet the needs of day to day operation in the latter
part of 1997. Approximately 89% of FTI 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, 1999 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. The Company may obtain working capital from sources other than operating
activities including business partners, public or private financings.
The Company believes that its anticipated need for working capital in 1997 will
be met by utilization of existing cash balances and revenue from its
telecommunication operations from the FTI acquisition. However, the Company
anticipates that additional funds will be necessary from public or private
financing markets to successfully integrate and finance the planned expansion of
the business communications services and to discharge the financial obligations
of the Company. The availability of such capital sources will depend on
prevailing market conditions, interest rates, and financial position and results
of operations of the Company. Therefore there can be no assurance that such
financing will be available, that the Company will receive any proceeds from the
exercise of outstanding warrants or that the Company will not be required to
arrange for additional debt, equity or other type of financing.
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.
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.
21
<PAGE>
Item 7. Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
<TABLE>
<CAPTION>
Name Age Title
- ------------------------- --- ----------------------------------------------
<S> <C> <C>
John W. Edwards.......... 41 President, Chief Executive Officer and
Director of the Company and Chief Executive
Officer of I-Link
Clay Wilkes.............. 36 Chairman of the Board of the Company
Karl S. Ryser, Jr........ 41 Treasurer and Chief Financial Officer of the
Company and Chief Financial Officer of I-Link
William H. Flury......... 42 Vice President, Sales and Marketing of I-Link
Dorothy L. Michon........ 41 Vice President, Operations of the Company
David E. Hardy........... 44 Secretary of the Company
Henry Y.L. Toh........... 39 Director of the Company
R. Huston Babcock, M.D... 67 Director of the Company
Joseph A. Cohen.......... 49 Director of the Company
</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. 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 Associates ("Commonwealth"), will expire at the
third succeeding annual meeting of shareholders. The terms of office of Dr. R.
Huston Babcock and John W. Edwards, Class III Directors, expire at the next
annual meeting of shareholders. The term of office of Clay Wilkes, a Class I
Director, expires at the next succeeding annual meeting of shareholders.
Commonwealth has also designated Michael Falk, President of Commonwealth, to
be a non-voting advisor to the Board. In addition,
22
<PAGE>
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.
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, Jr. are brothers.
John W. Edwards, President, Chief Executive Officer and Director of
the Company. Mr. Edwards was selected to fill a vacancy on the Board of
Directors as a Class III director in June 1996. Pursuant to the terms of his
employment agreement with I-Link, 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 President and a
director of Coresoft, Inc., a software company developing object-oriented
computer solutions for small business 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 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.
Clay Wilkes, Chairman of the Board of the Company. 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 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 completed course work in
Computer Science at Utah State University.
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the
Company and of I-Link. Pursuant to the terms of his employment agreement, Mr.
Ryser serves as Chief Financial Officer of I-Link. Mr. Ryser was self-
employed as a corporate financial consultant from May 1995 until September
1996, when he joined I-Link. 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 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.
23
<PAGE>
William H. Flury, Vice President, Sales and Marketing of I-Link.
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.
Dorothy L. Michon, Vice President, Operations of the Company. Ms.
Michon joined the Company in August 1983 as C.T. Technologist, was promoted to
Technical Director in 1983, and then Associate Director of Operations in 1985.
She was elected as the Company's Vice President - Operations in March 1990.
She holds an Associate Degree in Radiology Technology and a B.S. degree in
Professional Management from Nova University.
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. Mr. Toh is a
Director of Four M. International, Ltd. 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.
R. Huston Babcock, M.D., Neurosurgeon and Director of the Company.
Dr. Babcock served as Chairman of the Board of Directors of the Company from
its inception in April 1983 until March 1992. He was 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.
Joseph A. Cohen, President of 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
24
<PAGE>
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 Operations of I-Link. Mr.
Edwards was appointed Vice President of 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. From 1984 through 1993, Mr. Edwards was a
partner in ONE-2-ONE Communications, 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's officers and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership of
equity securities of the Company with the Securities and Exchange Commission
("SEC"). Officers, directors, and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act during its most recent
fiscal year and Forms 5 with respect to its most recent fiscal year, the
Company believes that all such forms required to be filed pursuant to Section
16(a) of the Exchange Act were timely filed, as necessary, by the officers,
directors, and security holders required to file the same during the fiscal
year ended December 31, 1996, except that reports were filed late by the
following persons: John W. Edwards, 3 transactions; Clay Wilkes, 3
transactions; Karl S. Ryser, Jr., 1 transaction; Alex Radulovic, 3
transactions; William H. Flury, 3 transactions; Joseph A. Cohen, 2
transactions; I-Link, Ltd., 1 transaction. In addition, the Company has
received no copies of Forms 3, 4 or 5 for the following persons relating to
the following number of transactions: Benchmark, 6 transactions; or
Commonwealth, 5 transactions.
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
25
<PAGE>
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.
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.
Item 10. 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 at
the end of the year ended December 31, 1996 whose compensation was in excess
of $100,000.
26
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------- --------------------------- ------------
Securities
Other Restricted Underlying All Other
Name and Annual Stock Options/ LTIP Compensa
Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARs(#) Payouts($) tion($)
- ------------------- ------ ---------- ----------- ---------------- ------------ ------------- ------------ -----------
<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 1995 -- -- -- -- -- -- --
CFO 1994 -- -- -- -- -- -- --
William H. Flury/7/ 1996 91,667/7/ 0 0 0 250,000/8/ 0 N/A
Vice President, 1995 -- -- -- -- -- -- --
Sales and 1994 -- -- -- -- -- -- --
Marketing of I-
Link
</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
"Item 12. 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 the 1996 year was $137,500 per year. See "--Employment Agreements."
8 Excludes warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.50 per share issued in connection with a bridge loan. See "Item
12. Certain Relationships and Related Transactions."
27
<PAGE>
Option/SAR Grants in Last Fiscal Year (1996)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1996, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options/SARs Granted Exercise
Options/SARs Granted to or Base
Name (#) Employees in Fiscal Year Price ($/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 "Management--Certain Relationships and Related Transactions."
/2/ Does not include warrants to purchase 5,000 shares of Common Stock at
an exercise price of $2.50 in connection with a bridge loan. See
"Management--Certain Relationships and Related Transactions."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to
options exercised during 1996 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1996.
<TABLE>
<CAPTION>
Shares
Acquired Number of Securities Value of Unexercised in the
On Exercise Value Underlying Unexercised Money Options/SARs at
Name (#) Realized ($) 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
28
<PAGE>
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.
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, Chairman of the Board, 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
and all Common Stock of Medcross held in escrow shall be released. 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, subject to the approval of the I-Link Board of
Directors, 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 was
29
<PAGE>
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 Medcross, Inc. at an exercise
price of $7.00. 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.
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.
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.
30
<PAGE>
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 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.
31
<PAGE>
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 Plan (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,
32
<PAGE>
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 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 event 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 February 1997, the Board of Directors of the Company approved adoption
of the Company's 1997 Recruitment Stock Option and Appreciation Rights Plan,
subject to stockholder approval, 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
33
<PAGE>
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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
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 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 reported by each such person, as of March 11, 1997. On
that date, there were 11,607,597 shares of the Company's Common Stock issued and
outstanding, no shares of the Company's Class A Preferred Stock issued and
outstanding, 7,500 shares of the Company's Class B Preferred Stock issued and
outstanding, and 240,000 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 3,772,832/(4)/ 32.5%
1980 Post Oak Boulevard
Houston, TX 77056
I-Link, Ltd./(5)/ Common Stock 1,925,141 16.6%
c/o Clay Wilkes
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
</TABLE>
34
<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>
Clay Wilkes/(6)/ Common Stock 3,713,344/(7)/ 31.9%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Benchmark Equity Group Inc. Common Stock 2,099,174/(10)/ 17.9%
700 Gemini Class C Preferred 752
Houston, TX 77058 Stock
R. Huston Babcock, M.D. Common Stock 682,173/(11)/ 5.6%
741 12th Street North Class B Preferred 7,500
St. Petersburg, FL 33705 Stock
Henry Y.L. Toh/(3)/ Common Stock 188,501/(12)/ 1.6%
3227 Bennet Street North
St. Petersburg, FL 33713
John W. Edwards Common Stock 711,665/(13)/ 5.8%
13751 S. Wadsworth Park Drive
Draper, UT 84020
T6-G Limited Partnership/(8)/ Common Stock 720,083/(9)/ 6.1%
185 South State Street Class C Preferred 7,133
Salt Lake City, UT Stock
William A. Baquet Common Stock 785,284/(14)/ 6.8%
33 Libby Avenue
Hicksville, NY 11801
Commonwealth Associates Common Stock 1,911,392/(15)/ 15.4%
733 Third Avenue Class C Preferred 3,750
Suite 700 Stock
New York, NY 10017
Alex Radulovic/(16)/ Common Stock 769,824/(17)/ 6.6%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Joseph A. Cohen Common Stock 121,000/(18)/ 1.0%
1370 Avenue of the Americas Class C Preferred 3,000
New York, NY 10019 Stock
Karl S. Ryser, Jr. Common Stock 65,910/(12)/ *
13751 S. Wadsworth Park Drive
Draper, UT 84020
William H. Flury Common Stock 105,650/(19)/ *
13751 S. Wadsworth Park Drive Class C Preferred 2,666
Draper, UT 84020 Stock
David E. Hardy Common Stock 71,750/(12)/ *
60 East South Temple
Salt Lake City, UT 84111
</TABLE>
35
<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>
All Executive Officers and Common Stock 5,712,851/(20)/ 43.4%
Directors as a Group (9 Persons) Class C Preferred 5,666
Stock
</TABLE>
________________________________
* Represents less than 1%.
(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. Does not give effect
to the agreement of certain holders of outstanding options not to
exercise such options pending shareholder approval of an increase in
the authorized capital stock of the Company.
(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. See Footnote 4.
(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 commencing July 1, 1996 (subject to the
satisfaction of certain conditions) to purchase 3,722,832 shares of
Common Stock. Commonwealth and affiliates or associates thereof have
the right to purchase 224,187 shares of Common Stock prior to September
6, 1997 and 270,696 shares of Common Stock prior to December 31, 1997.
Benchmark Equity Group, Inc. ("Benchmark") has the right to purchase
514,559 shares of Common Stock prior to September 6, 1997 and 537,500
shares prior to December 31, 1997. Certain members of management of I-
Link and/or the Company have the right to purchase 825,000 shares of
Common Stock prior to September 6, 1997 and 825,000 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 1,925,141 shares
of Common Stock. The Company has been informed that Mr. Wilkes may be
deemed to indirectly beneficially own the 1,925,141 shares owned by I-
Link, Ltd.
(7) Includes the 1,925,141 shares of Common Stock held of record by I-Link,
Ltd. See previous footnote. Also includes 780,000 shares of Common
Stock purchasable upon exercise of an option exercisable commencing on
July 1, 1996 granted by Four M and options to purchase 20,000 shares of
Common Stock issuable by the Company. Excludes 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 becomes exercisable (to the extent
vested) on June 30, 1997, vests in its entirety on June 30, 2001 and
lapses on June 30, 2002. Of the shares owned, 30,000 have been pledged
to secure the repayment of loans in the principal amount of $90,000
made in March 1997. 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) I-Link, Ltd., a limited partnership, owns an aggregate 1,925,141 shares
of Common Stock. The Company has been informed that T6-G Limited
Partnership may be deemed to indirectly beneficially own 548,891 of the
shares owned by I-Link, Ltd.
(9) Includes 548,891 shares of Common Stock held of record by I-Link, Ltd.
See previous footnote. Also includes 171,192 shares of Common Stock
which are issuable upon conversion of 7,133 shares of Class C Preferred
Stock.
(10) Includes 761,570 shares of Common Stock and 91,771 shares of Common
Stock issuable upon conversion 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 30,726 shares issued, and
an additional 1,052,059 shares of Common Stock which may be purchased,
upon exercise of an option exercisable commencing July 1, 1996 granted
by Four M to the noted shareholder. Also includes (a) 18,048 shares of
Common Stock issuable upon conversion of 752 shares of Class C
Preferred Stock, and (b) 145,000 shares of Common Stock, all of which
163,048 shares 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) 38,501 shares of Common Stock issuable pursuant to
options exercisable
36
<PAGE>
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 4,000 shares of Common Stock and 67,750 shares issuable
pursuant to options exercisable within 60 days of the date hereof.
(13) Includes 416,665 shares of Common Stock subject to the vested portion
of Mr. Edwards' option to purchase 1,000,000 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 525,890 shares
issuable pursuant to options exercisable commencing July 1, 1996
granted by Four M and 243,891 Kanter Shares.
(15) Includes 46,509 shares issued and an additional 494,883 shares of
Common Stock issuable pursuant to options exercisable commencing July
1, 1996 granted by Four M to Commonwealth 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) I-Link, Ltd., a limited partnership, owns 1,925,141 shares of Common
Stock. The Company has been informed that Mr. Radulovic may be deemed
to indirectly beneficially own 269,824 of the shares owned by I-Link,
Ltd.
(17) Includes 269,824 shares of Common Stock held of record by I-Link, Ltd.
See previous footnote. Also includes 500,000 shares of Common Stock
issuable pursuant to options exercisable commencing July 1, 1996
granted by Four M but excludes 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 becomes exercisable (to the extent vested) on
June 30, 1997, 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 shares to become immediately issuable upon exercise 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 41,666 shares of Common Stock issuable pursuant to options
exercisable within 60 days of the date hereof and 54,000 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.
(20) Includes 1,140,243 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 111,984 shares of Common Stock,
into which 4,666 shares of Class C Preferred Stock are convertible.
Also includes 780,000 shares of Common Stock subject of an option
exercisable commencing on July 1, 1996 granted by Four M and 1,925,141
shares owned of record by I-Link, Ltd. (see footnote 5), and excludes
certain unvested options granted by the Company.
Item 12. Certain Relationships and Related 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 bore interest at one percent over the prime rate of interest
established by Southwest Bank of Texas, N.A. The balance due as of December 31,
1996, was $175,682 which will 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.
37
<PAGE>
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.
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 registration
statements on Form S-8.
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.
In January 1996, certain associates and affiliates of Commonwealth
purchased an aggregate of 878,891 shares of Common Stock (the "Kanter Option
Shares") 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.
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, namely, Clay
Wilkes, Floyd Wilkes and Alex Radulovic, have the right to purchase an aggregate
of 825,000 shares of 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 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
38
<PAGE>
the aggregate amount exercised exceeded $200,000 in principal amount, the
exercise period of the remaining Four M Options was extended.
The shares of Common Stock owned by Four M are subject of a lockup
agreement with Commonwealth from and after the termination of the option
agreements and until 12 months from September 6, 1996; provided, however, that
to the extent Commonwealth releases more than 300,000 shares in the aggregate on
behalf of any affiliate or associated person of Commonwealth, any officer or
director of the Company or its subsidiaries or Benchmark, Commonwealth shall
release a number of Four M Shares equal to the same percentage as the number of
shares owned by such person. In addition, the Company has been informed that the
holders of the Four M Options have executed lock-up agreements with Commonwealth
for 12 months after September 6, 1996.
On February 21, 1996, R. Huston Babcock, M.D., a director of the Company,
granted certain options (the "Babcock 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% at 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.
Certain shares of Common Stock owned by Dr. Babcock are subject to a lock-
up agreement with Commonwealth for a period of twelve (12) months from September
6, 1996.
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 from the proceeds of the Class C
Offering.
In September 1996, the Company advanced the sum of $685,000 to FTI to be
utilized 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 is Robert W. Edwards, Jr.,
39
<PAGE>
a brother of John W. Edwards, the Company's President, Chief Executive Officer
and Director. Effective January 1, 1997, the Company acquired all of the
outstanding stock of FTI. See "Item 1. Description of Business."
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.
Certain officers and directors of the Company and/or I-Link have agreed to
vote shares over which they exercise voting power in an aggregate amount of
6,956,000 shares of Common Stock in favor of a proposal to increase the
authorized shares of Common Stock and Preferred Stock of the Company. In
addition, pending the solicitation of the necessary stockholder approval and as
a condition to the first closing of the Class C Offering, securityholders,
including certain officers and directors of the Company and/or I-Link, have
agreed not to exercise any options owned by them unless and until the
shareholders of the Company approve an increase in authorized capital stock.
On September 6, 1996, the Company closed a private placement of 240,000
shares of Class C Preferred Stock and $717,000 of principal amount of
Convertible Promissory Notes (the "Class C Offering"). As a result of the
closing of the Class C Offering, 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 additional acquired in-process research and development expense
of $9.8 million, and an increase to paid-in capital of $9.8 million.
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 of the aggregate
purchase price of the shares of Class C Preferred Stock and Convertible Notes
sold, a non-accountable expense allowance equal to three percent of the gross
proceeds from the sale of the Class C Preferred Stock and Convertible Notes and
certain other specified offering-related costs. Pursuant to the terms of the
Class C Preferred Stock, the shares of Common Stock issuable upon conversion
thereof and any shares of Common Stock issuable as a dividend on such Class C
Preferred Stock may not be publicly sold prior to September 5, 1997 without the
prior written consent of Commonwealth.
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.
40
<PAGE>
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 two percent of the gross
proceeds of the Class C Offering in excess of $10,000,000, for such twelve-month
period; and (iii) the Company agreed to pay Commonwealth a fee of five percent
of the first $5,000,000 and two and one-half percent 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.
Certain officers, directors and affiliated persons, including holders of
the Four M Options, the Kanter Option Shares and the Babcock Option have agreed
with Commonwealth not to sell any shares of Common Stock or options to purchase
Common Stock for a period of 12 months from September 6, 1996 without the prior
written consent of Commonwealth. In addition, holders of the 10% Notes issued by
the Company in February 1996 ("10% Notes") who converted a portion of such Notes
to Common Stock and who acquired Class C Preferred Stock in the Class C Offering
have agreed with Commonwealth not to sell any shares of Common Stock or the
Conversion Shares for a period of twelve (12) months from September 6, 1996,
without the prior written consent of Commonwealth; provided, however,
Commonwealth has agreed that such persons will be permitted to sell a sufficient
amount of the shares of Common Stock or Conversion Shares as will equal the
principal amount of the 10% Note previously held by such shareholder. In
addition, certain officers, directors and affiliated persons of the Company have
agreed not to exercise any options owned by them (and to waive reservation of
the shares of Common Stock underlying such options) until shareholders authorize
such number of additional shares of Common Stock necessary to accommodate the
lowest Conversion Price of the Class C Preferred Stock and, finally, all such
persons have agreed to vote their shares of Common Stock for such increase in
authorized capital.
Commonwealth designated Joseph A. 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.
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 "Item 3. Legal Proceedings" for a description of the terms of the
agreement in principle relating to the settlement of certain litigation and of
the additional consideration to an investor group led by the Company's Secretary
and its Treasurer and Chief Financial Officer in connection therewith.
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.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report.
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.
41
<PAGE>
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)/15/ Escrow Agreement, dated February 21, 1996, by and among
Medcross, Inc., I-Link, Ltd., and De Martino Finkelstein Rosen &
Virga.
2(f)/19/ Form of 8% Convertible Promissory Note.
2(g)/18/ Stock Purchase Agreement dated February 13, 1996, by and among
Medcross, Inc., I-Link, Ltd. and GNET Enterprises, Inc.
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.
3(d)/16/ Articles of Incorporation of I-Link Worldwide Inc.
3(e)/16/ Bylaws of I-Link Worldwide Inc.
3(f) Articles of Incorporation of Family Telecommunications, Inc.
and Articles of Amendment to the Articles of Incorporation.
3(g) Bylaws of Family Telecommunications, Inc.
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.
42
<PAGE>
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)/22/ Form of Convertible Promissory Note issued September 6, 1996.
4(n) Placement Agent's Common Stock Warrant Agreement and
Certificate.
4(o) Consultant's Common Stock Warrant Agreement and
Certificate.
4(p)/22/ 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.
4(q)/22/ 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)/22/ 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)/22/ 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.
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.
43
<PAGE>
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.
10(k)/13/ Termination of Amended and Restated Consulting Agreement, dated
March 5, 1996, by and among Medcross, Inc., Kalo Acquisitions,
LLC, and Jason H. Pollak.
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.
44
<PAGE>
*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 MFS Telecom,
Inc.
10(x) Consulting Agreement dated August 20, 1996 between the Company
and Commonwealth Associates.
10(y) Sales Agency Agreement dated July 1, 1996 between the Company
and Commonwealth Associates and Amendment No. 1 thereto.
10(z) Commercial Lease dated May 21, 1996 between I-Link
Worldwide Inc. and Draper Land Partnership II and First
Amendment dated July 22, 1996.
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) 1997 Recruitment Stock Option Plan.
45
<PAGE>
10(gg) Lease Agreement dated July 1, 1996 between Broadway Associates
and FTI Communications
10(hh) Lease Between Phoenix City Square Partnership
and Robert W. Edwards and Denise A. Edwards
10(ii) Carrier Agreement between MCI Telecommunications
Corporation and FTI, Inc.
10(jj) Strategic Member Reseller Agreement between I-Link
Worldwide Inc. and WealthNet Incorporated
10(kk) Settlement Agreement between WealthNet
Incorporated and Family Telecommunications Incorporated
10(ll) Agreement Regarding Certificate of Deposit between
Draper Land Partnership II and I-Link Worldwide Inc.
21 Subsidiaries of the registrant.
23(b) Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
____________________
/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.
/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.
46
<PAGE>
/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 Registration Statement on Form
SB-2 (File No. 333-17861).
* Indicates a management contract or compensatory plan or arrangement
required to be filed herewith.
(b) There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended December 31, 1996.
47
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
MEDCROSS, INC.
(Registrant)
Dated: August 29, 1997 By: /s/ John W. Edwards
------------------ ---------------------------------
John W. Edwards, Chairman of the
Board, President and
Chief Executive Officer
In accordance with Section 13 of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John W. Edwards Chairman of the Board, August 29, 1997
------------------------ President, Chief Executive
John W. Edwards Officer and Director
/s/ Karl S. Ryser, Jr. Treasurer and Chief Financial August 29, 1997
------------------------ Officer
Karl S. Ryser, Jr.
/s/ David E. Hardy Secretary August 29, 1997
------------------------
David E. Hardy
/s/ Henry Y.L. Toh Director August 29, 1997
------------------------
Henry Y.L. Toh
Director
------------------------
Clay Wilkes
/s/ R. Huston Babcock Director August 28, 1997
------------------------
R. Huston Babcock
/s/ Joseph A. Cohen Director August 27, 1997
------------------------
Joseph A. Cohen
</TABLE>
48
<PAGE>
FINANCIAL STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Title of Document Page
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheet as of December 31, 1996 F-2
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
49
<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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
