UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A#1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 0-17973
MEDCROSS, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2291344
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3227 Bennet Street North, St. Petersburg, Florida 33713
(Address of principal executive offices)
(813) 521-1793
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at October 31, 1996
Common Stock, par value $0.007 10,607,597
Traditional Small Business Disclosure Format (Check One): Yes No X
<PAGE> 1
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
Assets
September 30
1996
<S> <C>
Current assets
Cash and cash equivalents $ 7,354,003
Accounts receivable less allowance of $650,682 791,080
Inventory 830,666
Prepaid expenses 113,945
----------
Total current assets 9,089,694
----------
Property and equipment 4,447,844
Less accumulated depreciation 2,191,641
----------
Net property and equipment 2,256,203
----------
Intangible assets, net of amortization of $245,164 549,916
Restricted cash 1,682,211
Other assets 896,493
----------
Total assets $ 14,474,517
==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 2,189,186
Advance deposits received 233,728
Accrued royalty fees 520,000
Note payable - related party 88,000
Note payable - other 1,027,000
Current portion of long-term debt 461,775
Current obligations under capital lease 187,047
---------
Total current liabilities 4,706,736
Long-term debt 55,447
Obligations under capital leases 328,478
Minority equity interest in consolidated subsidiaries 330,884
Commitments and contingencies -
Stockholders' equity
Preferred stock 2,475,000
Common stock 73,264
Other stockholders' equity 6,504,708
----------
Total stockholders' equity 9,052,972
----------
Total liabilities and stockholders' equity $ 14,474,517
==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Health care service revenue $ 506,099 $ 607,014 $ 1,680,769 $ 2,144,977
Equipment sales and service - - - 337,889
Network service revenue 64,297 - 136,661 -
--------- --------- --------- ---------
Net operating revenue 570,396 607,014 1,817,430 2,482,866
--------- --------- --------- ---------
Cost of goods sold
- equipment sales and service - ( 46,601) - 193,197
Salaries and benefits 670,524 262,787 1,465,607 903,205
Repairs and maintenance 73,867 78,673 217,774 233,161
Network expenses 475,347 - 797,882 -
Provision for doubtful accounts 66,668 18,444 157,531 342,089
Depreciation and amortization 378,315 113,901 903,506 348,594
Acquired in-process research and
development 9,800,000 - 14,577,943 -
Other operating expenses 352,461 341,950 1,443,756 956,486
--------- --------- --------- ---------
Operating loss (11,246,786) ( 162,140) (17,746,569) ( 493,866)
Interest expense 585,850 44,066 1,653,616 124,886
Other income ( 36,251) ( 16,493) ( 49,013) ( 39,892)
Gain on sale of interest in
unconsolidated subsidiary - ( 20,500) - ( 20,500)
Equity in net loss of
unconsolidated subsidiary 3,212 - 3,212 -
--------- --------- ---------- ---------
Loss before minority interest in net income
(loss) of consolidated subsidiaries and
income tax provision (11,799,597) ( 169,213) (19,354,384) ( 558,360)
Minority interest in net income (loss) of
consolidated subsidiaries ( 2,281) 4,160 ( 2,344) ( 3,684)
--------- --------- --------- ---------
Loss before income tax provision (11,797,316) ( 173,373) (19,352,040) ( 554,676)
Income tax provision - - - -
--------- --------- --------- ---------
Net loss $(11,797,316) $( 173,373) $(19,352,040) $( 554,676)
========= ========= ========= =========
Loss per common and share
after preferred dividends $( 2.31) $( .12) $( 5.16) $( .37)
========= ========= ========= =========
Weighted average common shares
outstanding 9,051,408 1,749,841 5,519,449 1,749,389
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash provided (used) by operating activities $(2,149,923) $ 543 $(3,016,238) $
156,525
Cash flows from investing activities
Purchase of property and equipment ( 194,941) ( 2,946) ( 201,768) ( 18,321)
Proceeds from sale of property and equipment - 400 3,251 4,900
Proceeds from sale of interest in
unconsolidated subsidiary - 28,000 - 28,000
--------- --------- --------- ---------
Net cash provided (used)
by investing activities ( 279,877) 25,454 ( 943,341) 14,579
--------- --------- --------- ---------
Cash flows from financing activities
Proceeds (reduction) of note payable
related ( 625,500) - ( 693,333) 218,000
Proceeds (reduction) of note payable
other ( 703,000) ( 50,000) 557,425 ( 151,000)
Release of certificate of deposit
as collateral - - 60,000 -
Increase in restricted cash (1,682,211) - (1,682,211) -
Reduction of long-term debt ( 10,232) ( 86,426) ( 61,983) ( 280,997)
Payment of capital lease obligations ( 60,604) ( 62,338) ( 346,958) (
182,589)
Issuance of preferred stock 2,400,000 - 2,400,000 -
Issuance of common stock 330 - 1,329 -
Additional paid-in capital 9,996,130 - 10,291,196 -
Minority interest distributions - ( 18,250) ( 36,865) ( 54,750)
--------- --------- ---------- ---------
Net cash provided (used)
by financing activities 9,314,913 ( 217,014) 10,488,600 ( 451,336)
--------- --------- ---------- ---------
Effect of foreign currency translation
on cash flows - ( 375) 1 ( 2,233)
--------- --------- ---------- ---------
Increase (decrease) in cash and
cash equivalents 6,970,049 ( 191,392) 7,273,846 ( 282,465)
Cash and cash equivalents at
beginning of period 383,954 270,084 80,157 361,157
--------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 7,354,003 $ 78,692 $ 7,354,003 $ 78,692
========= ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> 4
Supplemental cash flow information
In February 1995 a holder of Class B Preferred Stock converted 9,350 shares into
227,714 shares of Common Stock.
In February 1996, the Company acquired all of the outstanding shares of I-Link
Worldwide, Inc. in exchange for the issuance of 4,000,000 shares of Common Stock
of the Company, of which 2,600,000 shares were being held in escrow.
In February 1996, a holder of Class A Preferred Stock converted 40,000 shares
into 978,891 shares of Common Stock.
In April 1996, holders of certain promissory notes issued by the Company in
February 1996 converted $10,000 in the aggregate into 140,000 shares of Common
Stock.
In June 1996, holders of certain promissory notes issued by the Company in June
1993 converted $180,542 in the aggregate into a 64,372 shares of Common Stock.
In June 1996, a holder of Class A Preferred Stock converted 160,000 shares into
3,915,570 shares of Common Stock.
In July 1996, a holder of a promissory note issued by the Company in June 1993
converted $69,612 into 24,750 shares of Common Stock.
In August 1996, the holders of certain promissory notes issued by the Company in
February 1996 converted $25,000 in the aggregate into a total of 350,000 shares
of Common Stock.
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 ILINK, Ltd. were released.
In August 1996, pursuant to the issuance of a promissory note to William Flury,
Vice President of Sales and Marketing of I-Link, a warrant to purchase 5,000
shares of Common Stock was issued at an exercise price of $2.50 per share. An
expense equal to the difference between the exercise price of the warrant and
the closing bid price of the Common Stock on the date of issuance of the warrant
was expensed.
In September 1996, the Company closed a private placement offering 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. These items were recorded as a reduction to the
proceeds of the offering.
Through September 1996, I-Link financed approximately $506,609 of equipment
through capital leases.
<PAGE> 5
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three-month and nine-month periods ended September 30, 1996
and September 30, 1995, (b) the financial position at September 30, 1996, and
(c) cash flows for the three-month and nine-month periods ended September 30,
1996 and September 30, 1995, have been made.
The unaudited consolidated financial statements and notes are presented as
permitted by Form 10-QSB. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The
accompanying consolidated financial statements and notes should be read in
conjunction with the audited financial statements and notes of the Company for
the fiscal year ended December 31, 1995. The results of operations for the
three-month and nine-month periods ended September 30, 1996 are not necessarily
indicative of those to be expected for the entire year.
Note 2 - Acquisition of subsidiary
In February 1996, the Company closed its acquisition of all of the issued and
outstanding common stock of I-Link Worldwide Inc., a Utah corporation ("I-Link")
from ILINK, Ltd., a Utah limited partnership in exchange for the issuance of an
aggregate of 4,000,000 shares of common stock of the Company. The acquisition
was accounted for using the purchase method of accounting. The results of
operations of the acquired enterprise are included in the consolidated financial
statements beginning February 13, 1996. Pursuant to the terms of the stock
purchase agreement, 2,600,000 shares of the common stock issued pursuant to the
acquisition of I-Link were placed in escrow. 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 (See Note 3 -
Intangible Assets). In addition, 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 3,000,000 shares issued to
date) was allocated to the net liabilities of $2,003,000 (based on their fair
market value) 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.
I-Link is in the business of delivering business communications services via the
emerging worldwide data communication networks (which includes the Internet).
I-Link seeks to provide business communications solutions and enhanced
capabilities to existing users of traditional telecommunications services, at
substantial cost savings to its customers through utilization of the Internet
and other existing data communications networks. I-Link's first business
communications product will be marketed under the name "Fax4Less[TM]".
<PAGE> 6
Note 2 - Acquisition of subsidiary - continued
The following presents the proforma financial information of the Company and
I-Link, as applicable for the nine months ended September 30, 1996 and 1995
assuming such transaction had occurred on January 1, 1995:
<TABLE>
<CAPTION>
Nine Months Ended Net Loss Per
September 30, 1996 Revenue Net Loss Common Share
-------------------------- ---------- ------------ -------------
<C> <S> <S> <S>
Company<F1>1/ $1,817,430 $(19,352,044) $(5.16)
I-Link<F2>2/ 48,585 ( 139,683) ====
--------- ---------
Combined 1,866,015 (19,491,727)
Proforma adjustment - 5,678,360
--------- ---------
Proforma combined $1,866,015 $(13,813,367) $(4.07)
========= ========= ====
Nine Months Ended Net Loss Per
September 30, 1995 Revenue Net Loss Common Share
-------------------------- ----------- ----------- -------------
Company $ 2,482,866 $( 554,676) $( .37)
I-Link<F3>3/ 175,829 ( 690,252) ====
--------- ---------
Combined 2,658,695 (1,244,928)
Proforma adjustment - (5,944,192)
--------- ---------
Proforma combined $ 2,658,695 $(7,189,120) $(2.31)
========= ========= ====
<FN>
<F1> 1/Includes I-Link operations from February 13, 1996 through September 30, 1996.
<F2> 2/For the period January 1, 1996 through February 12, 1996.
<F3> 3/For the period January 1, 1995 through September 30, 1995.
</TABLE>
Note 3 - Restricted Cash
During the third quarter of 1996, I-Link entered into a 24 month, $3.5 million
operating lease with IBM Credit Corporation. As a condition of that lease, I-
Link obtained from Zions First National Bank a letter of credit totaling $1.575
million. These monies are held in an escrow account at Zions First National
Bank and bear interest which is paid to I-Link. These funds will be released
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 has restricted cash totalling $107,211 used to secure lines of
credit in connection with capital leases at IBM Credit Corporation totalling
approximately $610,000. The monies are held in an escrow account at First Texas
Bank and bear interest which is to be paid to I-Link.
Note 4 - Notes Payable
Simultaneous with the closing of its acquisition of I-Link, the Company
completed a private placement of $1,000,000 in aggregate principal amount of
convertible promissory notes (the "10% Notes"). The 10% Notes were payable upon
the earlier of August 31, 1996 (subject to extension) or the Company's receipt
of proceeds of at least $4,000,000 from subsequent debt or equity offerings.
The 10% Notes bear interest payable semi-annually at the rate of 10% until
August 31, 1996 (13% after such date if the term of the 10% Note is extended).
Up to $1,250 of each $50,000 in principal amount of note is convertible at any
time at the option of the holder, into a maximum of 350,000 shares of Common
Stock at the rate of approximately $.0714 per share, subject to certain anti-
dilution adjustments. The 10% Notes may be extended until February 28, 1997
upon payment by the Company of 2.5% of the then outstanding principal balance
of the 10% Note. The proceeds of such offering were used to pay outstanding
accounts payable and other debts of I-Link. In August 1996 $25,000 in the
aggregate of these notes were converted into 350,000 shares of the Company's
Common Stock and the remaining principal balances plus interest were paid.
<PAGE> 7
Note 4 - Notes Payable - continued
In addition, the Company assumed notes payable to limited partners of ILINK,
Ltd. in the amount of $643,333 and to other parties in the amount of $104,575.
In June 1996, the Company issued promissory notes in the amount of $375,000.
These promissory notes were due on the earlier of December 31, 1996 or the
receipt of at least $4.8 million from debt or equity financings, with interest
at the rate of 8% per annum. The proceeds of the promissory notes were used for
I-Link working capital purposes. These notes were paid in full in September
1996.
Simultaneous with the closing of the Company's offering of Class C Preferred
Stock, the Company issued an aggregate of $717,000 in principal amount of
Convertible Promissory Notes. Each Convertible Note is due on April 1, 1997
with interest at the rate of 8% percent per annum. The entirety of the unpaid
principal amount of the Convertible Notes will be automatically converted into
shares of Class C Preferred Stock at the rate of $60 per share of Class C
Preferred Stock. The Convertible Notes are convertible into an aggregate of
11,950 shares of Class C Preferred Stock. The proceeds of the promissory notes
were used for I-Link working capital purposes.
The Company has recorded interest expense (non-cash) of $1,435,000 related to
above promissory notes and certain warrants to purchase common stock issued in
connection with the above notes payable. The interest expense is calculated as
the difference between the conversion price per common share per the promissory
notes or warrant as compared to the market price for the common stock on the
date the promissory notes or warrants were issued. The interest expense was
recognized over the period between the date the promissory notes were
issued and the date the promissory notes or warrants could first be converted.
Note 5 - Commitments and Contingencies
The remaining portion of the I-Link common stock purchase price placed in escrow
will be released upon the satisfaction of the contingency described in Note 2
above.
Note 6 - Earnings Per Common Share
Earnings per common share are based upon the weighted average number of common
shares outstanding and the dilutive effect of common stock equivalents
consisting of stock options and warrants, convertible debt, and convertible
preferred stock.
Loss per share for the three and nine months ended September 30, 1996 includes
cumulative preferred stock dividends not paid in the current periods of $1,154
and $54,476 respectively. Loss per share for the three and nine months ended
September 30, 1996 also includes a non-cash preferred stock dividend on Class
C Convertible Cumulative Redeemable Preferred Stock of $9,078,261. The dividend
is calculated as the difference between the conversion price per common share
per the Class C Private Offering Memorandum as compared to the market price of
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. The net loss for the three and
nine months ended September 30, 1995 includes cumulative preferred stock
dividends not paid to $32,687 and $95,982 respectively.
Note 7 - Lease Commitments
I-Link leases approximately 1,500 square feet of space, which space housed its
corporate offices in Austin, Texas. Such lease has a term of three years, which
is scheduled to expire on Novemver 30, 1997 but which I-Link is negotiating to
terminate. Pursuant to the terms of such lease, I-Link pays rent on a monthly
basis of $1,740. I-Link has recently entered into a ten-month lease for 5,000
square feet of space in Austin, Texas, which housed its corporate offices.
<PAGE> 8
Note 7 - Lease Commitments - continued
Pursuant to such lease, I-Link will pay rent of $5,000 per month. I-Link also
leases several other spaces to house its POPs throughout the United States.
Such spaces vary in size and are rented on a month-to-month basis.
I-Link currently leases and occupies approximately 6,500 square feet of office
space, in Draper Utah, pursuant to a commercial lease dated May 21, 1996, with
an unrelated third party. The initial lease term is five years commencing on
July 8, 1996 at a base rent of $5,451 per month. In addition, I-Link will be
responsible for certain improvements to such facilities above $97,120. In
September 1996, I-Link entered into a second lease for approximately 14,000
square feet of space from the same landlord in an adjacent building pursuant to
a commercial lease dated September 11, 1996. I-Link's offices and network
operations facilities will be moved to this space upon its completion. 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. In October 1996, I-Link delivered $214,000 in certificates
of deposit to the landlord as a security deposit under the second lease. When
the Company is able to occupy the new office space and commences lease payments
under the second lease, it is Management's intent to sublet the office space
under the first lease.
In September 1996, I-Link entered into a two year equipment lease with IBM
Credit Corporation 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 from Zions First National
Bank, a standby letter of credit totaling $1.575 million to the benefit of IBM
Credit Corporation. In order to obtain this letter of credit, I-Link deposited
$1.575 million into a certificate of deposit to be held at Zions First National
Bank, until the IBM Credit Corporation obligation is satisfied. The certificate
of deposit bears interest which is payable to the Company, 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 repurchased at fair market value.
I-Link is obligated to pay approximately $450,000 every quarter.
Through September 1996, I-Link financed approximately $506,609 of equipment
through IBM Credit Corporation. Under the terms of those credit arrangements,
I-Link is obligated to pay approximately $60,000 every quarter.
Note 8 - Geographic Segment Information
The Company's operations consist of providing telecommunications network
services and diagnostic and clinical outpatient health care services
domestically and the sale and service of used medical equipment in the People's
Republic of China (PRC). The corporate office provides management and
operational services for network services and domestic outpatient health care
services. The eliminations represent charges for these services to entities
included in the consolidation. Financial information for the different
geographic segments is as follows:
<TABLE>
<CAPTION>
Domestic
------------------------
Nine Months Ended Network Corporate/
September 30, 1996 Health Care Services China Management Eliminations Consolidated
- -------------------- ----------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <S>
Revenue $ 1,496,899 $ 136,661 $ - $ 251,464 $( 67,594) $ 1,817,430
========= ========== ========= ======== ========= ==========
Operating Profit (Loss)$ 61,280 $(18,854,872) $( 22,582) $( 468,276) $( 67,594) $(19,352,044)
========= ========== ========= ======== ========= ==========
Identifiable Assets $ 2,671,339 $ 10,824,862 $ 1,012,501 $ 171,685 $( 205,870) $ 14,474,517
========= ========== ========= ======== ========= ==========
<CAPTION>
Domestic
-------------------------
Nine Months Ended Network Corporate/
September 30, 1995 Health Care Services China Management Eliminations Consolidated
- -------------------- ----------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <S>
Revenue $ 1,907,911 $ - $ 337,889 $ 340,036 $( 102,970) $ 2,482,866
========= ========== ========= ======== ========= =========
Operating Profit (Loss)$ 258,469 $ - $( 197,230) $( 452,135) $( 102,970) $( 493,866)
========= ========== ========= ======== ========= =========
Identifiable Assets $ 3,120,198 $ - $ 964,635 $ 155,559 $( 70,108) $ 4,170,284
========= ========== ========= ======== ========= =========
</TABLE>
<PAGE> 9
Note 9 - Subsequent Events
In October 1996, in conjunction with I-Link's Utah lease of office and network
operations facilities, I-Link deposited in escrow with Zions First National Bank
the sum of $214,000 in the form of four separate certificates of deposit. One
CD has a four year maturity, the second a three year maturity, the third a two
year maturity, and the fourth a one year maturity. As each CD reaches maturity,
and provided I-Link is not in default under the lease, the money in the mature
CD is released to I-Link. So long as these CD's are held in escrow, they earn
interest at varying rates which is paid to I-Link.
Note 10 - Amendment of Form 10-QSB for the Period Ended September 30, 1996:
The Company has amended its original filing of Form 10-QSB for the period ended
September 30, 1996 based on its audit of the year ended December 31, 1996
financial statements. The amendments are primarily associated with (1) the
expensing of acquired in-process research and development costs acquired as
part of the acquisition of I-Link which were originally capitalized and other
minor adjustments related to the purchase price allocation; (2) the recording of
interest expense (non-cash) related to promissory notes issued with a
convertible feature into common stock at a conversion price per common share
below the market value of the common stock and certain warrants issued in
relation to other notes where the warrant price was below the fair market value
of the common stock; (3) correction of capitalized lease costs and related
obligations; (4) inclusion in the loss per share calculation of a preferred
stock dividend (non-cash) in the amount of $9.078 million on Class C Cumulative
Convertible Redeemable Preferred Stock calculated as the difference between the
conversion price per common share per the private placement memorandum as
compared to the market price for the common stock on the date the preferred
shares were sold; and (5) a correction of the weighted average shares
outstanding calculation. The following table reflects the correctons made to
the three months and nine months ended September 30, 1996:
<TABLE>
<CAPTION>
As Originally
Reported Adjustments As Adjusted
------------- ----------- -----------
Income statement for three
months ended September 30, 1996:
<S> <C> <C> <C>
Depreciation & amortization 1,258,420 ( 880,105) 378,315
Acquired in-process research
& development - 9,800,000 9,800,000
Other operating expenses 459,833 ( 107,372) 352,461
Interest expense 95,850 490,000 585,850
Net loss (2,494,793) (9,302,523) (11,797,316)
Loss per common share after
preferred dividends ( .27) ( 2.04) ( 2.31)
Income statement for the nine
months ended September 30, 1996:
Depreciation & amortization 2,056,046 (1,152,540) 903,506
Acquired in-process research
& development 2,034,103 12,543,840 14,577,943
Other operating expenses 1,589,721 ( 145,965) 1,443,756
Interest expense 218,616 1,435,000 1,653,616
Net loss (6,671,705) (12,680,339) (19,352,040)
Loss per common share after
preferred dividends ( .78) ( 4.38) ( 5.16)
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
As Originally
Reported Adjustments As Adjusted
------------- ----------- -----------
Balance sheet as of September 30, 1996:
<S> <C> <C> <C>
Property & equipment 4,584,331 ( 136,487) 4,447,844
Less accumulated depreciation 2,216,641 ( 25,000) 2,191,641
Intangible assets, net
of amortization 11,956,114 (11,406,198) 549,916
Other assets 835,342 61,151 896,493
Current obligations under
capital lease 244,749 ( 57,702) 187,047
Obligations under capital leases 407,263 ( 78,785) 328,478
Other stockholder's equity 17,824,755 (11,320,047) 6,504,708
</TABLE>
Item 2 - Management's Discussion and Analysis
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto
appearing elsewhere herein and in conjunction with the Management's Discussion
and Analysis set forth in the Company's Form 10-KSB/A#1 for the fiscal year
ended December 31, 1995.
Certain statements contained herein are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate
such transactions and achieve such events or results is subject to certain risks
and uncertainties. Such risks and uncertainties include, but are not limited
to, the existence of demand for and acceptance of the Company's products and
services, regulatory approvals and 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 Operations
The following table represents the net operating revenue and operating profit
(loss) of the Company for each category of service offered. The historical
results of operations for the Company include the acquired operations of I-Link
from February 13, 1996 through September 30, 1996. The net operating revenue
and operating profit (loss) shown are net of intercompany transactions that
were eliminated in consolidation.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUE
Diagnostic Imaging $ 444,809 $ 534,049 $ 1,496,899 $ 1,907,911
Sales and Services of Medical Equipment - - - 337,889
Network Services 64,297 - 136,661 -
Management and Other 61,290 72,965 183,870 237,066
--------- --------- --------- ---------
$ 570,396 $ 607,014 $ 1,817,430 $ 2,482,866
========= ========= ========= =========
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OPERATING PROFIT (LOSS)
Diagnostic Imaging $( 31,653) $ 21,339 $ 61,280 $ 258,469
Sales and Services of Medical Equipment ( 4,484) 44,921 ( 22,582) ( 197,230)
Network Services (11,057,656) - (17,419,868) -
Management and Other ( 152,993) ( 228,400) ( 365,399) ( 555,105)
--------- --------- --------- ---------
$(11,246,786) $( 162,140) $(17,746,569) $( 493,866)
========= ========= ========= =========
</TABLE>
Diagnostic Imaging
Net operating revenue from diagnostic imaging services decreased by 16.7% and
21.5% for the three and nine months ended September 30, 1996, respectively, as
compared to the same periods in 1995. Medcross Imaging, Ltd. accounted for
$63,901 and $324,684 of the decrease for the three and nine months ended
September 30, 1996, as compared to the same periods in 1995. This decrease in
revenue is primarily due to the decrease in the average revenue per patient,
which was caused by a decrease in the per patient charge to the hospital clients
pursuant to service contracts placed into effect on October 1, 1995. These
contracts extended the service period to the hospitals from February 29, 1996
to February 28, 1997. While the charge per procedure is reduced, each hospital
must meet specific monthly minimum quotas. The decrease in average revenue per
patient was offset by an increase of 15% in the number of procedures performed
for the three months ended September 30, 1996, compared to the same quarter in
1995. The number of procedures performed decreased 2% for the nine months
ending September 30, 1996, compared to the same period in 1995. MRI revenue of
Tampa MRI decreased $39,813 and $60,285 for the three and nine months ending
September 30, 1996, respectively, as compared to the same periods in 1995. This
decrease is due to a decrease in the average revenue per patient of
approximately 25%, offset by increases in the number of procedures performed of
11.2% for the three-month period ending September 30, 1996 and 21.3% for the
nine-month period ended September 30, 1996, compared to the same periods in
the prior year. Tampa MRI has obtained and will continue its efforts to obtain
managed care contracts. The participation in the managed care environment has
caused a decrease in the charges per procedure, however, these decreases have
been partially offset by increases in the number of procedures performed. The
revenue of the ultrasound operations increased 29% for the three-month period
ended September 30, 1996 and decreased 10.8% for the nine-month period ended
September 30, 1996, as compared to the same periods in 1995. This is mainly
due to an increase in the number of procedures performed of 8.7% for the third
quarter of 1996 and a decrease in the number of procedures performed of 7.1% for
the nine months ending September 30, 1996, respectively, as compared to the same
periods in 1995. Overall, revenue from diagnostic imaging services has
decreased due to a decrease in average revenue per procedure of 25% and 20.7%
for the three and nine months ending September 30, 1996 as compared to the
corresponding periods of 1995. This decrease has been partially offset by an
increase in the number of procedures performed of 11.1% for the three months and
1% for the nine months ending September 30, 1996, as compared to the same
periods of 1995.
The operating profit from diagnostic imaging services decreased by $52,992 for
the three-month period ending September 30, 1996, compared to the same period
in 1995. The decrease was caused by a decline in operating profit from Medcross
Imaging, Ltd. of $53,046, a decrease in operating profit from Tampa MRI's MRI
operations of $19,472, offset by an increase in the operating profit of the
ultrasound operations of $19,526, compared to the corresponding periods of the
prior year. The operating profit from diagnostic imaging services decreased
$197,189 for the nine-month period ending September 30, 1996, compared to the
same period in 1995. The decrease was caused by a decline in operating profit
from Medcross Imaging, Ltd. of $236,011, offset by increases in operating profit
from Tampa MRI's MRI operations of $34,364, and an increase in the operating
profit of the Tampa MRI's ultrasound operations of $2,458, compared to the
corresponding period of the prior year. The decline in the diagnostic imaging
operating profit for the three-month and nine-month periods ending September 30,
1996 was a result of the decrease in diagnostic imaging revenue, offset by a
decrease in total operating expenses for diagnostic imaging of $36,248 for the
three months ended September 30, 1996 and $213,823 for the nine months ended
September 30, 1996 as compared to the same period in 1995.
<PAGE> 12
The Company is considering the sale of its diagnostic imaging 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.
During the past several years, there has been increasing pressure from federal
and state regulatory and legislative bodies to prevent physicians from referring
patients to diagnostic imaging facilities in which they have an ownership
interest. Legislation passed in the State of Florida, where all of the
Company's diagnostic imaging services operate, placed a fee cap on diagnostic
imaging services. An injunction has been obtained preventing the State of
Florida from enforcing the fee cap. See "Item 3. Legal Proceedings" in the
Company's Annual Report on Form 10-KSB/A#1 for the year ended December 31, 1995.
Also, see Part II - Other Information, Item 1. Legal Proceedings.
Sales and Service of Medical Equipment
The Company sells and services used and refurbished computerized tomography (CT)
scanners in the People's Republic of China through a joint venture company,
Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of which it
owns 51%. In the first quarter 1995, the Company's Beijing office, which was
closed on May 31, 1995, completed the installation of two CT scanners. The
responsibilities for the parts depot and the inventory of the Company's Beijing
office were transferred to SMHME. The Company has elected to fully reserve for
all amounts due from the sale of the CT scanners sold by its Beijing office.
This resulted in an expense of $281,438 in the first quarter of 1995 and an
allowance for doubtful accounts of $315,753 as of September 30, 1996. The
Company has held discussions regarding the sale of its Beijing operations. No
assurance can be given regarding the outcome of such discussions.
Management and Other
Net operating revenue from management and other activities decreased by $11,675
in the third quarter of 1996 as compared to the same period in 1995 and by
$53,196 for the nine months ended September 30, 1996 as compared to the same
period in 1995. The decrease was primarily related to the management contracts
with Bay Area Renal Stone Center ("BARSC"). The BARSC contract accounted for
$11,775 and $27,475 in management fees for the three and nine month periods in
1995, respectively, and no management fees in 1996. The net operating loss from
management and other activities decreased 33% and 34% in the three-month and
nine-month periods ended September 30, 1996, respectively, as compared to the
same periods in 1995. Corporate overhead expenses decreased $87,082 and
$242,902 for the three-month and nine-month periods ended September 30, 1996,
respectively, as compared to the same periods in the prior year.
Telecommunications Network and Related Services - I-Link
The operating revenue of network and related services from I-Link, was $64,297
for the third quarter of 1996 and $136,661 for the nine months ended September
30, 1996. The net operating loss from network and related services was
$11,057,656 and $17,746,569 for the three and nine months ending September 30,
1996. The expenses incurred by I-Link during the third quarter were primarily
attributable to the build-out of the I-Link network and the expense of
$9,800,000 in acquired in-process research and development associated with the
issuance of 1,600,000 shares related to the purchase of I-Link (see Note #2 to
the Financial Statements). This network is utilized in delivering I-Link's
products and services. The year to date loss was primarily due to acquired
in-process research and development costs expense of $4,777,943 in the first
quarter of 1996 and $9,800,000 for the three months ending September 30, 1996
pursuant to the purchase of the common stock of I-Link by the Company.
Excluding the acquired in-process research and development expense, the
operating loss of network and related services was $1,257,656 and $2,841,925
for the three and nine months ending September 30, 1996, respectively.
I-Link expenditures to date have been primarily related to the development of
its communication product, Fax4Less, which is to be released in the near future.
These expenditures include software research and development, network
equipment, network buildout, operational facilities and infrastructure.
Expenditures also include the formation of a sales and marketing team, personnel
and plan.
<PAGE> 13
Consolidated Operating Results
Net operating revenue of the Company decreased 6% in the third quarter of 1996
compared to the same quarter of 1995 and 26.8% for the nine months ended
September 30, 1996 compared to the same period in the prior year. This decrease
was mainly due to the sale of CT scanners in China during the first quarter of
1995 and none in 1996 and the decrease in the net operating revenue of
diagnostic imaging services in 1996 as compared to 1995. Salaries and benefits
increased $407,737 and $562,402 for the three and nine months ending September
30, 1996, respectively, compared to the same periods in 1995. This increase was
due to the inclusion of salaries and benefits of $410,432 and $783,346 from
network and related services during the third quarter 1996 and the nine months
ended September 30, 1996, respectively, which was offset by a decrease in
salaries and benefits for diagnostic imaging, sales and service of medical
equipment and management and other of $2,695 and $220,944 during such periods.
Depreciation and amortization increased $264,414 in the third quarter of 1996
compared to the third quarter of 1995 and increased $554,912 for the nine
months ended September 30, 1996 compared to the nine months ended September 30,
1995 due to the inclusion of I-Link, offset by a decrease from diagnostic
imaging. The provision for doubtful
accounts increased $48,224 in the third quarter of 1996 compared to third
quarter of 1995 and decreased $184,558 for the nine months ended September 30,
1996 compared to the nine months ended September 30, 1995. This change is due
to the collection, in the second quarter of 1995 of amounts previously written-
off, and the write-off of the receivables due from the foreign operations in the
first quarter of 1995, none of which occurred in 1996. Other operating expenses
increased $10,511 in the third quarter of 1996 compared to the third quarter of
1995. This increase is due to the inclusion of $145,404 from network and
related services, offset by a decrease of operating expenses of $134,893 from
diagnostic imaging, sales and service of medical equipment, and management and
other activities. In the nine months ended September 30, 1996, other operating
expenses increased $487,270 compared to nine months ended September 30, 1995.
This increase is due to the inclusion of operating expenses from network and
related services of $790,829 offset by a decrease in operating expenses of
$303,559 from diagnostic imaging, sales and service of medical equipment,
and management and other activities.
Liquidity and Capital Resources
As a consequence of the I-Link acquisition and concurrent and subsequent
financings, most of the Company's balance sheet items at September 30, 1996 have
significantly increased from their respective levels at September 30, 1995.
Concurrent with the Company's acquisition of the securities of I-Link in
February 1996, the Company issued an aggregate of $1 million in 10% Notes and
received net proceeds of $845,000. The proceeds of such offering were used to
pay operating expenses and certain other indebtedness of I-Link. In the second
quarter of 1996, three loans evidenced by promissory notes, totalling $500,000,
were made to the Company. The proceeds of these notes were used to pay
operating expenses and certain outstanding indebtedness of I-Link. Warrants
to purchase up to 150,000 shares of the common stock of the Company were
issued in conjunction with these promissory notes.
In September 1996, the Company closed an offering of 240,000 shares of its Class
C Convertible Cumulative Redeemable Preferred Stock (the "Class C Preferred
Stock"), the gross proceeds of which were $14.4 million. The net proceeds were
earmarked for furthering operations of I-Link and will be used to repay short-
term debt, to pay for software licensing fees and current payables, to fund
network operations, to pay for marketing and advertising programs, to expand
I-Link's network infrastructure and marketing, and for general working capital
purposes. Simultaneous with the closing of the private placement of the Class
C Preferred Stock, the Company issued $717,000, in the aggregate of 8%
Convertible Promissory Notes, the proceeds of which will be used to further
the operations of I-Link and which are due April 1, 1997.
During the first quarter of 1995, the Company received advances totaling
$218,000 from Mortgage Network International, payable on demand. One of the
Company's directors has management control over Mortgage Network International.
The advances were subsequently formalized by the Company issuing a Promissory
Note bearing interest at 1% over prime rate of Southwest Bank of Texas, N.A.
with a maturity of October 1, 1995. Subsequent to October 1, 1995, the Company
and Mortgage Network International modified the note such that: (i) a principal
payment in the amount of $88,000 is due and payable on December 31, 1996; (ii)
interest thereon is payable monthly at a rate of 10.5%; and (iii) the remaining
<PAGE> 14
principal amount of $130,000 with interest thereon at the rate of 10.5% will be
paid in 36 equal monthly payments of $4,225.32 beginning December 10, 1995.
The working
capital position of the Company was $4,382,958 at September 30, 1996 and a
deficit of $315,573 at December 31, 1995. Cash flow used by operating
activities was $2,149,923 and $3,016,238 for the three and nine months ended
September 30, 1996 compared to cash flow provided by operations of $543 and
$156,525 for the same periods in 1995. Cash flow used by operating activities
includes $1,958,255 and $2,765,408 attributable to the inclusion of I-Link
in 1996.
Investing activities during the nine-months ending September 30, 1996 related to
the purchase of additional computer equipment for I-Link.
During the three and nine months ended September 30, 1996, the Company reduced a
portion of its long term debt and capital lease obligations by $70,836 and
$408,941, respectively. The Company increased its capital lease obligations
by $69,811 and $605,610 for the three and nine month periods ended September 30,
1996 due to the purchase of computer equipment for I-Link. Notes payable to
related parties were reduced by $625,500 and $693,333, for the three and nine
months ended September 30, 1996, respectively. Notes payable to others were
reduced by $703,000 and were increased by $557,425, for the three and nine
months ended September 30, 1996, respectively. These reductions include
indebtedness of I-Link. The inclusion of I-Link in the first quarter of 1996
increased capital lease obligations by $99,001, notes payable to related parties
by $693,333, and notes payable to others of $104,575. As of September 30, 1996,
the balance outstanding under the FUNB line of credit was $310,000. The Company
was in violation of loan covenants regarding cash flow coverage ratios and past
days sales in accounts receivable under the line of credit at September 30,
1996, However, the FUNB has waived such non-compliance through December 31,
1996. The Company and FUNB reached an agreement pursuant to which the Company
has agreed to secure alternative financing to repay amounts outstanding under
the Line of Credit by June 30, 1996; however, the Company was unable to secure
such financing, so that the Company is obligated to repay amounts outstanding
under the Line of Credit in increments of $10,000 per month which commenced
July 1, 1996, pursuant to the Company's agreement with FUNB, subject to
negotiation of the terms of a balloon payment thereafter.
During the remainder of 1996 and 1997, the Company plans to utilize its cash to
fund the cash flow deficit related to the business of I-Link and to market
Fax4Less and subsequent product offerings. The Company anticipates that cash
requirements in these areas will be at increasingly higher levels than those
experienced in the first three quarters of 1996 in preparation for initial
market penetration of Fax4Less. To a large extent, the Company's ability to
develop and market Fax4Less and other products and the timing thereof is
dependent on the working capital and financing alternatives available to the
Company. The Company expects to fund a significant portion of its equipment
purchases through its arrangement with IBM Credit Corporation or financing
arrangements with other institutions. The Company's working capital may be
derived from several sources, such as cash from operating activities, public
or private financings and asset sales. The Company may sell certain operating
or other assets which are underutilized or deemed not to be a part of its
ongoing operations. There are, however, no definitive arrangements for any
such asset sales. The Company has outstanding warrants to purchase an aggregate
of 331,126 shares of Common Stock at $1.51 per share (see "Legal Proceedings")
and 750,000 shares of Common Stock at $2.50 per share, subject to adjustment.
The closing sale price of the Company's Common Stock was $5.875 on November 1,
1996. There can be no assurance, however, that any of such warrants will be
exercised.
The Company believes that its anticipated short-term needs for working capital
will be adequately met by the utilization of existing cash balances and
available credit from its arrangement with IBM Credit Corporation. However,
the Company anticipates that additional funds will be necessary from public or
private financing markets to successfully integrate and expand the business of
I-Link and to discharge outstanding indebtedness, including the 8% Notes, the
Mortgage Network International advances and the outstanding balance of the FUNB
line of credit. 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
issue significant debt or equity securities in order to obtain additional
financing.
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been advised that the State of Florida's appeal of the
injunction issued by the Florida Circuit Court, Second Judicial Circuit,
enjoining the fee cap provision (See discussion in the Company's 1995 Form
10-KSB/A#1) has been dismissed. In addition, the circuit court action has
been dismissed.
A Complaint was filed on April 12, 1996, by JW Charles Financial Services, Inc.
("JWC") against the Company in Palm Beach County Florida Circuit Court, JW
Charles Financial Services, Inc. v. Medcross, Inc., Case No: CL96-3218. JWC
was issued a Common Stock Purchase Warrant ("Warrant") on or about November 3,
1994 by the Company. The alleged terms of the Warrant granted JWC the right
to purchase from the Company 250,000 shares of the Company's Common Stock
subject to adjustment. On or about February 12, 1996, JWC made written demand
to the Company to invoke its rights to have the common shares underlying the
Warrant registered pursuant to the terms of the Warrant. The Complaint alleges
that the Company breached the terms of the Warrant by failing to prepare and
file with the Securities and Exchange Commission ("SEC"), a registration
statement covering the common stock underlying JWC's Warrant. JWC alleges a
breach of contract; and requests specific performance, i.e., registering the
shares with the SEC, against the Company. JWC also demands damages in the
amount of $2,728,478.00 plus interest, reasonable attorneys fees, and forum
costs. The Company believes that it has a meritorious defenses to the
Complaint.
On May 6, 1996, the Company filed an Answer, Affirmative Defenses and
Counterclaim to the Complaint filed by JWC. The Company's counterclaim seeks
damages, cancellation of warrants, and interest and costs. The matter is on
the five week trial calendar commencing November 18, 1996; however, it is
unknown whether trial will be conducted during such period.
Item 5. Other Information
In October 1996, I-Link entered into three-year employment agreements with Karl
S. Ryser, Jr., I-Link's Chief Financial Officer, and with William 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,
under the term of their respective employment agreements, each of Mr. Ryser and
Mr. Flury is entitled to options to purchase 250,000 shares of Common Stock of
the Company exercisable at an exercise price equal to the closing bid price of
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 and bonus for that respective
year. Each of the employment agreements contains confidentiality and non-
competition provisions.
<PAGE> 16
In September 1996, the Company advanced the sum of $685,000 to Family
Telecommunications, Inc. ("FTI") to be utilized by FTI to acquire from Harris
Corporation, certain items of telecommunications equipment consisting of
telecommunication 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. FTI will then return the funds to I-Link. The majority owner of FTI
is Robert W. Edwards, a brother of John Edwards, I-Link's President and CEO.
In September 1996, John Edwards, President and Chief Executive Officer of
I-Link, was elected President and Chief Executive Officer of the Company, Clay
Wilkes, Chief Technical Officer of I-Link, was elected Chairman of the Board of
the Company, and Karl S. Ryser, Jr., Chief Financial Officer of I-Link, was
elected Treasurer of the Company.
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 loan plus a loan origination fee of
$5,000 was paid in September 1996. In connection with such loan, the Company
issued Mr. Flury a warrant to purchase 5,000 shares of Common Stock for two
years at $2.50 per share. The funds from the loan were used to general working
capital purposes of I-Link.
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 issued discount),
which sums were paid in August 1996. In connection with such loan, the Company
issued 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.
On April 29, 1996, the Company was notified that I-Link was in breach of its
contractual obligation to make payments to Spyglass. Spyglass provides software
licenses to I-Link. I-Link was obligated to pay Spyglass Initial and Quarterly
Minimum License Fees in the amount of $45,000 and $63,750, respectively no later
than 30 days subsequent to the end of each calendar quarter that the payments
were due. Total indebtedness claimed by Spyglass is $370,000, inclusive of
late payment fees. The Company was notified by Spyglass that it claims the
right to terminate the agreement in its entirety in the event the breach of the
agreement is not cured within 30 days. In October 1996, I-Link satisfied the
obligation with Spyglass.
On April 8, 1996, I-Link entered into a three year Employment Agreement with
John Edwards. Pursuant to the terms of the Employment Agreement, Mr. Edwards
will be employed as the Chief Executive Officer and a Director of I-Link, and
will be required to devote substantially all of his working time to the business
and affairs of I-Link. Mr. Edwards is entitled under his Employment Agreement
to receive compensation at the rate of $175,000 per year and is entitled to a
profitability bonus in the discretion of the I-Link Board of Directors and to
participate in fringe benefits of the Company as are generally provided to
Executive Officers. In addition, Mr. Edwards is entitled to receive an option
to purchase 1 million shares of Common Stock of the Company at an exercise price
of $7.00. Of such options, 83,333 vest and become exercisable upon the first
calendar day of each quarter for the 12 quarters after April 8, 1996. In the
event of termination by I-Link or in the event of a "Change in Control" (as
defined in the agreement), Mr. Edwards is entitled to receive, as liquidated
damages and severance pay, an amount equal to the monthly capital and
Compensation (as defined in the agreement) for the remaining term of the
agreement. The agreement contains non-competition and confidentiality
<PAGE> 17
provisions. Mr. Edwards agreed to amend his contract, effective August 21,
1996 to reduce his salary from $175,000 to $96,000; and in consideration of
the salary reduction, the Company agreed to grant him options to purchase
250,000 shares of Common Stock at an exercise price of $4.875 per share.
Item 6(a) - Exhibits
Page
11 Statement regarding computation of earnings per common share. 11.1
27 Financial Data Schedule 27.1
Item 6(b) - Reports on Form 8-K
A report on Form 8-K, dated August 27, 1996, was filed by the Company appending
an updated statement of risk factors and an updated statement of the business of
its subsidiary, I-Link Worldwide, Inc.
A report on Form 8-K, dated September 6, 1996, was filed by the Company
regarding the completion of a private offering of its Class C Convertible
Cumulative Redeemable Preferred Stock, the issuance of promissory notes, the
release of Common Stock held in escrow for the benefit of ILINK, Ltd. and the
conversion of certain portions of promissory notes into the Company's Common
Stock. This report included pro forma financial statements of the Company
giving effect to the reported transactions.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
MEDCROSS, INC.
(Registrant)
Date: May 9, 1997 By: /s/ John Edwards
John Edwards
President, Chief Executive
Officer
By: /s/ Karl S. Ryser, Jr.
Karl s. Ryser, Jr.
Chief Financial Officer,
Treasurer
<PAGE> 19
