UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 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 April 30, 1996
Common Stock, par value $0.007 4,463,705
Traditional Small Business Disclosure Format (Check One): Yes No X
<PAGE> 1
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
Assets
March 31
1996
<S> ----------
Current assets <C>
Cash and cash equivalents $ 421,751
Accounts receivable less allowance of $682,565 941,174
Inventory 830,292
Prepaid expenses 107,143
---------
Total current assets 2,300,360
---------
Property and equipment 3,644,566
Less accumulated depreciation 1,905,334
---------
Net property and equipment 1,739,232
---------
Investment in unconsolidated subsidiary 6,250
Intangible assets, net of amortization of $231,303 837,743
Other assets 19,116
---------
Total assets $ 4,902,701
=========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,810,927
Advance deposits received 233,728
Accrued royalty fees 450,000
Notes payable - related party 658,000
Notes payable - other 1,520,140
Current portion of long-term debt - related party 39,230
Current portion of long-term debt - other 669,799
Current obligations under capital lease 109,856
---------
Total current liabilities 5,491,680
Long-term debt 78,255
Obligations under capital leases 71,001
Minority interest equity in consolidated subsidiaries 372,036
Commitments and contingencies -
Stockholders' equity
Preferred stock 1,675,000
Common stock 29,917
Other stockholders' equity (2,815,188)
---------
Total stockholders' equity (1,110,271)
---------
Total liabilities and stockholders' equity $ 4,902,701
=========
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
March 31
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net health care service revenue $ 592,180 $ 779,604
Equipment sales and service - 337,889
Network service revenue 17,026 -
--------- ---------
Net operating revenue 609,206 1,117,493
--------- ---------
Cost of goods sold - equipment sales and service - 185,157
Salaries and benefits 252,448 328,931
Repairs and maintenance 68,963 76,946
Network expenses 98,233 -
Provision for doubtful accounts 41,244 327,588
Depreciation and amortization 329,373 117,952
Acquired in-process research and development 4,777,943 -
Other operating expenses 673,192 316,788
--------- ---------
Operating loss (5,632,190) ( 235,869)
Interest expense ( 992,639) ( 39,128)
Other income 15,527 3,816
--------- ---------
Loss before minority interest in net income of
consolidated subsidiaries and income tax provision (6,609,302) ( 271,181)
Minority interest in net income of consolidated subsidiary 1,943 12,779
--------- ---------
Loss before income tax provision (6,611,245) ( 283,960)
Income tax provision - -
--------- ---------
Net loss $(6,611,245) $( 283,960)
========= =========
Loss per common share after preferred dividends $( 2.24) $( .18)
========= =========
Weighted average common shares outstanding 2,971,400 1,749,163
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
<TABLE>
<CAPTION>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash provided (used) by operating activities $( 612,824) $ 50,068
--------- ---------
Cash flows from investing activities
Purchase of property and equipment ( 6,827) ( 15,000)
Proceeds from sale of property and equipment 80 -
--------- ---------
Net cash used by investing activities ( 6,747) ( 15,000)
--------- ---------
Cash flows from financing activities
Proceeds (reduction) of note payable - related party ( 73,333) 218,000
Proceeds (reduction) of note payable - other 965,565 ( 101,000)
Release of Certificate of Deposit held as collateral 60,000 -
Reductions of long-term debt ( 42,075) ( 97,286)
Reduction of capital lease obligations ( 73,289) ( 59,400)
Minority interest distributions - ( 36,500)
Issuance of common stock 643 -
Additional paid-in capital 123,653 -
--------- ---------
Net cash provided (used) by financing activities 961,164 ( 76,186)
--------- ---------
Effect of foreign currency translation on cash flows 1 12
--------- ---------
Increase (decrease) in cash and cash equivalents 341,594 ( 41,106)
Cash and cash equivalents at beginning of period 80,157 361,157
--------- ---------
Cash and cash equivalents at end of period $ 421,751 $ 320,051
========= =========
</TABLE>
Supplemental cash flow information
In February 1995, the holder of Class B Preferred Stock converted 9,350 shares
into 227,714 shares of common stock of the Company.
In February 1996, the Company acquired all of the issued and outstanding stock
of I-Link Worldwide, Inc. in exchange for the issuance of an aggregate of
4,000,000 shares of common stock of the Company, of which 2,600,000 shares are
held in escrow.
In February 1996, a holder of Class A Preferred Stock converted 40,000 shares
into 978,891 shares of common stock of the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 4
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 periods ended March 31, 1996 and March 31, 1995,
(b) the financial position at March 31, 1996, and (c) cash flows for the three-
month periods ended March 31, 1996 and March 31, 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 period ended March 31, 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 to be released as follows:
1. 1,600,000 shares of common stock are to be released upon the receipt of
proceeds greater than or equal to $4,000,000 from the sale of the
Company's securities pursuant to the conduct of one or more private or
public offerings prior to December 31, 1996; and
2. 1,000,000 shares of common stock are to be released upon the first to
occur of the following:
(i) the monthly revenue derived from subscribers serviced by I-Link
and revenue derived from the sale of related products and/or
services equals or exceeds $1,000,000; or
(ii) the number of subscribers serviced by I-Link exceeds 100,000 one
year from the date of receipt by the Company of gross proceeds
equal to $4,000,000 from the sale of its securities pursuant to
one or more private or public offerings.
I-Link provides network and related services, including Internet services, to
individuals and businesses in the United States. I-Link is the owner of a
proprietary technology (patent pending) which enables the transmission of
information via facsimile over the Internet.
The accounting cost of $2,800,000 (representing the 1,400,000 shares issued to
date) was allocated to the net liabilities of $2,003,000 (based on their fair
market value) with the balance of $4,803,000 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.
<PAGE> 5
The following presents the proforma financial information of the Company and
I-Link, as applicable for the three months ended March 31, 1996 and 1995
assuming such transaction had occurred on January 1, 1995:
<TABLE>
<CAPTION>
Three Months Ended Net Loss Per
March 31, 1996 Revenue Net Loss Common Share
---------------------- ---------- ------------ -------------
<S> <C> <C> <C>
Company $ 609,206 $(6,611,245) $(2.24)
I-Link<F1> 48,585 ( 139,683) ====
-------- ---------
Combined 657,791 (6,750,928)
Proforma adjustment - 5,678,360
-------- ---------
Proforma combined $ 657,791 $(1,072,568) $( .30)
======= ========= ====
<CAPTION>
Three Months Ended Net Loss Per
March 31, 1995 Revenue Net Loss Common Share
--------------------- ----------- ------------ -------------
<S> <C> <C> <C>
Company $ 1,117,493 $( 283,960) $( .18)
I-Link 30,697 ( 216,078) ====
--------- ---------
Combined 1,148,190 ( 500,038)
Proforma adjustment - (5,796,692)
--------- ---------
Proforma combined $ 1,148,190 $(6,296,730) $(2.01)
========= ========= ====
<FN>
<F1> (1) For the period January 1, 1996 through February 12, 1996.
</FN>
</TABLE>
Note 3 - Notes Payable
Simultaneous with the closing of its acquisition of I-Link, the Company
completed a private placement of $1,000,000 in aggregate principal amount of
convertible promissory notes (the "10% Notes"). The 10% Notes are payable upon
the earlier of August 31, 1996 (subject to extension) or the Company's receipt
of proceeds of at least $4,000,000 from subsequent debt or equity offerings.
The 10% Notes bear interest payable semi-annually at the rate of 10% until
August 31, 1996 (13% after such date if the term of the 10% Note is extended).
Up to $1,250 of each $50,000 in principal amount of note is convertible at any
time at the option of the holder, into a maximum of 350,000 shares of Common
Stock at the rate of 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.
The Company has recorded interest expense (non-cash) of $945,000 related to
these promissory 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.
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.
Note 4 - Long Term Debt
As part of the common stock acquisition of I-Link, the Company assumed the
obligations under capital leases in the amount of $99,001. The leases vary in
rates and have terms from 36 to 41 months expiring February 1998. Monthly
payments total approximately $2,000.
<PAGE> 6
Note 5 - Commitments and Contingencies
The portion of the I-Link common stock purchase price placed in escrow will be
released upon the satisfaction of the contingencies described in Note 2 above.
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 convertible preferred stock.
Note 7 - Geographic Segment Information
The Company's operations consist of providing network services and diagnostic
and clinical outpatient health care services domestically and the sale and
service of used medical equipment in the People's Republic of China (PRC). The
corporate office provides management and operational services for network
services and domestic outpatient health care services. The eliminations
represent charges for these services to entities included in the consolidation.
Financial information for the different geographic segments is as follows:
<TABLE>
<CAPTION>
Domestic
-------------------------
Three Months Ended Network Corporate/
March 31, 1996 Health Care Services China Management Eliminations Consolidated
- ----------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 530,890 $ 17,026 $ - $ 83,914 $( 22,624) $ 609,206
========= ========= ========= ========= ========= =========
Operating Profit (Loss) $ 66,962 $(5,581,487) $( 1,772) $( 93,269) $( 22,624) $(5,632,190)
========= ========= ========= ========= ========= =========
Identifiable Assets $ 2,821,013 $ 886,960 $ 1,013,881 $ 266,668 $( 85,821) $ 4,902,701
========= ========= ========= ========= ========= =========
<CAPTION>
Domestic
-------------------------
Three Months Ended Network Corporate/
March 31, 1995 Health Care Services China Management Eliminations Consolidated
- ----------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 696,818 $ - $ 337,889 $ 133,412 $( 50,626) $ 1,117,493
========= ========= ========= ========= ========= =========
Operating Profit (Loss) $ 146,185 $ - $( 210,987) $( 120,441) $( 50,626) $( 235,869)
========= ========= ========= ========= ========= =========
Identifiable Assets $ 3,533,507 $ - $ 1,044,902 $ 255,319 $( 46,978) $ 4,786,750
========= ========= ========= ========= ========= =========
</TABLE>
Note 8 - Amendment of Form 10-QSB for the Period Ended March 31, 1996
The Company has amended its original filing of Form 10-QSB for the period ended
March 31, 1996 based on its audit of the year end 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 in February 1996 which were originally capitalized and
other minor adjustments related to the purchase price allocation; (2) recording
of interest expense (non-cash) related to promissory notes issued with a
conversion feature into common stock at a conversion price per common share
below the market value of the common stock; and (3) a correction to the
calculation of weighted average shares outstanding. The following table
reflects the corrections made to the quarter ended March 31, 1996:
<PAGE> 7
<TABLE>
<CAPTION>
As Originally
Reported Adjustments As Adjusted
------------- ----------- -----------
Income Statement:
<S> <C> <C> <C>
Depreciation and amortization 281,703 47,670 329,373
Acquired in-process research
and development 2,034,103 2,743,840 4,777,943
Other operating expenses 506,785 166,407 673,192
Interest expense 47,639 945,000 992,639
Net loss (2,708,328) (3,902,917) (6,611,245)
Loss per common share after
preferred dividends ( .77) ( 1.47) ( 2.24)
Balance Sheet:
Intangible assets, net of
amortization 3,619,151 (2,781,408) 837,743
Other stockholder's equity ( 33,780) (2,781,408) (2,815,188)
</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.
Results of Operations
The following Table represents the net operating revenue and operating profit
(loss) of the Company for each category of service offered. The net operating
revenue and operating profit (loss) shown are net of intercompany transactions
that were eliminated in consolidation.
<TABLE>
<CAPTION>
Three Months
Ended March 31
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET OPERATING REVENUE
Diagnostic Imaging $ 530,890 $ 696,818
Sales and Services of Medical Equipment - 337,889
Network Services 17,026 -
Management and Other 61,290 82,786
--------- ---------
$ 609,206 $ 1,117,493
OPERATING PROFIT (LOSS) ========= =========
Diagnostic Imaging $ 66,962 $ 146,185
Sales and Services of Medical Equipment ( 1,772) ( 210,987)
Network Services (5,581,487) -
Management and Other ( 115,893) ( 171,067)
--------- ---------
$(5,632,190) $( 235,869)
========= =========
</TABLE>
<PAGE> 8
Diagnostic Imaging
Net operating revenue from diagnostic imaging services decreased by 23.8% in the
first quarter of 1996 as compared to the first quarter of 1995. Medcross
Imaging, Ltd. accounted for $152,981 of the decrease. This decrease in revenue
is mainly due to the decrease in the average revenue per patient. The decrease
in average revenue per patient was caused by a decrease in the per procedure
charge to the hospital clients pursuant to service contracts placed into effect
on October 1, 1995. These contracts extended the service period to the hospital
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 the diagnostic imaging revenue of Medcross Imaging, Ltd. was offset by an
increase in the MRI revenue of Tampa MRI of $13,801 in the first quarter of 1996
as compared to the first quarter of 1995. The increase is due to an increase in
the number of procedures performed of 39% offset by a decrease in the average
revenue per procedure of 23% for the first quarter of 1996 as compared to the
corresponding period of 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 charges per procedure, however,
these decreases have been significantly offset by increases in the number of
procedures performed. The revenue of the ultrasound operations decreased 25%
in the first quarter of 1996 as compared to the first quarter of 1995. This
decrease is mainly due to the decrease in the number of procedures performed of
17% in the first quarter of 1996 as compared to the corresponding period of
1995.
The operating profit from diagnostic imaging services decreased by $79,223 in
the first quarter of 1996 as compared to the same period of 1995. This decrease
is mainly due to a decrease in the operating profit of Medcross Imaging, Ltd. of
$102,874 and the ultrasound operations of $18,670, offset by an increase in the
operating profit from MRI operations of Tampa MRI of $42,321. The net decrease
in operating profit from diagnostic imaging services was due to a decrease in
operating revenue, as described above, offset by a decrease in total operating
expenses of $86,705 in the first quarter of 1996 as compared to the same period
of 1995.
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 for the year ended December 31, 1995.
Sales and Service of Medical Equipment
The Company sells and services used and refurbished computerized tomography (CT)
scanners in the People's Republic of China through a joint venture company,
Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of which it
owns 51%. In the first quarter 1995, the Company's Beijing office, which was
closed on May 31, 1995, completed the installation of two CT scanners. The
responsibilities for the parts depot and the inventory of the Company's
Beijing office were transferred to SMHME. The Company has elected to fully
reserve for all amounts due from the sale of the CT scanners sold by its
Beijing office. This resulted in an expense of $281,438 in the first quarter
of 1995 and an allowance for doubtful accounts of $315,753 as of March 31, 1996.
The Company has decided to sell its Beijing operation, and has held discussions
regarding the sale of these operations. No assurance can be given regarding the
outcome of such negotiations.
Management and Other
Net operating revenue from management and other activities decreased by $21,496
in the first quarter of 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 in management
fees in the first quarter of 1995 and no management fees in the first quarter of
1996. The net operating loss from management and other activities decreased
$55,174 in the first quarter of 1996 to $115,893. This decrease in net
operating loss was due to the decreased corporate overhead expenses of $76,670,
<PAGE> 9
offset by the decrease in net operating revenue. Salaries and benefits
decreased $89,260 in the first quarter of 1996 as compared to the same period
of 1995, which was offset by an increase in professional fees.
Network and Related Services
The operating revenue of network and related services from I-Link, was $17,026
in the first quarter of 1996. The net operating loss from network and related
services was $5,581,487. This was mainly due to acquired in-process
research and development expense of $4,777,943 recorded pursuant to the
purchase of the common stock of I-Link. Excluding the acquired in-process
research and development expense, the operating loss of network and related
services was $803,544.
Consolidated Operating Results
Net operating revenue of the Company decreased $508,287 in the first quarter of
1996 as compared to the same quarter of 1995. This decrease was mainly due to
the sale of CT scanners in China during the first quarter of 1995 and not in
1996 and the decrease in the net operating revenue of diagnostic imaging
services in the first quarter of 1996 as compared to the first quarter of
1995. Salaries and benefits decreased by $126,611 in the first quarter of 1996
as compared to the same period of 1995. This decrease was offset by the
inclusion of salaries and benefits of $50,128 from network and related services
during the first quarter of 1996. The decrease in repairs and maintenance was
mainly due to diagnostic imaging. Depreciation and amortization increased
$211,421 due to the inclusion of I-Link, offset by a decrease in diagnostic
imaging. The provision for doubtful accounts decreased $286,344 in 1996 as
compared to 1995, due to the reserve for the receivable from the Beijing
operations, which did not occur in 1996. Other operating expenses increased a
total of $356,404 in the first quarter of 1996 compared to the first quarter of
1995. This is due to the inclusion of I-Link and an increase in management and
other activities, offset by a decrease from diagnostic imaging and foreign
operations. Total operating expenses increased $4,888,034. This increase in
the first quarter of 1996 as compared to the first quarter of 1995 was caused by
the inclusion of expenses of $5,598,513 for I-Link, offset by decreases in
diagnostic imaging of $86,705, foreign operations of $547,104, and management
and other activities of $76,670.
Liquidity and Capital Resources
The working capital position of the Company was a
deficit of $3,191,320 at March 31, 1996 and $315,573 at December 31, 1995,
which includes $669,799 of the current portion of long term debt which may be
payable in common stock of the Company, and $1,000,000 in promissory notes
issued concurrent with the I-Link acquisition. Cash flow used by operating
activities was $612,824 in the first quarter of 1996 compared to cash flow
provided by operating activities of $50,068 for the same period in 1995. Cash
flow used by operating activities includes $600,556 attributable to the
inclusion of I-Link in the first quarter of 1996.
Investing activities expenditures during the first quarter of 1996 related to
the purchase of additional computer equipment for I-Link.
During the first quarter of 1996, the Company reduced its long term debt and
capital lease obligations by $115,364, notes payable to related parties by
$73,333, notes payable to others by $24,435 and the outstanding balance of its
line of credit by $60,000. These reductions include indebtedness of I-Link.
The inclusion of I-Link in the first quarter of 1996 increased capital lease
obligations by $99,001, notes payable to related parties by $693,333, and notes
payable to others of $104,575. As of March 31, 1996, the balance outstanding
under the line of credit was $340,000. The Company was in violation of loan
covenants regarding cash balances, consolidated equity ratios, debt to equity
ratios, cash flow coverage ratios and past days sales in accounts receivable
under the line of credit at March 31, 1996. The bank has waived those covenant
violations through June 30, 1996. 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. During the first quarter of 1995, the Company received advances
totaling $218,000 from Mortgage Network International, payable on demand. The
Company's Vice Chairman/President has management control over Mortgage Network
International. The advances were subsequently formalized by the Company issuing
<PAGE> 10
a Promissory Note bearing interest at 1% over prime rate of Southwest Bank of
Texas, N.A. with a maturity of October 1, 1995. Subsequent to October 1, 1995,
the Company and Mortgage Network International modified the note such that: (i)
a principal payment in the amount of $88,000 is due and payable on December 31,
1996; (ii) interest thereon is payable monthly at a rate of 10.5%; and (iii) the
remaining principal amount of $130,000 with interest thereon at the rate of
10.5% will be paid in 36 equal monthly payments of $4,225.32 beginning December
10, 1995.
The Company will require additional financing in order to successfully integrate
the business of I-Link, to fund the cash flow operating deficit of I-Link, to
expand its business and to discharge outstanding indebtedness, including the
10% Notes, the Mortgage Network International advances, and the outstanding
balance of the Company's line of credit with First Union National Bank.
Although the Company is presently negotiating for alternative financing to repay
First Union National Bank and Mortgage Network International, there can be no
assurance such negotiations will be successful. Additional funding through one
or more debt or equity offerings in the capital markets will be necessary to
continue to implement the growth of the Company's business and expand its
operations, including those of I-Link. The availability of such capital sources
will depend on prevailing market conditions, interest rates, and financial
position and results of operations of the Company. Therefore, there can be no
assurance that such financing will be available or that the Company will not be
required to issue significant debt or equity securities in order to obtain such
financing.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A Complaint was filed on April 12, 1996, by JW Charles Financial Services, Inc.
("JWC") against the Company in Palm Beach County Florida Circuit Court, JW
Charles Financial Services, Inc. v. Medcross, Inc., Case No: CL96-3218. JWC was
issued a Common Stock Purchase Warrant ("Warrant") on or about November 3, 1994
by the Company. The alleged terms of the Warrant granted JWC the right to
purchase from the Company
250,000 shares of the Company's Common Stock subject to adjustment. On or about
February 12, 1996, JWC made written demand to the Company to invoke its rights
to have the common shares underlying the Warrant registered pursuant to the
terms of the Warrant. The Complaint alleges that the Company breached the terms
of the Warrant by failing to prepare and file with the Securities and Exchange
Commission ("SEC"), a registration statement covering the common stock
underlying JWC's Warrant. JWC alleges a breach of contract; 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 Counter-
claim to the Complaint filed by JWC. The Company's counterclaim seeks damages,
cancellation of warrants, and interest and costs.
Item 5. Other Information
The Company entered into a consulting agreement with Windy City, Inc. for the
period beginning January 1, 1996 and ending December 31, 1998. Mr. Joel Kanter,
a director of the Company, 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 requested by the Company in exchange for compensation at
the rate of $6,250 per calendar quarter.
On April 29, 1996, the Company was notified that I-Link was in breach of its
contractual obligation to make payments to Spyglass. Spyglass provides software
licenses to I-Link. I-Link was obligated to pay Spyglass Initial and Quarterly
Minimum License Fees in the amount of $45,000 and $63,750, respectively no later
than 30 days subsequent to the end of each calendar quarter that the payments
were due. Total indebtedness claimed by Spyglass is $273,606, including late
payment fees. The Company was notified by Spyglass that it claims the right to
terminate the agreement in its entirety in the event the breach of the agreement
is not cured within 30 days. Management of I-Link is discussing the matter with
Spyglass but there can be no assurance that a satisfactory resolution will be
obtained.
<PAGE> 11
Item 6(a) - Exhibits Page
3(a) Amendment to the Amended and Restated Articles of
Incorporation dated April 29, 1996. 13
3(b) Composite copy of the Amended and Restated Articles of
Incorporation incorporating all amendments through the
date of the filing of this Form 10-QSB. 21
10(a) Consulting Agreement, effective January 1, 1996, by and
between Windy City, Inc. and Medcross, Inc. 42
11 Statement regarding computation of earnings per common
share. 45
27 Financial Data Schedule. 46
Item 6(b) - Reports on Form 8-K
An amendment to the report on Form 8-K dated February 23, 1996 was filed by the
Company regarding the acquisition of the securities of I-Link Worldwide Inc.,
the completion of a private placement of $1,000,000 in aggregate principal
amount of convertible promissory notes, and the conversion of Class A Preferred
Stock into Common Stock. The amendment included financial statements of the
business acquired and proforma financial statements.
A report on Form 8-K was filed by the Company regarding the complaint filed by
JW Charles Financial Services, Inc., the appointment of Clay Wilkes as a
director of the Company and appending an updated Statement of Risk Factors.
<PAGE> 11
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> 13
