<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
File No. 0-17973
[X] Filed by the Registrant
[_] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement (revised)
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
MEDCROSS, INC.
(Name of Registrant As Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
N/A
--------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
N/A
--------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
N/A
--------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
N/A
--------------------------------------------------------------------------
5) Total fee paid: $______________
[_] Fee paid previously with preliminary materials.
<PAGE>
MEDCROSS, INC.
13751 S. Wadsworth Park Drive
Suite 200
Draper, UT 84020
September [___], 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Medcross, Inc. on ____________, 1997. The meeting will begin at [time] a.m.
at the [place], [address].
Information regarding each of the matters to be voted upon at the
Annual Meeting is contained in the attached Proxy Statement. We urge you to read
the Proxy Statement carefully. The Proxy Statement is being mailed to all
shareholders on or about September [___], 1997.
Because it is important that your shares be voted at the Annual
Meeting, whether or not you plan to attend in person, we urge you to complete,
date, and sign the enclosed proxy card and return it as promptly as possible in
the accompanying envelope. If you are a shareholder of record and do attend the
Annual Meeting and wish to vote your shares in person, even after returning your
proxy, you still may do so.
We look forward to seeing you in [city], on ____________, 1997.
Very truly yours,
John W. Edwards, President
<PAGE>
MEDCROSS, INC.
13751 S. Wadsworth Park Drive, Suite 200
Draper, UT 84020
------------------------------
Notice of Annual Meeting of Shareholders
To be Held ____________, 1997
------------------------------
To the Shareholders of Medcross, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Medcross, Inc., a Florida corporation (the "Company"), will be held at [place],
[address], on ____________, 1997, at [time] a.m. and thereafter as it may from
time to time be adjourned, for the following purposes:
1. To elect two Class III Directors to serve for three years and
until their successors have been duly elected and shall qualify;
2. To approve and adopt an amendment of the Company's Articles of
Incorporation to change the Company's name to I-Link Incorporated;
3. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
Preferred Stock of the Company from 500,000 shares of Preferred
Stock, $10 par value, to 10,000,000 shares of Preferred Stock,
$10 par value, to permit the conversion of convertible notes
issued in September 1996, the issuance of Class D Preferred
Stock and Class M Preferred Stock and for other general
corporate purposes;
4. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
Common Stock from 20 million shares of Common Stock, $.007 par
value, to 50 million shares of Common Stock, $.007 par value,
to permit the issuance of shares in connection with the
Company's acquisition of Family Telecommunications
Incorporated, the issuance of options and warrants and for
other general corporate purposes;
5. To approve the adoption of the 1997 Recruitment Stock Option
Plan which provides for the issuance of Incentive Stock
Options, Non-Qualified Stock Options and Stock Appreciation
Rights; and
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders should note that the Company's By-Laws provide that no
proposals or nominations of Directors by Shareholders shall be presented for
vote at an Annual Meeting of Shareholders unless notice complying with the
requirements in the By-Laws is provided to the Board of Directors or the
Company's Secretary no later than the close of business on the fifth day
following the day that notice of the meeting is first given to Shareholders.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE DATE AND
SIGN THE ENCLOSED FORM OF PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE TO
AMERICAN STOCK TRANSFER & TRUST COMPANY, 40 WALL STREET, 46TH FLOOR, NEW YORK,
NEW YORK 10005.
By Order of the Board of Directors,
David E. Hardy, Secretary
Draper, Utah
September [____], 1997
<PAGE>
MEDCROSS, INC.
Proxy Statement
Dated September [____], 1997
Annual Meeting of Shareholders
SUMMARY
This Proxy Statement is being furnished to Shareholders in connection
with the solicitation of proxies by the Board of Directors of Medcross, Inc., a
Florida corporation (the "Company"), for use at the Annual Meeting of
Shareholders to be held on ____________, 1997, at [time], at [address] or at any
adjournments thereof (the "Annual Meeting"), as set forth in the accompanying
Notice of Annual Meeting. This Proxy Statement and the accompanying form of
proxy are first being mailed to Shareholders on or about September [____], 1997.
The principal executive offices of the Company are located at 13751 S. Wadsworth
Park Drive, Draper, UT 84020.
The Annual Meeting has been called to consider and take action on the
following proposals:
1. To elect two Class III Directors to serve for three years and
until their successors have been duly elected and shall
qualify;
2. To approve and adopt an amendment of the Company's Articles of
Incorporation to change the Company's name to I-Link
Incorporated;
3. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
Preferred Stock of the Company from 500,000 shares of Preferred
Stock, $10 par value, to 10,000,000 shares of Preferred Stock,
$10 par value, to permit the conversion of convertible notes
issued in September 1996, the issuance of Class D Preferred
Stock and Class M Preferred Stock and for other general
corporate purposes;
4. To approve and adopt an amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
Common Stock from 20 million shares of Common Stock, $.007 par
value, to 50 million shares of Common Stock, $.007 par value,
to permit the issuance of shares in connection with the
Company's acquisition of Family Telecommunications
Incorporated, the issuance of options and warrants and for
other general corporate purposes;
5. To approve the adoption of the 1997 Recruitment Stock Option
Plan which provides for the issuance of Incentive Stock
Options, Non-Qualified Stock Options and Stock Appreciation
Rights; and
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Affirmative action with respect to each of the above proposals has been
taken by a majority of the Company's Board of Directors and the Board of
Directors recommends that the Shareholders vote in favor of each of the
proposals. The close of business on August 8, 1997, has been fixed as the record
date for
<PAGE>
the determination of Shareholders entitled to notice of, and to vote at, the
Annual Meeting and any adjournment thereof (the "Record Date"). The stock
transfer books will not be closed.
SOLICITATION AND REVOCATION OF PROXIES
As of August 8, 1997 there are 11,627,597 shares of the Company's
common stock, par value $.007 per share (the "Common Stock"), issued and
outstanding, 7,500 shares of the Company's Class B Variable Rate Cumulative
Convertible Preferred Stock, par value $10.00 per share (the "Class B Preferred
Stock"), issued and outstanding, and 240,000 shares of Class C Convertible
Cumulative Redeemable Preferred Stock, par value $10.00 per share (the "Class C
Preferred Stock") issued and outstanding. Each share of Common Stock of record
as of the Record Date is entitled to one vote in all matters properly brought
before the Annual Meeting. The Class B Preferred Stock and Class C Preferred
Stock are non-voting except as otherwise specifically required by applicable
law. Only holders of record of shares of Common Stock as of the close of
business on the Record Date will be entitled to vote at the Annual Meeting;
however, holders of the Company's outstanding Preferred Stock are entitled to
notice of all stockholder meetings at the same time and in the same manner as
notice is given to all stockholders entitled to vote at such meetings.
The holders of a majority of all of the shares of stock entitled to
vote at the Annual Meeting, present in person or by proxy, will constitute a
quorum for the transaction of business at the Annual Meeting. If a quorum should
not be present, the Annual Meeting may be adjourned from time to time until a
quorum is obtained. Shares as to which authority to vote has been withheld with
respect to the election of any nominee for director will not be counted as a
vote for such nominee. Abstentions and broker non-votes are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business but are not counted as an affirmative vote for purposes of determining
whether a proposal has been approved.
The Class III Director nominees named in Proposal 1 of this Proxy
Statement must receive a plurality of the votes cast by the shares entitled to
vote to be elected. In order to obtain the approval of Proposals 2, 3, 4 and 5,
the votes cast by the holders of the Common Stock and represented at the Annual
Meeting and entitled to vote, in person or by proxy, favoring the action must
exceed the votes cast opposing the action.
The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, including audited financial statements, is enclosed herewith.
Proxies given by Shareholders of record for use at the Annual Meeting
may be revoked at any time prior to the exercise of the powers conferred. In
addition to revocation in any other manner permitted by law, Shareholders of
record giving a proxy may revoke the proxy by an instrument in writing, executed
by the Shareholder or his attorney authorized in writing or, if the Shareholder
is a corporation, under its corporate seal, by an officer or attorney thereof
duly authorized, and deposited either at the corporate headquarters of the
Company at any time up to and including the last business day preceding the day
of the Annual Meeting, or any adjournment thereof, that the proxy is to be used,
or with the chairman of such meeting on the day of the Annual Meeting or
adjournment thereof, and upon either of such deposits the proxy is revoked.
As of August 8, 1997, all of the present directors, as a group of five
persons, own beneficially 5,203,305 shares (38.8%) of the total outstanding
shares) and all of the present directors and executive officers of the Company,
as a group of nine persons, owned beneficially 5,962,096 shares (42.1%) of the
2
<PAGE>
total outstanding shares) of the Common Stock of the Company. The Company
believes that such officers and directors intend to vote their shares for each
of the proposals set forth herein. Certain officers and directors of the Company
have agreed to vote an aggregate of 5,653,773 shares of Common Stock in favor of
Proposals 3 and 4. To the knowledge of management, as of August 8, 1997, the
only executive officers, directors and nominees for director who owned
beneficially five percent or more of the Company's outstanding shares of Common
Stock were Clay Wilkes, R. Huston Babcock and John W. Edwards. In addition,
I-Link, Ltd., of which GNet Enterprises, Inc. is the general partner, and which
corporation is owned by Clay Wilkes, owned beneficially 10.4% of the Company's
outstanding shares of Common Stock. See "Security Ownership of Certain
Beneficial Owners and Management."
ALL PROXIES RECEIVED WILL BE VOTED IN ACCORDANCE WITH THE CHOICES
SPECIFIED ON SUCH PROXIES. PROXIES WILL BE VOTED IN FAVOR OF A PROPOSAL IF NO
CONTRARY SPECIFICATION IS MADE. ABSTENTIONS AND BROKER NON-VOTES ARE COUNTED FOR
PURPOSES OF DETERMINING THE PRESENCE OR ABSENCE OF A QUORUM BUT ARE NOT COUNTED
AS AN AFFIRMATIVE VOTE FOR PURPOSES OF DETERMINING WHETHER A PROPOSAL HAS BEEN
APPROVED. ALL VALID PROXIES OBTAINED WILL BE VOTED AT THE DISCRETION OF THE
BOARD OF DIRECTORS WITH RESPECT TO ANY OTHER BUSINESS THAT MAY COME BEFORE THE
MEETING.
The cost of soliciting proxies in the accompanying form will be borne
by the Company. The Company may reimburse brokerage firms and others for their
expenses in forwarding proxy materials to the beneficial owners and soliciting
them to execute the proxies.
Certain Information Concerning the Company
Certain information concerning the Company, including recent events, a
description of the business of Medcross, Inc., I-Link Worldwide, Inc. and Family
Telecommunications Incorporated (subsequently renamed I-Link Communications,
Inc. and for ease of reference referred to herein as "FTI"), certain market
information, management's discussion and analysis and financial statements for
the Company as of December 31, 1996 and for the year ended December 31, 1996, is
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, which accompanies this Proxy Statement and is incorporated
herein by this reference. Interim financial statements of the Company are
included as Appendix 1 hereto; historic and pro forma financial statements
relating to FTI are included as Appendix 2 hereto; and historic and pro forma
financial statements relating to MiBridge, Inc. are included as Appendix 3
hereto.
DISSENTERS' RIGHTS OF APPRAISAL
The Board of Directors has not proposed any action for which the laws
of the State of Florida, the Certificate of Incorporation or By-Laws of the
Company provide a right of a Shareholder to dissent and obtain payment for
shares.
INTEREST OF OFFICERS AND DIRECTORS
IN MATTERS TO BE ACTED UPON
Mr. John Edwards and Dr. R. Huston Babcock, Class III Directors, are
being nominated for election to the office of Director and serve in their
capacities as Directors. In addition, officers and directors of the Company have
an interest in Proposals 3, 4 and 5 inasmuch as officers and directors owning
options to purchase shares of Common Stock have agreed not to exercise any
options owned by them
3
<PAGE>
unless and until the shareholders of the Company approve an increase in
authorized capital stock. Such persons will also be entitled to receive options
to purchase Common Stock under the 1997 Recruitment Stock Option Plan.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Common Stock constitutes the only voting securities of the Company.
Each share of Class B Preferred Stock is convertible, at the option of the
holder thereof, into approximately 24.47 shares of Common Stock, subject to
adjustment upon the occurrence of certain events. Each share of Class C
Preferred Stock is convertible, at the option of the holder thereof, into such
number of shares of the Company's Common Stock as shall equal $60 divided by the
lower of (i) $2.50 or (ii) the closing bid price for any five consecutive
trading days during the period commencing on September 6, 1996 and ending on
March 5, 1998. The table below sets forth information, to the best of the
Company's knowledge, with respect to the total number of shares of the Company's
Common Stock, Class B Preferred Stock and Class C Preferred Stock beneficially
owned by each director, the Company's Named Executive Officers, each beneficial
owner of more than five percent of the Common Stock, and all directors and
executive officers as a group, as reported by each such person, as of August 8,
1997. On that date, there were 11,627,597 shares of the Company's Common Stock
issued and outstanding, no shares of the Company's Class A Preferred Stock
issued and outstanding, 7,500 shares of the Company's Class B Preferred Stock
issued and outstanding, and 240,000 shares of the Company's Class C Preferred
Stock issued and outstanding.
<TABLE>
<CAPTION>
% of Outstanding
Name and Address Number of Shares Shares of Common Stock
of Beneficial Owner/(1)/ Title of Class Beneficially Owned Beneficially Owned/(2)/
- ----------------------------------- ----------------- -------------------- --------------------------
<S> <C> <C> <C>
Four M International, Ltd./(3)/ Common Stock 3,452,832/(4)/ 29.7%
1980 Post Oak Boulevard
Houston, TX 77056
I-Link, Ltd./(5)/ Common Stock 1,212,738 10.4%
c/o Clay Wilkes
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Clay Wilkes/(6)/ Common Stock 3,375,941/(7)/ 28.1%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Benchmark Equity Group Inc. Common Stock 1,264,174/(10)/ 10.8%
700 Gemini Class C 752
Houston, TX 77058 Preferred
Stock
R. Huston Babcock, M.D. Common Stock 657,032/(11)/ 5.6%
741 12th Street North Class B 7,500
St. Petersburg, FL 33705 Preferred
Stock
Henry Y.L. Toh/(3)/ Common Stock 188,501/(12)/ 1.6%
3227 Bennet Street North
St. Petersburg, FL 33713
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
% of Outstanding
Name and Address Number of Shares Shares of Common Stock
of Beneficial Owner/(1)/ Title of Class Beneficially Owned Beneficially Owned/(2)/
- ----------------------------------- ----------------- -------------------- --------------------------
<S> <C> <C> <C>
John W. Edwards Common Stock 840,831/(13)/ 6.7%
13751 S. Wadsworth Park Drive
Draper, UT 84020
T6-G Limited Partnership Common Stock 720,083/(9)/ 6.1%
185 South State Street Class C 7,133
Salt Lake City, UT 84111 Preferred
Stock
William A. Baquet Common Stock 640,284/(14)/ 5.5%
33 Libby Avenue
Hicksville, NY 11801
Commonwealth Associates Common Stock 1,911,392/(15)/ 15.3%
733 Third Avenue Class C 3,750
Suite 700 Preferred
New York, NY 10017 Stock
Alex Radulovic/(16)/ Common Stock 894,824/(17)/ 7.6%
13751 S. Wadsworth Park Drive
Draper, UT 84020
Joseph A. Cohen Common Stock 141,000/(18)/ 1.2%
1370 Avenue of the Americas Class C 3,000
New York, NY 10019 Preferred Stock
Karl S. Ryser, Jr. Common Stock 229,110/(19)/ 1.9%
13751 S. Wadsworth Park Drive
Draper, UT 84020
William H. Flury Common Stock 126,483/(20)/ 1.1%
13751 S. Wadsworth Park Drive Class C 2,666
Draper, UT 84020 Preferred
Stock
David E. Hardy Common Stock 403,199/(21)/ 3.4%
60 East South Temple
Salt Lake City, UT 84111
All Executive Officers and Common Stock 5,962,096/(22)/ 42.1%
Directors as a Group (9 Persons) Class C 5,666
Preferred
Stock
</TABLE>
- --------------------------------
/(1)/ Unless noted, all of such shares are owned of record by each person or
entity named as beneficial owner and such person or entity has sole
voting and dispositive power with respect to the shares of Common Stock
owned by each of them.
/(2)/ As to each person or entity named as beneficial owners, such person or
entity's percentage of ownership is determined by assuming that any
options or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the Record Date have been
exercised or converted, as the case may be. Does not give effect to the
agreement of certain holders of outstanding options not to exercise such
options pending shareholder approval of an increase in the authorized
capital stock of the Company.
/(3)/ Mr. Toh, a director of the Company and one of two directors of Four M,
has disclaimed beneficial ownership of the shares of the Common Stock
owned by Four M.
/(4)/ Represents the number of shares of Common Stock owned by the noted
shareholder. As set forth hereinbelow, Four M has granted certain options
exercisable commencing July 1, 1996 (subject to the satisfaction of
certain conditions) to purchase 3,452,832 shares of Common Stock.
Commonwealth and affiliates or associates thereof have the right to
purchase 224,187 shares of Common Stock prior to September 6, 1997 and
270,696 shares of Common Stock prior to December 31, 1997. Benchmark
Equity Group, Inc. ("Benchmark") has the right to purchase 260,667 shares
of Common Stock prior to September 6, 1997 and 356,392 shares prior to
December 31, 1997. Certain employees and members of management of
5
<PAGE>
I-Link and/or the Company have the right to purchase 825,000 shares of
Common Stock prior to September 6, 1997 and 825,000 shares prior to
December 31, 1997.
(5) GNet Enterprises, Inc. ("GNet") is the General Partner of I-Link, Ltd. and
Clay Wilkes, a director of the Company, is the sole shareholder of
GNet.
(6) I-Link, Ltd., a limited partnership, owns an aggregate 1,212,739 shares of
Common Stock. The Company has been informed that Mr. Wilkes, a director of
the Company, may be deemed to indirectly beneficially own the 1,212,739
shares owned by I-Link, Ltd.
(7) Includes 1,212,739 shares of Common Stock held of record by I-Link, Ltd.
See previous footnote. Also includes 780,000 shares of Common Stock
purchasable upon exercise of Four M Options and options to purchase 20,000
shares of Common Stock issuable by the Company, and 375,000 shares of
Common Stock underlying an option granted by the Company on July 1, 1996 to
purchase 1,500,000 shares of Common Stock at an exercise price of $7.00 per
share, vesting in 25% increments in the event that the average closing bid
price of a share of the Company's Common Stock for five consecutive trading
days exceeds $10, $15, $20 and $25, respectively. Such option became
exercisable (to the extent vested) on June 30, 1997, vests in its entirety
on June 30, 2001 and lapses on June 30, 2002. Of the shares owned, 30,000
have been pledged to secure the repayment of loans in the principal amount
of $90,000 made in March 1997. The loans bear interest at the rate of 8%
per annum and are due and payable on or before September 30, 1997, at the
discretion of the payee in cash or the shares of Common Stock.
(8) [reserved]
(9) Includes 548,891 shares of Common Stock issued in connection with the
I-Link Acquisition. Also includes 171,192 shares of Common Stock which are
issuable upon conversion of 7,133 shares of Class C Preferred Stock.
(10) Includes 461,570 shares of Common Stock issued and 91,771 shares of Common
Stock issuable upon conversion of 3,750 shares of Class B Preferred Stock
subject of an option exercisable commencing July 1, 1996 granted by R.
Huston Babcock to the noted shareholder and 30,726 shares issued, and an
additional 617,059 shares of Common Stock which may be purchased upon
exercise of Four M Options. Also includes (a) 18,048 shares of Common Stock
issuable upon conversion of 752 shares of Class C Preferred Stock, and (b)
45,000 shares of Common Stock, all of which 63,048 shares are beneficially
owned by Trident I, LLC, of which the noted shareholder is the manager with
the power to exercise investment, dispositive and voting control.
(11) Includes: (a) 183,542 shares of Common Stock into which the 7,500 shares of
Class B Preferred Stock owned by the noted stockholder are convertible; and
(b) 38,501 shares of Common Stock issuable pursuant to options exercisable
within 60 days of the Record Date; 91,771 of the shares of Common Stock
issuable upon conversion of such shares of the Class B Preferred Stock are
subject to an option granted by the noted stockholder to Benchmark.
(12) Represents shares issuable pursuant to options exercisable within 60 days
of the Record Date.
(13) Includes 520,831 shares of Common Stock subject to the vested portion of
Mr. Edwards' option to purchase 1,000,000 shares of Common Stock. Also
includes 295,000 shares of Common Stock subject to options held by Mr.
Edwards, and 25,000 shares of Common Stock subject to a warrant held by Mr.
Edwards. See "Executive Compensation -- Employment Agreements" and "Certain
Relationships and Related Transactions."
(14) Includes 259,394 shares of Common Stock issued and 380,890 shares issuable
pursuant to Four M Options.
(15) Includes 46,509 shares issued and an additional 494,883 shares of Common
Stock issuable pursuant to Four M Options and 530,000 shares of Common
Stock owned by certain affiliates and control persons of the named
shareholder. Also includes 750,000 shares of Common Stock subject to
warrants held by the named stockholder and 90,000 shares of Common Stock
issuable upon conversion of 3,750 shares of Class C Preferred Stock which
are held by certain affiliates of the named stockholder. Does not include
shares of Common Stock which may be held by Commonwealth from time to time
in its trading account in connection with ordinary market-making
activities.
(16) I-Link, Ltd., a limited partnership, owns 1,212,739 shares. The Company has
been informed that Mr. Radulovic may be deemed to indirectly beneficially
own 269,824 of the shares owned by I-Link, Ltd.
(17) Includes 269,824 shares of Common Stock held of record by I-Link, Ltd. See
previous footnote. Also includes 500,000 shares of Common Stock issuable
pursuant to options exercisable commencing July 1, 1996 granted by Four M
and 125,000 shares of Common Stock underlying an option granted by the
Company on July 1, 1996, to purchase 500,000 shares of Common Stock at an
exercise price of $7.00 per share, vesting in 25% increments in the event
that the average closing bid price of a share of the Company's Common Stock
for five consecutive trading days exceeds $10, $15, $20 and $25,
respectively. Such option became exercisable (to the extent vested) on June
30, 1997, vests in its entirety on June 30, 2001 and lapses June 30,
2002.
(18) The Company has agreed to issue options to purchase 64,000 shares of Common
Stock to Mr. Cohen, to be exercisable at the fair market value thereof on
September 30, 1996. Of such options, 24,000 shall vest and become
exercisable immediately upon grant, 20,000 shall vest and become
exercisable on the first anniversary of the grant, and 20,000 shall vest
and become exercisable on the second anniversary of the grant. Represents
44,000 shares issuable upon exercise of the vested portion of such options.
Includes an additional 25,000 shares issuable upon exercise of options
issuable to Mr. Cohen and 72,000 Conversion Shares, subject to adjustment,
issuable to the Leslie Group upon conversion of Class C Preferred Stock.
Mr. Cohen is President of the Leslie Group, Inc., which is a limited
partner of the parent of Commonwealth, and which holds 3,000 shares of
Class C Preferred Stock.
6
<PAGE>
/(19)/ Includes 27,594 shares issuable under the JWC Warrant, 186,933 shares
issuable pursuant to the exercisable portion of options granted per Mr.
Ryser's employment agreement, and 14,583 shares issuable pursuant to the
Hardy Group Warrants.
/(20)/ Includes 62,499 shares of Common Stock issuable pursuant to options
exercisable within 60 days of the Record Date and 63,984 shares of Common
Stock issuable upon conversion of 2,666 shares of Class C Preferred
Stock, including 500 shares of Class C Preferred Stock held in the name
of Mr. Flury's wife.
/(21)/ Includes 4,000 shares issued, 137,969 shares issuable under the JWC
Warrant, 188,313 shares issuable pursuant to the exercisable portion of
options granted per Mr. Hardy's employment agreement, and 72,917 shares
issuable pursuant to the Hardy Group Warrants.
/(22)/ Includes 2,202,640 shares of Common Stock which may be obtained pursuant
to options exercisable within 60 days of the Record Date, 183,542 shares
of Common Stock into which the 7,500 shares of Class B Preferred Stock
are convertible and 135,984 shares of Common Stock, into which 5,666
shares of Class C Preferred Stock are convertible. Also includes 780,000
shares of Common Stock subject to Four M Options and 1,212,739 shares
owned of record by I-Link, Ltd. (see footnote 6), and excludes certain
unvested options granted by the Company.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Title
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
John W. Edwards..................... 42 Chairman of the Board, President and Chief Executive
Officer of the Company and Chief Executive Officer
of I-Link
Karl S. Ryser, Jr................... 42 Treasurer and Chief Financial Officer of the Company
and Chief Financial Officer of I-Link
David E. Hardy...................... 44 Secretary of the Company
William H. Flury.................... 43 Vice President, Sales & Marketing of I-Link
Henry Y.L. Toh...................... 40 Director and Assistant Secretary of the Company
Clay Wilkes......................... 37 Director of the Company
R. Huston Babcock, M.D.............. 68 Director of the Company
Joseph A. Cohen..................... 50 Director of the Company
Robert W. Edwards, Jr............... 48 Vice President of Network Operations of I-Link
</TABLE>
The Company's Articles of Incorporation provide that the number of
directors of the Company shall not be less than five or more than nine.
Currently, the Board of Directors has five members. The Company's Articles of
Incorporation provide that the Board of Directors is divided into three classes.
Messrs. Joel S. Kanter (who resigned in July 1996 for personal reasons) and
Henry Y.L. Toh, Class II Directors, stood for re-election at the annual meeting
of shareholders in 1995. The terms of office of Mr. Toh and Joseph A. Cohen, who
was appointed a Class II Director in September 1996 as the designee of
Commonwealth, will expire at the second annual meeting of shareholders following
the Annual Meeting. The terms of office of Dr. R. Huston Babcock and John W.
Edwards, Class III Directors, expire at the upcoming Annual Meeting of
shareholders and such persons have been nominated for re-election. See Proposal
1. The term of office of Clay Wilkes, a Class I Director, expires at the next
succeeding Annual Meeting of shareholders. Commonwealth has also designated
Michael Falk to be a non-voting advisor to the Board. In addition, Commonwealth
has the right to approve the Company's selection of a second outside director in
accordance with the terms of the Sales Agency Agreement between the Company and
Commonwealth Associates entered into in July 1996 in connection with the
Company's private placement of Class C Preferred Stock. A second outside
director has not been selected as of the date hereof.
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Biographical information with respect to the present executive officers,
directors, and key employees of the Company are set forth below. There are no
family relationships between any present executive officers and directors except
that John W. Edwards and Robert W. Edwards, Jr. are brothers.
John W. Edwards, Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Edwards was selected to fill a vacancy on the Board
of Directors as a Class III director in June 1996 and was elected Chairman of
the Board in August 1997. Mr. Edwards serves as the Chief Executive Officer of
I-Link and, as of September 30, 1996, serves as the President and Chief
Executive Officer of the Company. Mr. Edwards served as Acting Chief Financial
Officer of the Company from September 1996 to January 1997. Mr. Edwards served
as President and a director of Coresoft, Inc., a software company developing
object-oriented computer solutions for small businesses from September 1995 to
April 1996. During the period August 1988 through July 1995, Mr. Edwards served
in a number of executive positions with Novell, Inc., a software company
providing networking software, including Executive Vice President of Strategic
Marketing, Executive Vice President of the Appware and Desktop Systems Groups
and Vice President of Marketing of the NetWare Systems Group. Mr. Edwards was
involved in the development of the NetWare 386 product line. Until May 1996, he
was a visiting faculty member at the Marriott School of Management at Brigham
Young University. Mr. Edwards received a B.S. degree in Computer Science from
Brigham Young University and has taken graduate courses in Computer Science at
Brigham Young University. Mr. Edwards has been nominated for reelection to the
Board of Directors as a Class III Director.
Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company
and of I-Link. Mr. Ryser was elected Treasurer of the Company and Treasurer and
Chief Financial Officer of L-Link in September 1996, and Chief Financial Officer
of the Company in January 1997. Mr. Ryser was self-employed as a corporate
financial consultant from May 1995 until September 1996, when he joined I-Link
as its Treasurer. From July 1993 through April 1995, Mr. Ryser served as Vice
President of Finance and Treasurer of Megahertz Corporation, a publicly-held
manufacturer of data communication products, in which position he served until
Megahertz was acquired by U.S. Robotics Corporation. After earning his MBA, Mr.
Ryser's work experience was concentrated in the investment banking field,
working first with the Capital Markets Division of First Security Corporation
and later with Dain Bosworth, Inc. Mr. Ryser holds a B.S. degree in Finance from
the University of Utah in 1979, and an MBA from the University of San Diego in
1982.
David E. Hardy, Secretary of the Company. Mr. Hardy was appointed Secretary
of the Company in December 1996. He is a founding partner of the law firm of
Hardy & Allen, in Salt Lake City. From February 1993 to April 1995, Mr. Hardy
served as Senior Vice President and General Counsel of Megahertz Corporation, a
publicly-held manufacturer of data communication products. Prior to his
association with Megahertz Corporation, Mr. Hardy was a senior partner of the
law firm of Allen, Hardy, Rasmussen & Christensen which was founded in 1982. Mr.
Hardy holds a Bachelor of Arts degree from the University of Utah and a Juris
Doctor degree from the University of Utah School of Law.
William H. Flury, Vice President, Sales and Marketing of I-Link since May
1996. Mr. Flury has over 17 years of sales and marketing management experience.
From November 1994 to March 1996, Mr. Flury held the Vice President of Worldwide
Sales position at Zebra Technologies, VTI. From June 1988 to September 1989, Mr.
Flury was employed by Novell, Inc., where he was the Senior Director of National
Accounts and Industry Markets. From November 1989 to July 1992, he worked for
Adobe Systems as Director of Market Development. From August 1992 to October
1994, he was employed by NetLabs as Vice President of Worldwide Sales and
Customer Support. From October 1994 to March 1996,
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he was employed by Vertical Technologies. Mr. Flury has established domestic and
international programs in direct sales, multi-tiered channel sales, and OEM
sales. Mr. Flury holds Business and Sociology degrees from the University of
Utah, and is a graduate of the Stanford Executive Program.
Henry Y.L. Toh, Director of the Company. Mr. Toh was elected by the
Board of Directors as a Class II Director and as Vice Chairman of the Board of
Directors in March 1992. Mr. Toh was elected President of the Company in May
1993, Acting Chief Financial Officer in September 1995 and Chairman of the Board
in May 1996, and served as such through September 1996. He was appointed
Assistant Secretary of the Company in May 1997. Mr. Toh is a Director of Four M.
Mr. Toh served as a senior tax manager in international taxation and mergers and
acquisitions with KPMG Peat Marwick from March 1980 to February 17, 1992. He is
a graduate of Rice University.
Clay Wilkes, Director of the Company since September 1996. Mr. Wilkes
served as Chairman of the Board of the Company for September 1996 to August
1997. Mr. Wilkes was elected by the Board of Directors of the Company as a Class
I Director in April 1996. Mr. Wilkes served as President and Chief Executive
Officer of I-Link from inception to April 1996, Chief Technology Officer of
I-Link until January 1997 and is a director of I-Link. Mr. Wilkes has served as
President of GNet Enterprises, Inc., the general partner of I-Link, Ltd., since
its inception. From February 1993 through June 1994, Mr. Wilkes has served as a
consultant to IBM in Austin, Texas on the PowerPC project. From August 1990
through September 1992, he was responsible for UNIX product development at
Novell, Inc. in Provo, Utah, where he managed the networking server and client
development groups. Mr. Wilkes has spent many years in the management and
development of computer communications software. Mr. Wilkes attended the
University of Oregon and Brigham Young University and course work in Computer
Science at Utah State University.
R. Huston Babcock, M.D., Neurosurgeon and Director of the Company since
April 1983. Dr. Babcock served as Chairman of the Board of Directors of the
Company from its inception in April 1983 until March 1992. He was President of
the Company from inception until November 1987. He was Medical Director of the
Company from November 1987 to February 1993. Dr. Babcock is a neurosurgeon and
has been engaged in the full-time private practice of medicine on the West Coast
of Florida since 1960. Dr. Babcock's term as a Director of the Company expires
at the Annual Meeting and upon election and qualification of a successor.
Joseph A. Cohen, President of an investment firm and Director of the
Company. Mr. Cohen was appointed a Class II Director of the Company in September
1996 as the designee of Commonwealth. He has been the Chairman, Chief Executive
Officer and Director of New Frontier Entertainment, Inc. ("New Frontier") since
its formation in May 1995 and held the same positions since January 1993 in New
Frontier's predecessor company, The Frondelle Company, Inc. He is also President
of Leslie Group, Inc., a diversified company with holdings primarily in the
music, film, home video and other entertainment-oriented businesses. The Leslie
Group is a limited partner of Commonwealth Associates Management Corp., a
limited partnership which is the parent of Commonwealth. He is also a Founder
and President of Leslie/Linton Entertainment Inc., a merchant banking company
that provides investment funds and assists in raising capital and debt for
companies. Mr. Cohen also serves as President of Pickwick Communications, Inc.,
an independent music publishing company. From 1977 to 1986, Mr. Cohen served as
Executive Vice President of the National Association of Recording Merchandisers,
Inc. and Founder and Executive Vice President of Video Software Dealers
Association, Inc., trade associations representing all segments of the recorded
music and home video industries, respectively.
Robert W. Edwards, Jr., Vice President of Network Operations of I-Link.
Mr. Edwards was appointed Vice President of Network Operations of I-Link in
January 1997. From its inception in March
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1996 to January 1997 Mr. Edwards served as President and a Director of FTI, a
long-distance telecommunications carrier. Prior to incorporating FTI, Mr.
Edwards worked from September 1995 to March 1996 on preliminary regulatory,
tariff, equipment lease, employment and other organizational matters for FTI.
Mr. Edwards was President of FTI Publishing, Inc., a publisher of travel-related
advertising brochures (not associated or affiliated with FTI) from 1993 to 1995.
From 1984 through 1993, Mr. Edwards was a partner in ONE-2-ONE Communications,
Inc., a telecommunications reseller for the southwest region of the United
States. He received his B.S. Degree in Computer Science from the University of
Utah in 1976.
Each officer of the Company is chosen by the Board of Directors and
holds his or her office until his or her successor shall have been duly chosen
and qualified or until his or her death or until he or she shall resign or be
removed as provided by the By-Laws.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse to the Company or any of its subsidiaries.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act during its most recent
fiscal year and Forms 5 with respect to its most recent fiscal year, the Company
believes that all such forms required to be filed pursuant to Section 16(a) of
the Exchange Act were timely filed, as necessary, by the officers, directors,
and security holders required to file the same during the fiscal year ended
December 31, 1996, except that reports were filed late by the following persons:
John W. Edwards, 3 transactions; Clay Wilkes, 3 transactions; Karl S. Ryser,
Jr., 1 transaction; Alex Radulovic, 3 transactions; William H. Flury, 3
transactions; Joseph A. Cohen, 2 transactions; and I-Link, Ltd., 1 transaction.
In addition, the Company has received no copies of Forms, 3, 4 or 5 for the
following persons relating to the following number of transactions: Benchmark, 6
transactions; and Commonwealth, 5 transactions.
Certain Relationships and Related Transactions
During the first quarter of fiscal 1995, the Company received advances
totaling $218,000 from Mortgage Network International ("MNI"). Henry Y.L. Toh, a
Director of the Company, has management control over MNI. Such advances were
previously payable upon demand. Subsequent to the extension of such advances,
the Board of Directors approved delivery of a promissory note representing the
aggregate amount of such advances, which promissory note matured by its terms on
October 1, 1995 and bore interest at one percent over the prime rate of interest
established by Southwest Bank of Texas, N.A. The balance due as of December 31,
1996, was $175,682 which will be discharged as follows: (i) a principal payment
of $88,000 originally due December 31, 1996 will be paid in 21 equal monthly
payments of approximately
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$4,600 beginning March 10, 1997; and (ii) the remaining principal amount of
$87,682 plus interest at 10.5% per annum will be paid at the rate of $4,200 per
month.
I-Link was a party to a 12-month consulting agreement with Benchmark
dated August 10, 1995 pursuant to which I-Link was obligated to pay $6,000 per
month to Benchmark for consulting services rendered. Those payments accrued and
were deferred pending the Company's attaining stockholder's equity of at least
$2.5 million. The sums due were paid and the agreement has not been renewed.
I-Link entered into a consulting agreement with T6-G Limited
Partnership ("T6-G") for two years commencing upon the successful completion of
at least $4 million in funding. The agreement required the payment of a total of
$70,000 payable monthly over 24 months. I-Link discharged the entirety of the
sums due in September 1996 and T6-G designated such sums to be allocated to its
purchase of Class C Preferred Stock.
I-Link was indebted to T6-G in the amount of $300,000, which sums were
repaid in full from the proceeds of the Class C Offering. T6-G owns a 9.5%
interest in I-Link, Ltd.
The Company also entered into two consulting agreements with Jason H.
Pollak, the initial term of one of which expired on January 31, 1996 and the
second of such agreements commenced thereafter. The term of the second agreement
was for a period of three years, subject to earlier termination by the Company.
Pursuant to the terms of the first of such agreements (collectively, the "Pollak
Agreements"), Mr. Pollak received 50,000 shares of Common Stock. The second of
the Pollak Agreements provided Mr. Pollak with an option to purchase up to
50,000 shares of Common Stock each year at prices of $1.50, $2.50 and $3.50,
respectively. The shares of Common Stock were included in a registration
statement on Form S-8. The second of the Pollak Agreements was terminated by the
Company effective April 4, 1996.
In January 1996, certain associates and affiliates of Commonwealth
purchased an aggregate of 878,891 shares of Common Stock (the "Kanter Option
Shares") upon conversion of Class A Preferred Stock held by Walnut Capital Corp.
("WCC"), Windy City, Inc. ("WCI") and Canadian Imperial Bank of Commerce Trust
Company (Bahamas) Limited at a cost per share of approximately $0.49. Joel
Kanter, a director of the Company at the time of the transaction, is affiliated
with WCC and WCI.
On February 21, 1996, Four M International, Ltd. ("Four M"), a
principal shareholder of the Company, granted certain options to purchase shares
of the Company owned by Four M exercisable commencing July 1, 1996 (subject to
the satisfaction of certain conditions) to purchase 3,915,570 shares of Common
Stock. Henry Y.L. Toh, a director of the Company, is one of the two directors of
Four M. The initial exercise price of $1.79 per share represents the lesser of
200% of the average of the closing bid and ask price per share of Common Stock
for the ten (10) business days preceding July 1, 1996 or $1.79 per share.
Commonwealth and affiliates or associates thereof received the right to purchase
545,285 shares of Common Stock prior to December 31, 1996 and 537,500 shares of
Common Stock prior to December 31, 1997. Benchmark received the right to
purchase 545,285 shares of Common Stock prior to December 31, 1996 and 537,500
shares prior to December 1997. Certain members of management of I-Link (at that
time), namely, Clay Wilkes, Floyd Wilkes and Alex Radulovic, received the right
to purchase an aggregate of 825,000 shares of Common Stock prior to December 31,
1996 and 825,000 shares prior to December 31, 1997. Scott Cook received the
right to purchase 100,000 shares prior to December 31, 1996. On April 24, 1996,
the Four M Options issued to Mr. Cook were cancelled and options were issued as
of that date by Four M to Mr. Cook (50,000 shares), S.C. Culbreth (25,000
shares) and John Beardmore (25,000 shares).
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In August 1996, the Four M Options were amended to provide that in the
event that $200,000 in principal amount (i.e., exercise proceeds) of the Four M
Options have been exercised prior to December 31, 1996, the exercise period of
the remaining Four M Options exercisable during 1996 (the "1996 Four M Options")
would be extended to September 6, 1997 and the exercise price would be increased
by four percent (4%) of the then current exercise price for each 30 day period
or portion thereof commencing January 1, 1997 in which the remainder of the 1996
Four M Options were not exercised. In December 1996 Four M Options to purchase
the following shares were exercised by the following persons: 25,000 shares by
Scott Cook, 12,500 shares by John Beardmore, 12,500 shares by S.C. Culbreth,
30,726 shares by Benchmark, 46,509 shares by Commonwealth and 15,503 shares by
William Baquet. Inasmuch as the aggregate amount exercised exceeded $200,000 in
principal amount, the exercise period of the remaining Four M Options was
extended. Subsequently, an aggregate of 1,488,677 of such options were exercised
at prices ranging from $2.26 to $2.54 per share and a like amount of shares of
Common Stock were issued to the respective exercising option holders. In all,
Four M has received an aggregate of $3,942,539 for all exercises of
Four M Options. As of the Record Date, the following parties and/or their
affiliates or associates held the following Four M Options: (i) Commonwealth -
options for 269,187 shares to be exercised prior to September 6, 1997 and
options for 485,696 shares prior to December 31, 1997; (ii) William Baquet -
140,184 shares prior to September 6,1997 and 240,696 shares prior to December
31, 1997; (iii) Scott Mednick - 50,000 shares prior to September 6, 1997; (iv)
members of management of the Company - an aggregate 435,000 shares prior to
September 6, 1997 and 824,891 shares prior to December 31, 1997; (v) Benchmark -
260,667 shares prior to September 6, 1997 and 356,392 shares prior to December
31, 1997; and (vi) Messrs. Cook, Culbreth and Beardmore - an aggregate 50,000
shares prior to December 31, 1997. The shares of Common Stock owned by Four M
were subject to a lock-up agreement with Commonwealth through September 6,
1997.
On February 21, 1996, R. Huston Babcock, M.D., a director of the
Company, granted certain options (the "Babcock Options") to Benchmark
exercisable commencing July 1, 1996 (subject to the satisfaction of certain
conditions) to purchase 183,542 shares of Common Stock issuable upon conversion
of outstanding Class B Convertible Preferred Stock. The exercise price is equal
to the lesser of 200% at the average of the closing bid and ask price per share
of Common Stock for the ten (10) business days preceding July 1, 1996 or $1.79
per share. Benchmark received the right to purchase 91,771 shares of Common
Stock prior to December 31, 1996, which options have expired, and the right to
purchase 91,771 shares prior to December 1997. Certain shares of Common Stock
owned by Dr. Babcock were subject to a lock-up agreement with Commonwealth
through September 6, 1997.
In August 1996, William H. Flury, Vice President, Sales and
Marketing of I-Link, loaned I-Link the sum of $100,000, with $105,000 (including
a loan origination fee of $5,000) due and payable the earlier of September 16,
1996 or upon the closing of a debt or equity offering by the Company. In
connection with such loan, the Company agreed to issue Mr. Flury a warrant to
purchase 5,000 shares of Common Stock for two years at $2.50 per share. The
Company recorded additional interest expense of $11,875 in connection with the
transaction. The funds from the loan were used for general working capital
purposes of I-Link. The loan was repaid in September 1996 and the sums directed
by Mr. Flury to purchase 1,666 shares of Class C Preferred Stock.
In August 1996, John W. Edwards, President and Chief Executive Officer
of I-Link, loaned I-Link the sum of $131,250 (including a $6,250 original issue
discount) due and payable the earlier of September 6, 1996, or upon the receipt
of proceeds from a debt or equity financing of the Company. In connection with
such loan, the Company agreed to issue Mr. Edwards a warrant to purchase 25,000
shares of Common Stock for two years at $4.87 per share. Funds from the loan
were used to pay a $100,000 payment due to
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AT&T and for general working capital purposes. The loan was repaid in September
1996 from the proceeds of the Class C Offering.
In September 1996, the Company advanced the sum of $685,000 to FTI to
be used by FTI to acquire from Harris Corporation certain items of
telecommunications switches known as "Harris switches." FTI is an authorized
Harris reseller and was able to obtain favorable pricing for these switches.
These Harris switches are included in the equipment covered by the IBM operating
lease, and IBM paid FTI for the switches as a vendor, and leased them to I-Link.
As of December 31, 1996, the remaining portion of the advance was $120,000. The
majority owner of FTI is Robert W. Edwards, a brother of John W. Edwards, the
Company's President, Chief Executive Officer and Director. Effective January 1,
1997, the Company acquired all of the outstanding stock of FTI. See "Proposal 4
- -- Information About the FTI Acquisition" and "-- Reasons for Acquisition."
Clay Wilkes, the sole shareholder of GNet Enterprises, Inc. ("GNet"),
the general partner of I-Link, Ltd. pledged all of the issued and outstanding
shares of GNet to secure the Company's guarantee of $100,000 of the principal
amount of a loan on October 19, 1995 from Scott Cook to I-Link. The loan was
repaid in September 1996 from the proceeds of the Class C Offering.
Certain officers and directors of the Company and/or I-Link have agreed
to vote shares over which they exercise voting power in an aggregate amount of
5,653,773 shares of Common Stock in favor of a proposal to increase the
authorized shares of Common Stock and Preferred Stock of the Company. In
addition, pending the solicitation of the necessary stockholder approval and as
a condition to the first closing of the Class C Offering, securityholders,
including certain officers and directors of the Company and/or I-Link, agreed
not to exercise any options owned by them unless and until the shareholders of
the Company approve an increase in authorized capital stock.
On September 6, 1996, the Company closed a private placement of 240,000
shares of Class C Preferred Stock and $717,000 of principal amount of
Convertible Promissory Notes (the "Class C Offering"). As a result of the
closing of the Class C Offering, 1.6 million shares of the Company's restricted
Common Stock held in escrow for the benefit of the former shareholders of I-Link
have been released from escrow, in accordance with the terms of the Stock
Purchase Agreement between I-Link and the Company. Upon such release, the
Company recorded acquired in-process research and development expense of $14.6
million in fiscal 1996, and an increase to paid-in capital of $12.6 million in
fiscal 1996. The final one million shares held in escrow were released in August
1997 as a result of satisfaction of certain revenue targets, resulting in an
increase in intangible assets and paid-in capital of $8,875,000.
Commonwealth acted as the placement agent for the Class C Offering.
Commonwealth received a commission equal to seven percent of the aggregate
purchase price of the shares of Class C Preferred Stock and Convertible Notes
sold, a non-accountable expense allowance equal to three percent of the gross
proceeds from the sale of the Class C Preferred Stock and Convertible Notes and
certain other specified offering-related costs. In addition, the Company granted
Commonwealth a right of first refusal to underwrite or place any future public
or private sale of debt or equity securities or any such sale by certain
principal shareholders of the Company, its subsidiaries and successors, for a
period of five years after the closing of the Class C Offering.
The Company issued to Commonwealth Placement Agent's Warrants to
purchase up to 250,000 shares of the Company's Common Stock and Consultant's
Warrants to purchase up to 500,000 shares of Common Stock (together previously
defined as the "Commonwealth Warrants"). The Commonwealth Warrants will be
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exercisable for five (5) years commencing March 1997 at an exercise price of
$2.50 per share, subject to adjustment.
The Company also entered into a Consulting Agreement with Commonwealth,
pursuant to which: (i) the Company shall employ Commonwealth as its investment
banker and financial consultant for a period of twelve months; (ii) the Company
paid Commonwealth a fee of $200,000, plus two percent of the gross proceeds of
the Class C Offering in excess of $10,000,000, for such twelve-month period; and
(iii) the Company agreed to pay Commonwealth a fee of five percent of the first
$5,000,000 and two and one-half percent of the amount over $5,000,000 of the
consideration paid or received by the Company (or by any affiliated entity of
the Company) in any transaction (including mergers, acquisitions, joint ventures
and other business transactions) consummated by the Company or any subsidiary or
affiliate of the Company introduced to the Company by Commonwealth.
Certain officers, directors and affiliated persons, including holders
of the 10% Notes, the Four M Options, the Kanter Option Shares and the Babcock
Option agreed with Commonwealth not to sell any shares of Common Stock or
options to purchase Common Stock for a period of 12 months from September 6,
1996 without the prior written consent of Commonwealth. In addition, holders of
the 10% Notes and certain other promissory notes who acquired Class C Preferred
Stock in the Class C Offering agreed with Commonwealth not to sell any shares of
Common Stock or the Conversion Shares for a period of twelve months from
September 6, 1996, without the prior written consent of Commonwealth; provided,
however, Commonwealth has agreed that such persons will be permitted to sell a
sufficient amount of the shares of Common Stock or Conversion Shares as will
equal the principal amount of the note previously held by such shareholder. Such
lock-up periods have expired. In addition, certain officers, directors and
affiliated persons of the Company have agreed not to exercise any options owned
by them (and to waive reservation of the shares of Common Stock underlying such
options) until shareholders authorize such number of additional shares of Common
Stock necessary to accommodate the lowest Conversion Price of the Class C
Preferred Stock and, finally, all such persons have agreed to vote their shares
of Common Stock for such increase in authorized capital.
Commonwealth designated Joseph A. Cohen for election to the Board of
Directors of the Company, and designated Michael Falk as a non-voting advisor to
the Board of Directors. In addition, Commonwealth was granted the right to
approve the Company's selection of a second outside director to be nominated for
election at the next annual or special meeting of stockholders.
Commonwealth also arranged bridge financings for the Company in the amount
of $375,000 and was paid $37,500 in commissions from the proceeds of the Class C
Offering.
On April 29, 1997, the Company entered into a Settlement Agreement
("Settlement Agreement") with JW Charles Financial Services, Inc. ("JWC"),
pursuant to which the Company and JWC settled certain litigation between them.
Pursuant to the Settlement Agreement, the Company agreed (a) to pay or cause JWC
to be paid the sum of six hundred thousand dollars ($600,000); and (b) to
terminate a financial consulting agreement between the parties (the "1994
Consulting Agreement"); concurrently JWC agreed (c) to transfer to the Company
or its designees and/or assignees all of its right, title and interest to a
warrant (the "JWC Warrant") representing the right to purchase shares of Common
Stock, which warrant had been issued pursuant to the 1994 Consulting Agreement,
(d) to deliver to the Company the JWC Warrant with an executed assignment of the
JWC Warrant with the name of the assignee left in blank to be filled in by the
Company, and (e) to terminate the 1994 Consulting Agreement. Both parties
executed general releases in full settlement of all claims and disputes between
them. The JWC Warrant, as adjusted through the date of its surrender to the
Company, represents the right to purchase 331,126 shares of Common Stock at
$1.51
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per share until November 3, 1999. In connection with the execution of the
Settlement Agreement the JWC Warrant was purchased by a group of investors which
includes David E. Hardy and Karl S. Ryser, Jr., both of whom are members of
Company management (the "Hardy Group"), in consideration for payment by the
Hardy Group of six hundred thousand dollars ($600,000) to JWC in satisfaction of
the amounts owed to JWC under the Settlement Agreement. As additional
compensation for the Hardy Group's commitment to purchase the JWC Warrant, the
Company also (i) will amend the JWC Warrant to provide for adjustment of its
exercise price in the event that the conversion rate of the Class C Preferred
Stock is adjusted; (ii) will issue to the Hardy Group new warrants to purchase
an aggregate of 175,000 shares of Common Stock at an exercise price of $2.50 per
share (adjustable in relation to any adjustments in the Class C Preferred Stock
conversion rate) for a term of five years, pursuant to which the members of the
Hardy Group shall have piggy-back registration rights; and (iii) will amend
options previously issued to each of Messrs. Hardy and Ryser to provide that, as
to the unvested portion of such options, 100,000 options would vest immediately
and the balance would vest in four equal installments over twelve months.
See "Compensation of Executive Officers and Directors -- Employment
Agreements" and "Compensation of Executive Officers and Directors -- Consulting
Agreements" for descriptions of the terms of employment and consulting
agreements between the Company or I-Link and certain officers, directors and
other related parties.
THE BOARD OF DIRECTORS
The Company's Certificate of Incorporation provides that the number of
Directors of the Company shall not be less than five nor more than nine. The
Board of Directors currently consists of five members. The Company's Certificate
of Incorporation provides that the Board of Directors shall be divided into
three classes. The terms of office of Messrs. Joseph A. Cohen and Henry Y.L.
Toh, Class II Directors, expire at the second succeeding shareholders' meeting.
The terms of office of Mr. John W. Edwards and Dr. R. Huston Babcock, Class III
Directors, expire at the Annual Meeting. The term of office of Mr. Clay Wilkes,
Class I Director, will expire at the next succeeding shareholders' meeting. Mr.
Edwards and Dr. Babcock have been nominated for reelection at the Annual
Meeting.
The Board of Directors held seven meetings during the fiscal year ended
December 31, 1996. During the fiscal year ended December 31, 1996, no incumbent
director attended fewer than 75 percent of the meetings of the Board of
Directors or of the committees on which he served.
Committees of the Board of Directors
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning the
selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Henry Y.L. Toh, Chairman of the Audit Committee, Clay Wilkes and
Joseph A. Cohen are members of the Audit Committee. The Audit Committee held one
meeting during the last fiscal year.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Dr. R. Huston Babcock, Chairman of the Compensation Committee, John
W. Edwards, and Joseph A. Cohen are members of the Compensation Committee. The
Compensation Committee held one meeting during the last fiscal year.
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Finance Committee. The Company's finance committee (the "Finance
Committee") is responsible for reviewing and evaluating financing, strategic
business development and acquisition opportunities. Joseph A. Cohen, Chairman of
the Finance Committee, Clay Wilkes and John W. Edwards are members of the
Finance Committee. The Finance Committee held one meeting during the last fiscal
year.
The Company has no nominating committee or any committee serving a similar
function.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by each
person serving as the Company's Chief Executive Officer during the last year and
the Company's three most highly compensated executive officers serving at
December 31, 1996 whose compensation was in excess of $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------- ------------------------ ----------
Securities
Other Restricted Underlying All Other
Name and Annual Stock Options/ LTIP Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARs(#) Payouts($) ($)
- ------------------ ---- --------- -------- --------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry Y.L. Toh/1/ 1996 55,802 0 837/2/ 0/3/ 173,501 0 N/A
President and CEO 1995 58,051 0 225/2/ 0 11,167 0 N/A
1994 54,362 0 815/2/ 0 1,167 0 N/A
John W. Edwards/4/ 1996 101,663/4/ 0 0 0 1,250,000/5/ 0 N/A
President and CEO 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Karl S. Ryser, Jr./6/ 1996 41,665/6/ 0 0 0 250,000 0 N/A
Treasurer and CFO 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
William H. Flury/7/
Vice President, 1996 91,667/7/ 0 0 0 250,000/8/ 0 N/A
Sales and 1995 -- -- -- -- -- -- --
Marketing of I-Link 1994 -- -- -- -- -- -- --
</TABLE>
- ---------------------
/1/ Mr. Toh began his employment with the Company in April 1992 and was
appointed President and CEO in May 1993 and served as such through
September 30, 1996.
/2/ Represents Company contributions to 401(k) plan on behalf of Mr. Toh.
/3/ None of Mr. Toh, Mr. Edwards, Mr. Ryser or Mr. Flury had restricted stock
holdings at the end of the last year.
/4/ Mr. Edwards began his employment with I-Link in April 1996 and was
appointed President and CEO as of September 30, 1996; his annual salary was
$175,000 from April to August 21, 1996 and was $96,000 for the balance of
the year. See " -- Employment Agreements."
/5/ Excludes warrants to purchase 25,000 shares of Common Stock at an exercise
price of $4.875 per share issued in connection with a bridge loan. See
"Directors and Executive Officers --Certain Relationships and Related
Transactions."
/6/ Mr. Ryser began his employment with I-Link in September 1996; his annual
salary during the 1996 year was $125,000. See "--Employment Agreements."
/7/ Mr. Flury began his employment with I-Link in May 1996; his annual salary
during the 1996 year was $137,500 per year. See "--Employment Agreements."
/8/ Excludes warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.50 per share issued in connection with a bridge loan. See
"Directors and Executive Officers -- Certain Relationships and Related
Transactions."
16
<PAGE>
Option/SAR Grants in Last Fiscal Year (1996)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1996, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Number of Securities Percent of Total Exercise
Underlying Options/SARs Granted to or Base
Name Options/SARs Granted (#) Employees in Fiscal Year Price ($/Sh) Expiration Date
- ---------------------- -------------------------- -------------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Henry Y.L. Toh 150,000 3.5% $1.125 2/3/2006
10,000 *% 1.000 1/1/2006
John W. Edwards/1/ 1,000,000 23.1% 7.000 4/8/2006
250,000 5.8% 4.875 8/21/2006
Karl S. Ryser, Jr. 250,000 5.8% 4.410 10/15/2006
William H. Flury/2/ 250,000 5.8% 4.410 10/15/2006
</TABLE>
- ---------------------
* Less than 1%.
/1/ Does not include warrants to purchase 25,000 shares of Common Stock at an
exercise price of $4.875 issued in connection with a bridge loan. See
"Directors and Executive Officers -- Certain Relationships and Related
Transactions."
/2/ Does not include warrants to purchase 5,000 shares of Common Stock at an
exercise price of $2.50 in connection with a bridge loan. See "Directors
and Executive Officers -- Certain Relationships and Related Transactions."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to options
exercised during 1996 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of fiscal 1996.
<TABLE>
<CAPTION>
Shares Value Number of Securities Value of Unexercised in the
Name Acquired On Realized Underlying Unexercised Money Options/SARs at
Exercise (#) ($) Options/SARs at FY-End (#) FY-End ($)/1/
- -------------------- -------------- ---------- -------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Henry Y.L. Toh 0 0 173,501 0 581,919 0
John W. Edwards 0 0 416,666 833,334 N/A N/A
Karl S. Ryser, Jr. 0 0 25,000 225,000 N/A N/A
William H. Flury 0 0 0 250,000 N/A N/A
</TABLE>
- ----------------
/1/ The calculations of the value of unexercised options are based on the
difference between the closing bid price on Nasdaq of the Common Stock on
December 31, 1996, and the exercise price of each option, multiplied by the
number of shares covered by the option.
Director Compensation
During 1996, Directors of the Company then serving received options to
purchase 10,000 shares of Common Stock on the first business day of January at
an exercise price equal to the fair market value of the Common Stock on the date
of grant. Mr. Cohen received options to purchase 64,000 shares of Common Stock
upon his appointment to the Board. Effective February 6, 1997, and the first
business day of January of each year thereafter, each Director then serving will
receive options, to purchase 10,000 shares of Common Stock and, for each
committee on which the Director serves, options to purchase 5,000 shares of
Common Stock. The exercise price of such options shall be equal to the fair
market value of the Common Stock on the date of grant. The Directors are also
eligible to receive options under the Company's stock option plans at the
discretion of the Board of Directors.
17
<PAGE>
Employment Agreements
In February 1996, the Company entered into two-year employment
agreements with Henry Y.L. Toh, then President and Chief Executive Officer;
Dorothy Michon, Vice President, Operations; and Stephanie Giallourakis,
Controller and Secretary. Ms. Michon's title was subsequently changed to
Director-Medical Division. The employment agreements are each for an initial
period ending on December 31, 1997 and are automatically renewable for
successive one-year periods unless written notice to the contrary is given by
the Company not less than 120 days prior to expiration of the term. Pursuant to
the terms of the employment agreements, each such officer is required to devote
such of his or her time to the business and affairs of the Company as is
required to fulfill the duties and responsibilities of his or her office. Mr.
Toh is entitled under his employment agreement to receive compensation at the
rate of $54,000 per year. Ms. Michon is entitled to compensation at the rate of
$63,000, and Ms. Giallourakis is entitled to compensation at the rate of $53,000
per year. Each such officer is entitled to an annual bonus at the discretion of
the Board of Directors and may participate in fringe benefits, deferred
compensation, stock benefits and option plans of the Company. In the event of
termination of his employment by the Company other than for "cause" (as defined
in the agreement) or by Mr. Toh upon "good reason" (as defined in the
agreement), the Company is required to pay Mr. Toh, as liquidated damages or
severance pay, monthly termination payments equal to the base salary in effect
for a period of six months after such termination and, with respect to Ms.
Michon and Ms. Giallourakis, each such officer is entitled to monthly
termination payments equal to the base salary for periods of three months after
any such termination. Each of the employment agreements contains confidentiality
and non-solicitation provisions.
I-Link entered into three-year employment agreements on February 21,
1996 with each of Clay Wilkes, Chairman of the Board, and Alex Radulovic, senior
engineer of I-Link. Under his employment agreement, Mr. Wilkes is employed at a
salary of $95,000 per annum, subject to adjustment upon satisfaction of
performance criteria. Under his employment agreement, Mr. Radulovic is employed
at a salary of $90,000 per annum, subject to adjustment upon satisfaction of
performance criteria. In the event of termination by the Company not involving
"Just Cause" (as defined in the agreement), or upon a material breach by the
Company which is unremedied for 30 days after written notice, each of Mr. Wilkes
and Mr. Radulovic is entitled to receive, as liquidated damages or severance
pay, an amount equal to the Monthly Compensation (as defined in the agreement)
for the remaining term of the Agreement and, in addition, all options shall vest
and all Common Stock of Medcross held in escrow shall be released. Each of the
agreements contain non-competition and confidentiality provisions. On July 1,
1996, the Company approved the grant of options to purchase 1,500,000 and
500,000 shares of Common Stock at $7.00 per share for five years, to Messrs.
Wilkes and Radulovic, respectively. To the extent vested, the options may be
exercised commencing June 30, 1997. The options vest on June 30, 2001; provided
however, that vesting will accelerate in 25% increments at such time as the
average closing bid price of a share of Common Stock equals or exceeds $10, $15,
$20 and $25, respectively. As of the Record Date, 25% of each of such options
has vested.
On April 8, 1996, subject to the approval of the I-Link Board of
Directors, I-Link entered into a three-year employment agreement with John W.
Edwards, President, Chief Executive Officer and Director of the Company.
Pursuant to the terms of the employment agreement, Mr. Edwards was employed as
the Chief Executive Officer and a Director of I-Link, and is required to devote
substantially all of his working time to the business and affairs of I-Link. Mr.
Edwards is entitled under his employment agreement to receive compensation at
the rate of $175,000 per year and is entitled to a profitability bonus in the
discretion of the I-Link Board of Directors and to participate in fringe
benefits of the Company as are generally provided to executive officers. In
addition, Mr. Edwards is entitled to receive an option to purchase one
18
<PAGE>
million shares of Common Stock of Medcross, Inc. at an exercise price of $7.00.
Of such options, 83,333 vested immediately and 83,333 vest and become
exercisable on the first calendar day of each quarter after April 8, 1996. In
the event of termination by I-Link or in the event of a violation of a material
provision of the agreement by I-Link which is unremedied for thirty days and
after written notice or in the event of a "Change in Control" (as defined in the
agreement), Mr. Edwards is entitled to receive, as liquidated damages or
severance pay, an amount equal to the Monthly Compensation (as defined in the
agreement) for the remaining term of the agreement. The agreement contains non-
competition and confidentiality provisions. Mr. Edwards agreed to amend his
contract, effective August 21, 1996, to reduce his annual salary from $175,000
to $96,000; and in consideration of the salary reduction, the Company has agreed
to grant him options to purchase 250,000 shares of Common Stock at an exercise
price of $4.875 per share.
In October 1996, I-Link entered into three-year employment agreements
with Karl S. Ryser, Jr., Treasurer and Chief Financial Officer of the Company,
and with William H. Flury, I-Link's Vice President, Sales and Marketing.
Pursuant to the terms of the employment agreements, each such officer is
required to devote all of his time to the business and affairs of the Company
except for vacations, illness or incapacity. Mr. Ryser is entitled under his
employment agreement to receive compensation at the rate of $125,000 per year
and a bonus in the sole discretion of the Chief Executive Officer and Mr. Flury
is entitled to compensation at the rate of $137,500 per year and a bonus
commensurate with his performance and that of I-Link. Each such employee may
participate in fringe benefits, deferred compensation, stock benefits and option
plans of the Company. In addition, each of Mr. Ryser and Mr. Flury is entitled
to options to purchase 250,000 shares of Common Stock exercisable at an exercise
price equal to the closing bid price on the date of the employment agreement.
Options issuable to Mr. Ryser to purchase 25,000 shares vest immediately and the
remaining options will vest in quarterly increments of 20,455 commencing January
1, 1997. Options issuable to Mr. Flury to purchase 41,666 shares vest six months
from the date of the employment agreement and the remaining options will vest in
quarterly increments of 20,833. In the event of a change of control or upon
termination of the employment agreement by the Company without cause all options
shall thereupon be fully vested and immediately exercisable. In the event of
termination by the Company other than for "cause" (as defined in the agreement),
the Company is required to pay Mr. Ryser or Mr. Flury, as the case may be, a
lump sum severance payment equal to one year's then current salary. Each of the
employment agreements contains confidentiality and non-competition provisions.
Consulting Agreements
The Company is a party to a consulting agreement for the period
beginning January 1, 1996 and ending December 31, 1998 with Windy City, Inc.
Joel Kanter, a director of the Company until July 30, 1996, is the President and
a director of Windy City, Inc. Pursuant to such agreement, Windy City, Inc. was
engaged to provide such consulting services as the Company may request in
exchange for compensation at the rate of $6,250 per calendar quarter.
The Company entered into a consulting agreement with David E. Hardy
effective February 6, 1997 and for a term of 36 months thereafter. Pursuant to
the agreement, Mr. Hardy shall provide legal services to the Company in exchange
for compensation at the rate of $10,417 per month for the term of the Agreement.
In addition, in the event the Company increases the salary of its senior-level
vice presidents, the consulting fee shall be equally increased and in the event
the Company shall pay any company performance-based bonuses to its senior level
vice presidents, the Company shall pay an equal amount to Mr. Hardy. In
addition, Mr. Hardy was granted options to purchase 250,000 shares of the
Company's Common Stock at an exercise price equal to the closing price of the
Company's publicly traded shares as of
19
<PAGE>
the effective date of the Agreement ($5.375 per share). The options vest as to
47,500 shares upon the execution of the Agreement and options relating to 20,250
shares shall vest at the commencement of each calendar quarter for ten quarters,
with the first quarterly vesting to occur on April 1, 1997 and the final
quarterly vesting to occur July 1, 1999. In the event of the termination of the
Agreement prior to the expiration of the full term for any reason other than as
a result of a material, unremedied breach by Mr. Hardy which remains uncured
following 30 days written notice, Mr. Hardy is entitled to a lump sum payment
equal to the lesser of the monthly consulting fee payable through the end of the
term of the Agreement or the monthly consulting fee payable over 12 months and
all unvested options shall accelerate and immediately become fully vested and
exercisable.
Other Rights of Executives to Purchase Securities
The Company has agreed to issue options to purchase 64,000 shares of
Common Stock at an exercise price of $5.25 to Joseph Cohen, Commonwealth's
designee as Director of the Company. Pursuant to the terms of their employment
agreements with I-Link, Karl S. Ryser, Jr., Treasurer of the Company, and
William H. Flury, Vice President, Sales and Marketing of I-Link, are each
entitled to receive options to purchase 250,000 shares of Common Stock. The
Company has also agreed to issue warrants to purchase 25,000 and 5,000 shares of
Common Stock at an exercise price of $4.875 and $2.50, respectively, to Mr. John
Edwards and Mr. Flury, in connection with the loan by such persons to I-Link of
$125,000 and $100,000, respectively, in August 1996. On May 15, 1997, the
Company issued 500,000 additional options to John Edwards at an exercise price
of $8.125 per share, 250,000 of which shall vest in twelve equal quarterly
installments and the remaining 250,000 of which shall vest upon conditions yet
to be determined by the board of directors. Further, on May 15, 1997, the
Company issued 250,000 options to each of Mr. Ryser and David Hardy, Secretary
of the Company, at an exercise price of $8.125 per share, half of which shall
vest in twelve equal quarterly installments and the remaining half of which
shall vest upon conditions yet to be determined by the board of directors. On
May 15, 1997, Mr. Flury was granted options to purchase 250,000 shares of Common
Stock and Mr. Robert Edwards, Vice President of Network Operations of I-Link,
was granted options to purchase 500,000 shares of Common Stock, each at the
exercise price of $8.125; such options vest in three annual installments.
Furthermore, directors of the Company approved the grant of options to purchase
10,000 shares of Common Stock to each director and an additional 5,000 options
per director per committee on which he or she serves for an aggregate of options
to purchase 95,000 shares. Finally, on May 15, 1997, the Company granted 300,000
options to each of Messrs. Ryser and Hardy at an exercise price of $8.125 per
share; such options are contingent upon the closing of the investment in the
Company by Winter Harbor and shall vest in full upon such closing.
Director Stock Option Plan
The Company's Director Stock Option Plan (the "DSOP") authorizes the
grant of stock options to directors of the Company. Options granted under the
DSOP are non-qualified stock options exercisable at a price equal to the fair
market value per share of Common Stock on the date of any such grant. Options
granted under the DSOP are exercisable not less than six months nor more than
ten years after the date of grant.
As of December 31, 1996, options for the purchase of 8,169 shares of
Common Stock at prices ranging from $.875 to $3.875 per share were outstanding.
As of December 31, 1996, options to purchase 15,228 shares of Common Stock have
been exercised. In connection with adoption of the 1995 Director Plan (as
hereinafter defined) the Board of Directors authorized the termination of future
grants of options under the DSOP; however, outstanding options granted under the
DSOP will continue to be governed by the terms thereof until exercise or
expiration of such options.
20
<PAGE>
Stock Purchase Plan
In accordance with the Employee Qualified Stock Purchase Plan (the
"Purchase Plan"), employees may contribute up to ten percent of their base wages
toward the purchase of Common Stock. The exercise price of options granted under
the Purchase Plan is the lesser of 85% of the market value on the first business
day of the payment period (September 1) or the last business day of the payment
period (August 31). As of December 31, 1996, the Company had 35,146 shares of
Common Stock reserved for issuance on exercise of the purchase rights granted
under the Purchase Plan.
1995 Director Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of
the Company's 1995 Director Stock Option and Appreciation Rights Plan, which
plan provides for the issuance of incentive options, non-qualified options and
stock appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary grants
of stock options which qualify as incentive stock options (the "Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), as well as options which do not so qualify (the "Non-Qualified
Options") to be issued to directors. In addition, stock appreciation rights (the
"SARs") may be granted in conjunction with the grant of Incentive Options and
Non-Qualified Options. No SARs have been granted to date.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 250,000 shares of Common Stock
(subject to adjustment in the event of stock dividends, stock splits and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of Common Stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employees.
The shares of Common Stock subject to the 1995 Director Plan may be made
available from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified
Options on a non-discretionary basis pursuant to the following formula: each
member of the Board of Directors then serving shall receive a Non-Qualified
Option to purchase 10,000 shares of Common Stock at an exercise price equal to
the fair market value per share of the Common Stock on that date. Pursuant to
such formula, directors received options to purchase 10,000 shares of Common
Stock as of October 17, 1995, options to purchase 10,000 shares of Common Stock
on January 2, 1996, and will receive options to purchase 10,000 shares of Common
Stock on the first business day of each January. Each option is immediately
exercisable for a period of ten years from the date of grant. The Company has
250,000 shares of Common Stock reserved for issuance under the 1995 Director
Plan. As of December 31, 1996, options exercisable to purchase 190,000 shares of
Common Stock at prices ranging from $1.00 to $1.25 per share are outstanding
under the 1995 Director Plan. As of December 31, 1996, options to purchase
40,000 shares have been exercised under the 1995 Director Plan.
21
<PAGE>
1995 Employee Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of
the Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options,
Non-Qualified Options and SARs.
Directors of the Company are not eligible to participate in the 1995
Employee Plan. The 1995 Employee Plan provides for the grant of stock options
which qualify as Incentive Stock Options under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as
Non-Qualified Options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of Incentive Options
and Non-Qualified Options. No SARs have been granted to date.
The 1995 Employee Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs of up to 400,000 shares of Common Stock (subject
to adjustment in the event of stock dividends, stock splits and other similar
events). To the event that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then-unexercised portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of Common Stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of Common Stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1996, options to purchase 400,000 shares of Common
Stock with exercise prices of $1.125 to $6.75 per share have been granted under
the 1995 Employee Plan. As of December 31, 1996, no options have been exercised
under the 1995 Employee Plan.
1997 Recruitment Stock Option Plan
For a description of the 1997 Recruitment Stock Option Plan, see
Proposal 5.
PROPOSAL 1
TO ELECT TWO CLASS III DIRECTORS TO SERVE FOR THREE YEARS AND UNTIL
THEIR SUCCESSORS HAVE BEEN DULY ELECTED AND SHALL QUALIFY
The Board of Directors has concluded that the reelection of John W.
Edwards and R. Huston Babcock as Class III Directors is in the best interest of
the Company and recommends approval of their election. Biographical information
concerning Mr. Edwards and Dr. Babcock can be found under "Directors and
Executive Officers." The remaining Directors will continue to serve in their
positions for the remainder of their terms.
Unless otherwise instructed or unless authority to vote is withheld,
the enclosed proxy will be voted for the election of Mr. John W. Edwards and Dr.
R. Huston Babcock, the nominees listed herein. Although the Board of Directors
of the Company does not contemplate that such nominees will be unable to serve,
if such a situation arises prior to the Annual Meeting, the persons named in the
enclosed proxy will vote for the election of such other person as may be
nominated by the Board of Directors. The election of directors will be decided
by a plurality of votes cast.
22
<PAGE>
Vote Required for Approval
The Class III director nominees named in Proposal 1 must receive a
plurality of the votes cast by the shares entitled to vote in order to be
elected.
The Board of Directors unanimously recommends a vote FOR the election of
Mr. John W. Edwards and Dr. R. Huston Babcock, the nominees listed above.
PROPOSAL 2
TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S
ARTICLES OF INCORPORATION TO CHANGE
THE COMPANY'S NAME TO I-LINK INCORPORATED
The Board of Directors has unanimously determined that it is in the
best interest of the Company and its stockholders to amend the Company's
Articles of Incorporation to effect the change of the Company's name from
Medcross, Inc. to "I-Link Incorporated" (the "Name Change Amendment") and
directed that the Name Change Amendment be considered at the Annual Meeting of
shareholders.
Principal Effects of and Reasons for Name Change
The Company believes that the name "I-Link Incorporated" will more
accurately reflect the business of the Company since the Company's acquisition,
in February 1996, of 100% of the issued and outstanding shares of the equity
securities of I-Link Worldwide, Inc. The Company's new name will be I-Link
Incorporated. The Company changed its stock symbol for Nasdaq Stock Market
purposes to "ILNK" effective March 8, 1996.
The name change, if adopted, will not affect the rights of any holder of
Common Stock of the Company nor of any holder of any right to receive Common
Stock of the Company.
The text of the proposed amendment to the Articles of Incorporation is
set forth in full in Exhibit A hereto and reference is made thereto for a
complete statement of its terms. The amendment to the Articles of Incorporation
will become effective upon approval by the shareholders and the filing of the
Articles of Amendment to the Articles of Incorporation containing such amendment
with the Secretary of State of Florida. If approved by the shareholders, the
Company anticipates that such Articles of Amendment to the Articles of
Incorporation will be filed as soon as practicable.
Vote Required for Approval
Approval of the amendment of the Articles of Incorporation will require
the affirmative vote of the holders of at least a majority of the outstanding
shares of Common Stock entitled to vote thereon, present in person or by proxy.
The enclosed proxy will be voted as specified, but if no specification is made
with respect to the proposed amendment to the Articles of Incorporation, it will
be voted in favor of the proposal to amend the Articles of Incorporation.
23
<PAGE>
The Board of Directors unanimously recommends a vote FOR the approval
of the amendment of the Articles of Incorporation to change the name of the
Company to I-Link Incorporated, as set forth in Exhibit A hereto.
PROPOSAL 3
TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S
ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF PREFERRED STOCK FROM 500,000 SHARES
OF PREFERRED STOCK, $10 PAR VALUE, TO 10,000,000 SHARES OF
PREFERRED STOCK, $10 PAR VALUE, TO PERMIT THE CONVERSION
OF THE CONVERTIBLE NOTES ISSUED IN SEPTEMBER 1996,
THE ISSUANCE OF CLASS D PREFERRED STOCK AND CLASS M
PREFERRED STOCK AND FOR OTHER GENERAL CORPORATE PURPOSES
The Board of Directors has adopted a resolution declaring it advisable
and in the best interest of the Company and its stockholders that the Company's
Articles of Incorporation be amended to provide for an increase in the
authorized number of shares of Preferred Stock of the Company from five hundred
thousand (500,000) shares of Preferred Stock to ten million (10,000,000) shares
of Preferred Stock. Such resolution also recommends that such amendment be
approved and adopted by the Company's stockholders and directs that such
proposal be submitted to the Company's stockholders at the Annual Meeting.
The Company is currently authorized to issue up to five hundred
thousand (500,000) shares of Preferred Stock, $10.00 par value (the "Preferred
Stock"). The Company has designated, issued and retired 7,500 shares of 12%
Cumulative Convertible Preferred Stock and 200,000 shares of Class A Variable
Rate Cumulative Convertible Preferred Stock. As of the date hereof, 22,500
shares of Preferred Stock have been designated Class B Variable Rate Cumulative
Convertible Preferred Stock (the "Class B Preferred Stock") of which 7,500
shares are issued and outstanding and 240,000 shares of Preferred Stock have
been designated Class C Convertible Cumulative Redeemable Preferred Stock (the
"Class C Preferred Stock") of which 240,000 shares are issued and outstanding.
Accordingly, there remain 30,000 shares of Preferred Stock which are
undesignated, unissued and not reserved for any specific purpose.
The Class C Preferred Stock provides the holders thereof the right to
cumulative preferential dividends, when, as and if declared by the Board of
Directors on a quarterly basis in an amount equal to 8% per annum of the
liquidation preference per share of $60. The Class C Preferred Stock dividend
rate is subject to an upward adjustment to 12% per annum if a registration
statement relating to such stock has not been declared effective by the SEC
within twelve months of the date of the final closing of the private placement
of the Class C Preferred Stock, which occurred on September 6, 1996 (the "Final
Closing"). Dividends may be payable in cash or, at the option of the Company, in
shares of Common Stock. Except as otherwise provided by law, the Class C
Preferred Shares have no voting rights. The Class C Preferred Stock is
redeemable by the Company in certain circumstances at any time prior to the
fourth anniversary of the Final Closing at a redemption price equal to $60 per
share plus accrued and unpaid. After the fourth anniversary of the Final Closing
the Class C Preferred Stock is redeemable at a redemption price of $90 per share
plus accrued and unpaid interest. With respect to the payment of dividends and
rights to redemption and upon liquidation, the shares of Class C Preferred Stock
are subordinate to any issued and outstanding shares of Class A Preferred Stock
and Class B Preferred Stock of the Company, and shall rank senior to the
Company's Common Stock. Class C Preferred Stock may be converted, at the option
of the holder thereof, into shares of Common Stock ("Conversion Shares"), at a
conversion rate of 24 Conversion Shares for each share of Class C Preferred
Stock, subject to adjustment. On the fifth anniversary of the Final Closing the
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Class C Preferred Stock shall be automatically converted into Conversion Shares.
The shares of Class C Preferred Stock carry registration rights which obligate
the Company to file a registration statement registering the reoffer and resale
of the Conversion Shares by the holders thereof. The Conversion Shares, and any
shares of Common Stock which may be issued as dividends on the Class C Preferred
Stock may not be publicly sold until after the first anniversary of the Final
Closing without the prior written consent of Commonwealth.
If the Board of Directors' proposal is approved by the Company's
stockholders, the Board of Directors would have authority to issue up to ten
million (10,000,000) shares of Preferred Stock to such persons, for such
consideration and with such rights and preferences, including dividend rates,
conversion prices, voting rights, redemption prices, and similar matters as the
Board of Directors may determine without further action by the stockholders
except as may be required by law.
The Board of Directors has proposed the increase in and classification
of the authorized capital stock to provide shares which could be used for a
variety of corporate purposes, including stock splits, mergers, acquisitions and
the raising of additional capital (including public and private offerings of
securities). The Company issued $717,000 in aggregate principal amount of
Convertible Promissory Notes in September 1996. The Convertible Promissory Notes
are due and payable on September 30, 1997 and bear interest at 8%. The unpaid
principal balance of the Convertible Promissory Notes will be automatically
converted into an aggregate of 11,950 shares of Class C Preferred Stock (equal
to one share of Class C Preferred Stock for each $60 of principal amount of the
Convertible Promissory Notes) upon the amendment of the Company's Articles of
Incorporation to increase the number of shares of Preferred Stock to at least
2,000,000 and the authorized number of shares of Common Stock to at least
50,000,000 shares and the designation of sufficient shares to accommodate
conversion.
The Company realized net proceeds from the offering of the Class C
Preferred Stock and Convertible Notes of $12,898,000. Of such amount, the
Company repaid short-term debt ($2,214,000, or 17.2% of net proceeds); paid
software license fees ($300,000, or 2.3% of net proceeds); repaid current
accounts payable in the amount of $532,000 (4.1%); and used $2,757,000 (21.4%)
for network infrastructure capital expenditure; $1,409,000 (10.9%) for network
operations; $344,000 (2.7%) for marketing and advertising programs; and
approximately $5,342,000 (41.4%) for working capital purposes. The principal
amount of the Convertible Notes outstanding is $717,000.
Winter Harbor Loan and Investment; Class M Preferred Stock
On June 5, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with Winter Harbor, L.L.C. ("Winter
Harbor") pursuant to which Winter Harbor agreed to loan to the Company the
principal sum of $2,000,000 (the "Loan") for capital expenditures and working
capital purposes. As further consideration for Winter Harbor's commitment to
make the Loan, the Company granted to Winter Harbor a warrant ("Loan Warrant")
to purchase up to five hundred thousand (500,000) shares of Common Stock at a
purchase price of $4.97 per share, subject to adjustment, pursuant to the terms
of a Warrant Agreement between the parties. The Loan Warrant expires on March
11, 2002, and contains demand and piggyback registration rights and customary
anti-dilution terms. The maturity date of the Note is October 15, 1998; however,
the Loan Agreement anticipates an equity investment in the Company by Winter
Harbor (the "Investment"). Upon closing of the Investment, all principal and
accrued interest then due under the Note may, at the option of Winter Harbor, be
credited toward payment of Winter Harbor's purchase price for the Investment and
the Note shall be cancelled. The loan from Winter Harbor has an interest rate of
prime plus 2%. In addition to the stated interest rate, the Company will
recognize debt issuance cost (non-
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cash) over the life of the loan (maturity date is October 15, 1998) of
approximately $3,800,000 which reflects the approximate fair value of the
warrants issued in connection with the debt. The Company expended significant
time and effort pursuing various financing alternatives and determined that the
Winter Harbor proposal was the best alternative available to the Company.
In August 1997, the Company and Winter Harbor amended their agreement
to provide that the Company would be allowed to borrow up to an additional
$3,000,000 (thus revising the maximum amount of the Loan to $5,000,000). In the
event the Company borrows against such additional credit, it has agreed to issue
to Winter Harbor warrants to purchase 100,000 shares of Common Stock for each
$1,000,000 in additional borrowing. The exercise price for such additional
warrants shall equal the closing bid price of the Common Stock on the date each
such $1,000,000 increment is borrowed by the Company. On August 18, 1997, the
Company borrowed an additional $3,000,000 pursuant to such arrangement, and
issued an additional 300,000 warrants to Winter Harbor in connection therewith.
Winter Harbor is owned by First Media, L.P., a private media and
communications company which, in turn, is a private investment principally of
Richard E. Marriott and his family. Medcross's general counsel, David E. Hardy,
is a brother of Ralph W. Hardy, Jr. who is general counsel and a minority equity
holder in Winter Harbor. David E. Hardy has no ownership or association with
Winter Harbor. As a result of this relationship, as well as personal
relationships of David E. Hardy with the principals of Winter Harbor,
discussions were initiated which led to Winter Harbor's investment in the
Company.
On September [ ], 1997 the Company closed on an agreement with Winter
Harbor relating to the Investment. Winter Harbor invested $7,100,000 (which
includes accrued interest associated with the Loan) in a new series of the
Company's convertible preferred stock (the "Series M Preferred Stock"). Winter
Harbor purchased 2,582 shares of Series M Preferred Stock, convertible into
2,582,000 shares of Common Stock for an aggregate cash consideration of
$7,100,000 (equivalent to $2.75 per share of Common Stock). The agreement with
Winter Harbor included the purchase of 1,818 additional shares of Series M
Preferred Stock, convertible into 1,818,000 shares of Common Stock. Such
additional shares of Series M Preferred Stock were paid for by converting the
$5,000,000 outstanding principal balance due under the Note. Upon conversion of
the Note, Winter Harbor's total equity investmenet in the Company equalled
$12,100,000. As additional consideration for its equity financing commitments,
Winter Harbor will be issued additional warrants by the Company to acquire (a)
2,500,000 shares of Common Stock at an exercise price of $2.75 per share (the
"Series A Warrants"), (b) 2,500,000 shares of Common Stock at an exercise price
of $4.00 per share (the "Series B Warrants") and (c) 5,000,000 shares of Common
Stock at an exercise price of $4.69 (the "Series C Warrants"). The respective
exercise prices for the Series A Warrants, the Series B Warrants and the Series
C Warrants (collectively, the "Investment Warrants") shall be subject to
adjustment. The Series A Warrants will be exercisable at any time for thirty
months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) will have demand registration
rights and anti-dilution rights and (ii) will contain cashless exercise
provisions.
The Series M Preferred Stock is entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred or
common stock receives any dividends. Thereafter, the Series M Preferred Stock
will participate with the common stock in the issuance of any dividends on a per
share basis. Moreover, the Series M Preferred Stock will have the right to veto
the payment of dividends on any other class of stock. The Series M Preferred
Stock shall be convertible at any time prior to the fifth anniversary of its
issuance, at the sole option of Winter Harbor, into shares of Common Stock on a
one-to-one thousand basis; provided, however, that the Series M Preferred Stock
shall be automatically converted to Common Stock on the fifth anniversary of its
issuance at no cost to Winter Harbor. The conversion price ("Class M Conversion
Price") shall be equal to the lower of $2.75 per share
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or 50% of the average closing bid price of the Common Stock for the ten trading
days immediately preceding the fifth anniversary of issuance. The basis for
discretionary conversion, or the conversion price for automatic conversion,
shall be adjusted upon the occurrence of certain events, including without
limitation, issuance of stock dividends, recapitalization of the Company, or the
issuance of stock by the Company at less than the fair market value thereof.
Conversion of the Series M Preferred Stock will be subject to approval by the
Company's shareholders of an increase in the number of shares of authorized
capital stock pursuant to Proposal 3. The Series M Preferred Stock will vote
with the Common Stock on an as-converted basis on all matters which are
submitted to a vote of the stockholders, except as may otherwise be provided by
law or by the Company's Articles of Incorporation or By-Laws; provided, however,
that the Series M Preferred Stock will have the right to appoint two members of
the Company's board of directors. Furthermore, the Class M Preferred Stock shall
have the right to be redeemed at fair market value in the event of a change of
control of the Company (as those terms are defined in the designation of
preferences for the Class M Stock), shall have preemptive rights to purchase
securities sold by the Company, and shall have the right to preclude the Company
from engaging in a variety of practices, including without limitation: mergers,
acquisitions and disposition of corporate assets and businesses, the payment of
dividends, the formation of subsidiaries engaging in new businesses, hiring or
discharging key employees and auditors, transactions with affiliates,
commitments in excess of $500,000, the adoption or settlement of employee
benefit plans and filing for protection from creditors.
Upon the completion of the Winter Harbor Investment, the Company will
recognize a (non-cash) preferred stock dividend (assuming a common stock market
value of [$9.00] per share) in the approximate amount of [$100,000,000] at the
date of the investment. The actual dividend will be determined based upon the
actual common stock market price on the date the equity investment is finalized.
This amount is calculated as the difference between the conversion price per
common share per the agreement as compared to the market price of the common
stock for the common stock as of the date of the agreement, plus the value of
the warrants issuable in connection with the Investment.
MiBridge Acquisition; Class D Preferred Stock
On August 12, 1997 the Company entered into an agreement with MiBridge,
Inc., a New Jersey corporation ("MiBridge") and Mr. Dror Nahumi, the principal
shareholder of MiBridge, pursuant to which the Company acquired all of the
issued and outstanding stock of MiBridge (the "MiBridge Acquisition"). The
MiBridge Acquisition subsequently closed on September 2, 1997. MiBridge is the
owner of patent-pending audio-conferencing technology and is a leader in
creating speech-encoding and compression algorithms designed to produce superior
audio quality and lower delay over low-band networks. The Company committed to
pay the stockholders of MiBridge (the "MiBridge Stockholders") consideration
consisting of (i) an aggregate $2,000,000 in cash, payable in quarterly
installments over two years, and (ii) an aggregate 1,000 shares of a series of
the Company's convertible preferred stock to be created (the "Series D Preferred
Stock"). The 1,000 shares of Series D Preferred Stock will be convertible at the
option of the MiBridge Shareholders, at any time during the nine months
following the closing of the MiBridge Acquisition, into such number of shares of
Common Stock as shall equal the sum of $6,250,000 divided by $9.25 (the
"Conversion Price"), which price was the closing bid price of the Company's
Common Stock on June 5, 1997 (the date that the first letter of agreement
relating to the transaction was executed). On the nine-month anniversary of the
closing of the MiBridge Acquisition, any unconverted Series D Preferred Stock
shall automatically convert to Common Stock. In either case, the Series D
Preferred Stock shall be converted at the lower of the Conversion Price or the
average closing bid price for the five trading days immediately preceding the
date the Company receives notice of conversion or the automatic conversion date,
as the case may be. Conversion of the Series D Preferred Stock will be subject
to approval by the
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Company's shareholders of an increase in the number of shares of authorized
capital stock pursuant to Proposal 3.
The Company will enter into an employment contract with Mr. Nahumi
providing terms, conditions and benefits similar to those provided in employment
contracts with existing members of the Company's senior management, including
standard confidentiality, non-competition and assignment of invention
provisions. Mr. Nahumi's annual salary shall be at least $100,000, and Mr.
Nahumi will devote his full time to managing the operations of MiBridge under
the direction of the Company. See the financial statements of MiBridge for the
period from its date of inception (March 18, 1996) to December 31, 1996 and
Medcross and MiBridge pro forma financial statements for the year ended December
31, 1996 included in Appendix 3 hereto.
The Board of Directors believes it important that the Company have the
flexibility that would be provided by having additional authorized preferred
stock available and by having the ability to designate and issue additional
classes thereof. The Board of Directors believes it would be in the Company's
best interest to have such additional shares of authorized stock available and
by having the ability to designate and issue additional classes thereof to
enable the Company to take advantage of opportunities for possible future
acquisitions and for raising capital for future growth. The Company may enter
into acquisition agreements involving the issuance of additional shares of
preferred or common stock. Of course, there can be no assurance that the Company
will effect any acquisitions. If such opportunities arise in the future,
significant amounts of capital stock may be issued by the Company's Board of
Directors without further authorization by the Company's Stockholders. Such
issuances could have a significant dilutive effect on the current stockholders
of the Company. The Company currently has no binding commitments or arrangements
that would require the issuance of such stock, except as described herein.
It is possible that the additional capital stock that would be
authorized by the proposed amendment could be issued in a transaction that might
discourage offers by takeover bidders or make such offers more difficult or
expensive to accomplish, although the Board of Directors has no current plans
for any such use of the capital stock. For example, the Board of Directors could
approve the issuance of stock, or grant rights or stock options for such
issuance, to persons, firms or entities that are known to be friendly to
management of the Company. The Board of Directors could also approve the
issuance of additional shares of preferred stock having classes, series, rights
and preferences (including the number of votes applicable to each share of such
class or series of capital stock) which may render it more difficult in the
future for takeover bidders or others to accomplish takeovers or changes in
control of the Company. Any issuance of preferred stock must be made for proper
business purposes and for proper consideration from the recipient.
The text of the proposed amendment to the Articles of Incorporation is
set forth in full in Exhibit B hereto and reference is made thereto for a
complete statement of its terms. The amendment to the Articles of Incorporation
will become effective upon approval by the stockholders and the filing of the
Articles of Amendment to the Articles of Incorporation containing such amendment
with the Secretary of State of Florida. If approved by the stockholders, the
Company anticipates that such Articles of Amendment to the Articles of
Incorporation will be filed as soon as practicable.
Vote Required for Approval
Approval of the amendment of the Articles of Incorporation will require
the affirmative vote of the holders of at least a majority of the outstanding
shares of Common Stock entitled to vote thereon, present in person or by proxy.
The enclosed proxy will be voted as specified, but if no specification is made
with respect to the proposed amendment to the Articles of Incorporation, it will
be voted in favor of the
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proposal to amend the Articles of Incorporation; however, broker non-votes will
not be counted as an affirmative vote for purposes of determining whether the
proposal has been approved. Certain officers, directors and shareholders of the
Company owning an aggregate of 5,653,773 shares (or approximately 48.6% of the
outstanding shares) of Common Stock have agreed to vote in favor of Proposal 3.
The Board of Directors unanimously recommends a vote FOR the approval
of the amendment of the Articles of Incorporation to increase the number of
shares of authorized preferred stock from 500,000 shares of Preferred Stock to
10,000,000 shares of Preferred Stock, as set forth in Exhibit B.
PROPOSAL 4
TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 20 MILLION SHARES OF COMMON STOCK, $.007 PAR
VALUE, TO 50 MILLION SHARES OF COMMON STOCK, $.007 PAR VALUE, TO
PERMIT THE ISSUANCE OF SHARES IN CONNECTION WITH THE COMPANY'S
ACQUISITION OF FAMILY TELECOMMUNICATIONS INCORPORATED, THE ISSUANCE
OF OPTIONS AND WARRANTS AND FOR OTHER GENERAL CORPORATE PURPOSES
The Board of Directors has adopted a resolution declaring it advisable
and in the best interest of the Company and its stockholders that the Company's
Articles of Incorporation be amended to provide for an increase in the
authorized number of shares of Common Stock of the Company from twenty million
shares of Common Stock to fifty million shares of Common Stock. Such resolution
also recommends that such amendment be approved and adopted by the Company's
stockholders and directs that such proposal be submitted to the Company's
stockholders at the Annual Meeting.
If the Board of Directors' proposal is approved by the Company's
stockholders, the Board of Directors would have authority to issue up to fifty
million shares of Common Stock for such consideration as the Board of Directors
may determine without further action by the stockholders except as may be
required by law.
General
The Company is currently authorized to issue up to 20,000,000 shares of
Common Stock. As of August 8, 1997, there were 11,627,597 shares of Common Stock
issued and outstanding. The Board of Directors of the Company has reserved
8,347,403 shares of Common Stock for issuance pursuant to the exercise of
outstanding warrants and stock options and conversion of outstanding convertible
securities. Accordingly, the Company is without additional shares of Common
Stock which are unissued and are not reserved for any specific purpose. Upon
approval of Proposal 4 by the Shareholders the Board of Directors will reserve
an additional 4,400,000 shares of Common Stock for issuance upon conversion of
Class M Preferred Stock issued pursuant to the Winter Harbor LOI, and
another 10,800,000 shares of Common Stock for issuance upon exercise of warrants
issued or to be issued to Winter Harbor. See "Proposal 3 - Winter Harbor Loan
and Investment; Class M Preferred Stock."
The Board of Directors has proposed the increase in and classification
of the authorized capital stock to provide shares which could be used for a
variety of corporate purposes, including stock splits, stock dividends, mergers,
acquisitions, the raising of additional capital (including public and private
offerings of securities), and implementation of incentive and other option
plans. The Board of Directors believes it important that the Company have the
flexibility that would be provided by having additional authorized
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capital stock available and by having the ability to designate and issue
additional classes thereof. The Board of Directors believes it will require
additional financing in order to fund the cash flow operating deficit of I-Link,
to expand its business and that of FTI and to discharge outstanding
indebtedness. Failure to increase the Company's authorized capital could
significantly impair the Company's ability to raise additional capital and could
limit the effect of the Conversion Price adjustment or reset provisions of the
Class C Preferred Stock insofar as the Company may not have sufficient shares of
available Common Stock issuable upon conversion as a result of a reduction in
the Conversion Price. The Company may, in its discretion, pay cumulative
dividends on its outstanding shares of Preferred Stock through the issuance of
shares of Common Stock provided such shares of Common Stock are registered under
the Securities Act of 1933. Additional shares of authorized stock are also
needed to enable the Company to take advantage of opportunities for possible
future acquisitions, and the establishment of option plans. The Company from
time to time conducts discussions with possible acquisition candidates. The
Company may enter into acquisition agreements involving the issuance of
additional shares of preferred or common stock. Of course, there can be no
assurance that the Company will effect any acquisitions. If such opportunities
arise in the future, significant amounts of capital stock may be issued by the
Company's Board of Directors without further authorization by the Company's
Shareholders. Such issuances could have a significant dilutive effect on the
current Shareholders of the Company.
It is possible that the additional capital stock that would be
authorized by the proposed amendment could be issued in a transaction that might
discourage offers by takeover bidders or make such offers more difficult or
expensive to accomplish, although the Board of Directors has no current plans
for any such use of the capital stock. For example, the Board of Directors could
approve the issuance of stock, or grant rights or stock options for such
issuance, to persons, firms or entities that are known to be friendly to
management of the Company. The Board of Directors could also approve the
issuance of additional shares of common stock having classes, series, rights and
preferences (including the number of votes applicable to each share of such
class or series of capital stock) which may render it more difficult in the
future for takeover bidders or others to accomplish takeovers or changes in
control of the Company. Any issuance of Common Stock must be made for proper
business purposes and for proper consideration from the recipient. Shares of
Common Stock of the Company do not entitle holders thereof to preemptive rights.
The Company will reserve a total of [4,400,000] shares for future
issuances under the 1997 Plan as described in the discussion of Proposal 5. In
addition, the Company has agreed to issue warrants to purchase 5,000 and 25,000
shares of Common Stock to William H. Flury, Vice President of Sales & Marketing
of I-Link, and John W. Edwards, President of the Company, respectively, in
connection with loans to I-Link in August 1996. The Company has also agreed to
issue an aggregate of 400,000 shares of Common Stock, subject to satisfaction of
certain conditions, in connection with its acquisition of FTI. In addition, the
Company is in discussions with Joseph A. Cohen, a Director, concerning his
engagement as a consultant to the Company, the terms of which have not been
finalized but which are expected to include options to purchase up to 100,000
shares of Common Stock. The Company has also reserved 175,000 shares of Common
Stock for issuance upon exercise of the warrants issued to the Hardy Group in
connection with the Settlement Agreement. In May 1997, the Company agreed to
grant additional options to purchase an aggregate of up to 2,100,000 shares of
Common Stock. See "Information about the FTI Acquisition" below, "Business of
Family Telecommunications Incorporated" in the Company's Form 10-KSB for the
fiscal year ended December 31, 1996, and the audited financial statements of FTI
for the period from its date of inception (March 20, 1996) to December 31, 1996
and Medcross and FTI pro forma financial statements for the year ended December
31, 1996 included in Appendix 2 hereto.
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Information About the FTI Acquisition
On January 13, 1997, pursuant to the terms of a Share Exchange
Agreement for the Acquisition of Family Telecommunications Incorporated by
Medcross, Inc. effective as of January 1, 1997 (the "Exchange Agreement"), the
Company acquired the outstanding stock of Family Telecommunications
Incorporated, a Utah corporation (subsequently renamed I-Link Communications,
Inc., and for ease of reference and clarity, referred to herein as "FTI"), from
the stockholders of FTI, namely, Robert W. Edwards, Jr. and Jerald L. Nelson.
The consideration for the transaction consists of an aggregate of 400,000 shares
of the Company's Common Stock to be issued by the Company upon the satisfaction
of certain conditions, including approval by the Company's shareholders of an
amendment to the Articles of Incorporation authorizing an increase in the number
of shares of Common Stock from 20 million to 50 million; upon approval of
Proposal 4 by the Shareholders, the consideration will be paid in full. The
operations and business of FTI, however, are being integrated with the Company's
business and operations. There are no written employment agreements with any of
the principals of FTI. The Company intends to maintain the current FTI
employment arrangements. The purchase price was determined based upon the
negotiated value of the assets and operations of FTI. John W. Edwards, Chairman
of the Board, President and Chief Executive Officer of the Company, and Robert
W. Edwards, Jr., the principal shareholder and one of two shareholders of FTI,
are brothers. For a description of the Company's advance to FTI, see "--Reasons
for Acquisition" below and "Directors and Executive Officers--Certain
Relationships and Related Transactions."
No federal or state regulatory requirements must be complied with or
approval obtained in connection with the acquisition.
Reasons for Acquisition
Following the Company's acquisition (the "I-Link Acquisition") of
I-Link Worldwide, Inc. ("I-Link") in February 1996, the focus of the Company's
business shifted to the business of delivering business communications services
via the emerging worldwide communication network (which includes the Internet)
to existing users of traditional telecommunications services; while the Company
has not made a decision as to whether it will sell its medical diagnostic
services operations, it has determined not to expand them. The Company's
acquisition of FTI in January 1997 provided the Company with an existing long
distance network licensed to do business in approximately 44 states, as of the
time of acquisition (48 states as of the date hereof); and a customer base in
excess of 17,000 and, through FTI's contractual agreements with MCI and
telephone facilities and equipment owned and operated by FTI, access to the
switched telephone network at favorable rates. Access to the switched telephone
network is a necessary component of the I-Link Network (as hereinafter defined)
in order for phone and fax transmissions to be routed to destinations in lesser
populated geographic areas that are not serviced by one of I-Link's Points of
Presence ("POPs"), which the Company estimates encompasses approximately 15% to
20% of users nationwide. In addition, the access to the switched telephone
network at favorable pricing that FTI affords to I-Link permits I-Link to
rapidly develop and expand its customer bases in given geographic areas across
the switched telephone network until such time as the size of the customer base
and deployment of the I-Link Network in the area determines that the customers
be transferred from the switched telephone network to the I-Link Network. Except
as set forth in this Proxy Statement, there are no past, present or proposed
material contracts, arrangements, understandings, relationships, negotiations or
transactions between FTI and its affiliates on the one hand and the Company and
its affiliates on the other hand relating to or concerning an acquisition,
securities ownership, the constituency of the Company's Board of Directors or a
sale or transfer of assets.
The principal shareholder of FTI (prior to its acquisition by the
Company) is the brother of the Chairman of the Board and President of the
Company. During the period from March 20, 1996 (the
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inception of FTI) to December 31, 1996, FTI rendered long distance services and
sold switching equipment to the Company. Revenues and expenses relating to these
transactions were as follows: long distance revenue was $5,026; revenue from
sale of switching equipment was $1,723,369; and cost of switching equipment sold
was $1,137,828. As of December 1, 1996 FTI had a receivable from the Company for
services in the amount of $30,726 and an advance from the Company in the amount
of $120,000 for services to be rendered by FTI for the Company subsequent to
year end. Subsequent to December 31, 1996, FTI entered into the share exchange
agreement for the acquisition of FTI by the Company.
The consideration payable for the FTI acquisition was derived from
negotiation. The Company's assessment as to the amount of consideration that was
appropriate to be paid was based on a number of factors, including but not
limited to: (i) FTI's ability to provide long distance services throughout the
United States immediately; (ii) the opportunity costs (both in terms of time and
monetary costs) to be suffered by the Company if it attempted to establish its
own long distance network licensed to do business throughout the United States;
and (iii) the Company's perception as to the per-Subscriber value of similarly
situated companies. The Company assumed no liabilities of FTI incurred through
the date of the acquisition; rather, it acquired the stock of FTI. The
negotiations were led by John W. Edwards and Frank DeLape (an affiliate of
Benchmark Equity Group, Inc.) on behalf of the Company and by Robert W. Edwards,
Jr. on behalf of FTI. Mr. John Edwards abstained from all Company Board of
Directors votes relating to the FTI acquisition.
Nature of FTI Business
FTI was incorporated under the law of the state of Utah on March 20,
1996, and maintains its principal place of business in Phoenix, Arizona. FTI
also maintains facilities in Salt Lake City, Utah. It is a long-distance
telecommunications carrier that provides long distance service to most of the
United States. Through its Carrier Agreement with MCI Telecommunications
Corporation ("MCI"), FTI provides 1-plus long distance service, 800/888 service,
worldwide calling card service, worldwide prepaid phone card service, long
distance cellular phone service, data line service and T-span service. FTI
currently maintains switch facilities in twelve states. This allows FTI to offer
additional services in its home state and surrounding states, and to offer
specialized services, including a variety of customized 800/888 services, voice
mail, voice inter-active services, debit cards, travel cards and other
customized services to its entire customer base. See "Business of Family
Telecommunications Incorporated" in the Company's Form 10-KSB for the year ended
December 31, 1996, and the audited financial statements of FTI for the period
from its date of inception (March 20, 1996) to December 31, 1996 and Medcross
and FTI pro forma financial statements for the year ended December 31, 1996
included in Appendix 2 hereto.
Accounting Treatment
The acquisition of FTI was accounted for using the purchase method of
accounting. This method accounts for a business combination as the acquisition
of one enterprise by another. The Company recorded at its cost the acquired
assets less liabilities assumed. In the event that the cost of FTI is greater
than the sum of the fair values of tangible and identifiable intangible assets
less liabilities assumed, such difference are recorded as goodwill. The reported
income of the acquiring corporation shall include the operations of the acquired
enterprise after acquisition, based on the cost to the acquiring corporation.
Representatives of the Company's independent public accountants,
Coopers & Lybrand, LLP, are expected to be present at the Annual Meeting. They
will have an opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
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Regulatory Approvals
The transaction contemplated by the Exchange Agreement is not subject
to any material regulatory review or approval.
Federal Income Tax Consequences of the Acquisition
It is the intention of Company and FTI that the acquisition will
qualify as a "tax free reorganization" within the meaning of Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code").
Assuming the acquisition is treated as a reorganization under the Code,
generally no gain or loss will be recognized by the Company or FTI as a result
of the acquisition. The acquisition will not have any tax consequences to the
Company's stockholders. Neither the Company nor FTI has requested or will
request any ruling from the Internal Revenue Service in connection with the
acquisition. However, the acquisition has been structured with the intention
that it will qualify as a tax-free reorganization under Code Section
368(a)(1)(B).
Comparative Market Price and Dividend Information
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "ILNK." Prior to March 8, 1996, the Common Stock was traded on
the Nasdaq SmallCap Market under the symbol "MDCR." There is no established
trading market for the FTI common stock. Neither the Company nor FTI has paid a
cash dividend on its respective Common Stock. The Company does not currently
anticipate paying any dividends on its Common Stock in the foreseeable future.
Holders of the Company's outstanding Class B and Class C Preferred Stock are
entitled to cumulative preferential dividends when, as and if declared by the
Board of Directors. At the Company's option, the dividend may be paid in shares
of Common Stock provided that such shares are registered under the Act. As of
July 31, 1997, no dividends have been declared; accrued and unpaid dividends on
all shares of Preferred Stock totaled $885,522.
On January 15, 1997, the last full trading day prior to the public
announcement of the FTI Acquisition, the high and low sale prices per share of
the Company's Common Stock as reported on Nasdaq were $7.125 and $6.50,
respectively, and on January 10, 1997, the last full trading day prior to the
execution of the Exchange Agreement, the high and low sale prices per share were
$6.875 and $6.50, respectively.
Proposed Amendment
The text of the proposed amendment to the Articles of Incorporation is
set forth in full in Exhibit C hereto and reference is made thereto for a
complete statement of its terms. The amendment to the Articles of Incorporation
will become effective upon approval by the stockholders and the filing of the
Articles of Amendment to the Articles of Incorporation containing such amendment
with the Secretary of State of Florida. If approved by the stockholders, the
Company anticipates that such Articles of Amendment to the Articles of
Incorporation will be filed as soon as practicable.
Vote Required for Approval
Approval of the amendment of the Articles of Incorporation will require
the affirmative vote of the holders of at least a majority of the outstanding
shares of Common Stock entitled to vote thereon, present in person or by proxy.
The enclosed proxy will be voted as specified, but if no specification is made
with respect to the proposed amendment to the Articles of Incorporation, it will
be voted in favor of the
33
<PAGE>
proposal to amend the Articles of Incorporation; however, broker non-votes will
not be counted as an affirmative vote for purposes of determining whether the
proposal has been approved. Certain officers, directors and shareholders of the
Company owning an aggregate of 5,653,773 shares (or approximately 48.6% of the
outstanding shares) of Common Stock have agreed to vote in favor of Proposal 4.
The Board of Directors unanimously recommends a vote FOR the approval
of the amendment of the Articles of Incorporation to increase the number of
shares of authorized capital stock from 20 million shares of Common Stock to 50
million shares of Common Stock.
PROPOSAL 5
TO APPROVE THE ADOPTION OF THE 1997 RECRUITMENT STOCK
OPTION PLAN WHICH PROVIDES FOR THE ISSUANCE OF INCENTIVE
STOCK OPTIONS, NON-QUALIFIED OPTIONS AND STOCK APPRECIATION RIGHTS
The Board of Directors has adopted a resolution authorizing the
establishment of the 1997 Recruitment Stock Option Plan (the "Recruitment
Plan"), which plan shall provide for the issuance of Incentive Options,
Non-Qualified Options and SARs. Pursuant to the resolution, the Board of
Directors has declared it to be advisable and in the best interests of the
Company and its stockholders that the Company adopt such plan and has directed
that the proposal to adopt the Recruitment Plan, as set forth herein, be
submitted to the stockholders of the Company for vote at the Annual Meeting.
Proposal 5 will be submitted to the Company's stockholders for approval
only if the Company's stockholders have approved the amendment of the Company's
Articles of Incorporation to increase the authorized shares of Common Stock as
set forth in Proposal 4.
The summary of the material provisions of the Recruitment Plan set
forth herein is not intended to be complete and is qualified in its entirety by
reference to the Recruitment Plan, a copy of which is attached hereto in Exhibit
D to this Proxy Statement.
General
The purpose of the Recruitment Plan is to induce officers, directors,
employees and consultants of the Company (or any of its subsidiaries) who are in
a position to contribute materially to the Company's prosperity to remain with
the Company, to offer such persons incentives and rewards in recognition of
their contributions to the Company's progress and to encourage such persons to
continue to promote the best interests of the Company. The Recruitment Plan
provides for the grant of stock options which qualify as incentive stock options
(previously defined as "Incentive Options") under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as options
which do not so qualify (previously defined as "Non-Qualified Options") to be
issued to officers, directors, employees and consultants. In addition, stock
appreciation rights (previously defined as "SARs") may be granted in conjunction
with the grant of Incentive Options and Non-Qualified Options.
The Recruitment Plan provides for the granting of Incentive Options,
Non-Qualified Options and SARs with respect to, in the aggregate, up to
[4,400,000] shares of Common Stock (which number is subject to adjustment in the
event of stock dividends, stock splits and other similar events). To the extent
that an Incentive Option or Non-Qualified Option is not exercised within the
period of exercisability specified therein, it will expire as to the then
unexercised portion. If any Incentive Option, Non-Qualified Option or SAR
terminates prior to exercise thereof and during the duration of the Recruitment
Plan, the shares of
34
<PAGE>
Common Stock as to which such option or right was not exercised will become
available under the Recruitment Plan for the grant of additional options or
rights to any eligible employee. The shares of Common Stock subject to the
Recruitment Plan may be made available from either authorized but unissued
shares, treasury shares, or both. The Recruitment Plan became effective upon
adoption by the Board of Directors, subject to its approval by the affirmative
vote of the holders of a majority of the Company's outstanding voting stock
entitled to vote thereon and subject to the approval of the amendment of the
Company's Articles of Incorporation to increase the authorized shares of Common
Stock (see Proposal 4). In the event that the Recruitment Plan is not approved
by the stockholders, the Recruitment Plan shall remain in force; provided,
however, that all options granted thereunder shall automatically be deemed to be
Non-Qualified Options.
Administration
The Recruitment Plan will be administered by: (a) the Board of
Directors or (b) in the discretion of the Board of Directors, by a committee
(the "Committee") of the Board of Directors of two or more members of the Board
of Directors, each of whom is a "Non-Employee" Director as such term is defined
by Rule 16b-3 (as such rule may be amended from time to time, "Rule 16b-3")
under the Exchange Act of 1934, as amended (the "Exchange Act"). The Board of
Directors or the Committee generally has the authority to determine the
individuals to whom and the date on which options and rights are to be granted,
the number of shares of stock to be subject to each option and right, the
exercise price of shares of stock subject to options and rights, the terms of
any vesting or forfeiture schedule and the other terms and provisions of each
option and right.
Section 16(b) Compliance
It is intended that transactions pursuant to the Recruitment Plan will
satisfy the conditions of Rule 16b-3, as amended, promulgated under Section 16
of the Exchange Act. Section 16(b) of the Exchange Act provides that any
so-called "short-swing profits," that is, a profit realized by an officer,
director or owner of 10 percent or more of the outstanding securities on a
purchase and a sale of stock within a six-month period, are recoverable by the
issuer of the securities. Although the application of Section 16(b) (and the
rules promulgated thereunder) is complex, Rule 16b-3 generally mitigates the
impact of Section 16(b) by providing an exemption from the liability provisions
for transactions which satisfy the conditions of Rule 16b-3.
Eligibility and Extent of Participation
Incentive Options may be granted pursuant to the Recruitment Plan only
to employees of the Company (or any subsidiary). Non-Qualified Options and SARs
may be granted pursuant to the Recruitment Plan to officers, directors,
employees or consultants of the Company or any subsidiary.
There is no minimum number of shares of Common Stock with respect to
which an option or right may be granted. However, if the aggregate fair market
value of shares with respect to which Incentive Options are exercisable for the
first time by any employee during any calendar year (under all stock option
plans of the Company) exceeds $100,000, such excess options shall be treated as
Non-Qualified Options. For the purpose of the foregoing limitation, the fair
market value of shares subject to an Incentive Option is to be determined as of
the time the option is granted.
The Board of Directors or the Committee may require, as a condition of
granting any option or right, that the optionee enter into a stock option
agreement which shall require, among other things, the
35
<PAGE>
agreement by the employee with the Company that the employee not sell or
otherwise dispose of shares acquired pursuant to the exercise of an Incentive
Option for a minimum of two years from the date of grant of the Incentive Option
and one year from the date of issuance of the Common Stock, absent the written
approval, consent or waiver of the Board of Directors or Committee.
As of June 30, 1997, there have been 1,190,000 options or rights
granted under the Recruitment Plan, including 150,000 options to directors who
are not officers and 1,040,000 options to employees and consultants. As of such
date, an aggregate of approximately 125 persons are eligible to participate in
the Recruitment Plan. Consultants engaged by the Company from time to time are
also expected to be eligible to receive Non-Qualified Options under such Plan.
Purchase Price and Exercise of Options
The price at which shares of Common Stock covered by an option may be
purchased shall be determined by the Board of Directors or the Committee;
however, the purchase price of shares of Common Stock issuable upon exercise of
an Incentive Option must not be less than 100 percent of the fair market value
of such shares on the date the Incentive Option is granted. Any cash proceeds
received by the Company from the exercise of the options will be used for
general corporate purposes.
Expiration and Transfer of Options
The Board of Directors or the Committee has the sole discretion to fix
the period within which any Incentive or Non-Qualified Option may be exercised.
Any Incentive Option granted under the Recruitment Plan to a 10 percent or less
shareholder and any Non-Qualified Option shall be exercised during a period of
not more than ten years from the date of grant and any Incentive Option granted
to a greater than 10 percent shareholder shall be exercised within five years
from the date of grant. No Incentive Options may be granted under the
Recruitment Plan more than ten years after the date of adoption of the
Recruitment Plan.
Options granted under the Recruitment Plan are not transferable except
upon death. Options generally may be exercised only while the option holder is
employed by the Company, or in some cases, within three months of termination of
employment. In the event of disability of an option holder, options may be
exercised to the extent of the accrued right to purchase the option within one
year of termination of employment due to disability. In the event of the death
of an option holder, options may be exercised within three years after the date
of death.
Upon a reorganization, merger or consolidation of the Company as a
result of which the outstanding Common Stock is changed into or exchanged for
cash or property or securities not of the Company's issue, or upon a sale of
substantially all the property of the Company, the Recruitment Plan will
terminate and all outstanding options previously granted thereunder shall
terminate, unless provision is made in connection with such transaction for the
continuance of the Recruitment Plan or for the assumption of options theretofore
granted. If the Recruitment Plan and unexercised options are to terminate
pursuant to such transaction, persons owning any unexercised portions of options
then outstanding will have the right, prior to the consummation of the
transaction, to exercise the unexercised portions of their options, including
the portions thereof which would, but for such transaction, not yet be
exercisable.
Federal Income Tax Considerations
In the case of Incentive Options, no taxable gain will be realized by
an option holder upon grant or exercise of the option, and the Company will not
be entitled to a tax deduction at the time any such option is
36
<PAGE>
granted or exercised. However, the excess of the fair market value of any stock
received over the option price will constitute an adjustment in computing
alternative minimum taxable income at the time of the transfer of stock pursuant
to the exercise of the option, or if later, at the earlier of the time that the
stock is transferable or is not subject to a substantial risk of forfeiture.
The treatment for federal income tax purposes of Non-Qualified Options
depends on whether the option has a readily ascertainable fair market value at
the time it is granted. Because the Non-Qualified Options are not actively
traded on an established market and because it is likely that the Non-Qualified
Options will be nontransferable by the optionee or will not be immediately
exercisable, it is expected that the Non-Qualified Options will not have a
readily ascertainable fair market value. If a Non-Qualified Option does not have
a readily ascertainable fair market value at the time of grant, there is no
taxable event at grant; rather, the excess of (i) the fair market value of the
Common Stock on the date it is acquired pursuant to exercise of the option over
(ii) the exercise price, plus the amount, if any, paid for the option must be
included in the optionee's gross income at the time of the receipt of stock
pursuant to exercise of the option, or if later, at the earlier of the time that
the stock is transferable or is not subject to a substantial risk of forfeiture.
If stock received pursuant to the exercise of a Non-Qualified Option is not
taxable at receipt because the stock is nontransferable and subject to a
substantial risk of forfeiture, the optionee may nevertheless elect to include
such amount in gross income when the stock is received pursuant to exercise of
the option.
Under Section 280G of the Code, certain persons who receive
compensation payments in connection with a change in control of a company may be
subject to a 20 percent excise tax and the issuer may lose its tax deduction
with respect to such payments. These rules may apply to options and rights
granted under the Recruitment Plan. The determination of the application of
these rules will depend upon a number of factual matters not determinable at
this time. It should be realized, however, that these rules may affect the
ability of the Company to secure a tax deduction on the exercise of certain
Non-Qualified Options granted under the Recruitment Plan.
The tax consequences summarized above may change in the event of
amendment to the Code or the regulations adopted thereunder.
Exercise of Options; SARs
Generally, an option will be exercised by the tender in cash of the
total exercise price for the shares of stock for which the option is being
exercised. The Board of Directors or the Committee may, however, permit an
optionee to pay all or a portion of the exercise price by delivering to the
Company shares of Common Stock having an aggregate fair market value at least
equal to such total exercise price. An option may also be exercised by tender to
the Company of a written notice of exercise together with advice of the delivery
of an order to a broker to sell part or all of the shares of Common Stock
subject to such exercise notice and an irrevocable order to such broker to
deliver to the Company sufficient proceeds from the sale of such shares to pay
the exercise price and any withholding taxes (a "cashless exercise") provided
all documentation and procedures are approved in advance by the Board of
Directors or the Committee. The Company has the authority under the Recruitment
Plan to assist any employee of the Company with the payment of the purchase
price of the Common Stock by lending the amount of the purchase price to the
employee, on terms, including rate of interest and security for the loan, as the
Board of Directors shall authorize.
The Board of Directors or the Committee may, in its discretion, at any
time prior to the exercise of any option, grant in connection with such option
the right to surrender part or all of such option to the extent
37
<PAGE>
the option is exercisable, and receive an amount (payable in cash, shares of the
Company's Common Stock or combination thereof as determined by the Board of
Directors or the Committee) equal to the difference between the then fair market
value of the shares issuable upon the exercise of the option (or portions
thereof surrendered) and the exercise price of the option or portion thereof
surrendered.
Amendments to the Recruitment Plan
The Board of Directors may at any time terminate the Recruitment Plan
or make such amendments thereto as it deems advisable and in the best interests
of the Company, without action on the part of the Company's shareholders, unless
such approval is required pursuant to Section 422 of the Code or other federal
or state law. Such amendments may include, without limitation, changes in the
number of shares reserved for issuance under the plan, the class or classes of
individuals eligible to participate therein and the manner of administration and
duration of the plan.
Vote Required for Approval
Approval of the Recruitment Plan will require the affirmative vote of
the holders of at least a majority of the outstanding shares of Common Stock
entitled to vote thereon, present in person or by proxy. The enclosed proxy will
be voted as specified, but if no specification is made with respect to the
proposed amendment to the Articles of Incorporation, it will be voted in favor
of the proposal to approve the Recruitment Plan; however, broker non-votes will
not be counted as an affirmative vote for purposes of determining whether the
proposal has been approved.
The Board of Directors unanimously recommends a vote FOR the approval
and adoption of the 1997 Recruitment Stock Option Plan, which plan shall provide
for the issuance of Incentive Options, Non-Qualified Options and SARs, as set
forth in Exhibit D hereto.
OTHER PROPOSED ACTION
The Board of Directors does not intend to bring any other matters
before the Annual Meeting, nor does the Board of Directors know of any matters
that other persons intend to bring before the Annual Meeting. If, however, other
matters not mentioned in this Proxy Statement properly come before the Annual
Meeting, the persons named in the accompanying form of proxy will vote thereon
in accordance with the recommendation of the Board of Directors.
Shareholders should note that the Company's By-Laws provide that no
proposals or nominations of Directors by Shareholders shall be presented for
vote at an Annual Meeting of Shareholders unless notice complying with the
requirements in the By-Laws is provided to the Board of Directors or the
Company's Secretary no later than the close of business on the fifth day
following the day that notice of the Annual Meeting is first given to
Shareholders.
SHAREHOLDER PROPOSALS AND SUBMISSION
If any Shareholder wishes to present a proposal for inclusion in the
proxy materials to be solicited by the Company's Board of Directors with respect
to the next Annual Meeting of Shareholders, such proposal must be presented to
the Company's management prior to [____________,] 1998.
38
<PAGE>
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. YOUR VOTE IS IMPORTANT. IF YOU ARE A
SHAREHOLDER OF RECORD AND ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOU MAY
WITHDRAW YOUR PROXY AT ANY TIME PRIOR TO THE VOTE.
MEDCROSS, INC.
By: /s/ David E. Hardy
------------------------------------
David E. Hardy, Secretary
39
<PAGE>
APPENDIX 1
----------
MEDCROSS, INC.
------
Financial Statements for the Quarter ended
June 30, 1997 (unaudited) and the Six Months
ended June 30, 1997 (unaudited)
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30,
1997
----
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 1,176,386
Accounts receivable, less allowance of $1,069,389 3,936,492
Certificate of deposit - restricted 198,640
Inventory, less allowance of $260,033 763,263
Other current assets 199,074
----------
Total current assets 6,273,855
----------
Property and equipment:
Property and equipment 7,360,958
Less accumulated depreciation (3,198,000)
----------
Net property and equipment 4,162,958
----------
Other assets:
Intangible assets, net of amortization of $467,384 11,600,414
Certificate of deposit - restricted 1,742,711
Other assets 124,065
----------
Total other assets 13,467,190
----------
Total assets $ 23,904,003
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,163,076
Notes payable - related party 88,000
Notes payable - other 957,000
Current portion of long-term debt - related party 43,554
Current portion of long-term debt - other 408,429
Current obligations under capital lease 187,047
----------
Total current liabilities 8,847,106
Long-term debt, net of debt issuance costs of $3,615,000 610,114
Obligations under capital leases 147,274
Minority interest in consolidated subsidiaries 299,198
----------
Total liabilities 9,903,692
----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10 par value, 247,500 shares outstanding 2,475,000
Common stock, $.007 par value, authorized 20,000,000 shares
issued and outstanding 10,627,597 shares 74,393
Additional paid-in capital 40,236,521
Deferred compensation from stock options (4,200,000)
Common stock to be issued 11,289,583
Accumulated deficit (35,875,186)
----------
Total stockholders' equity 14,000,311
----------
Total liabilities and stockholders' equity $ 23,904,003
==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Appendix 1-1
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications service revenue $ 2,266,492 $ - $ 4,414,825 $ -
Health care service revenue 582,298 582,490 1,179,555 1,174,670
Marketing services revenue 720,490 - 720,490 -
Other revenue - 55,338 - 72,364
------------ ---------- ------------ ------------
Net operating revenue 3,569,280 637,828 6,314,870 1,247,034
------------ ---------- ------------ ------------
Operating costs and expenses:
Telecommunications network expense 4,174,708 224,302 7,065,790 322,535
Marketing services costs 640,739 - 640,739 -
Selling, general and administrative 2,378,890 1,035,682 5,026,034 2,030,285
Provision for doubtful accounts 368,273 49,619 503,498 90,863
Depreciation and amortization 618,443 195,818 1,019,938 525,191
Provision for asset valuation - - 213,944 -
Acquired in-process research
and development - - - 4,777,943
Research and development 234,246 - 345,334 -
------------ ---------- ------------ ------------
Total operating costs and expenses 8,415,299 1,505,421 14,815,277 7,746,817
------------ ---------- ------------ ------------
Operating loss (4,846,019) (867,593) (8,500,407) (6,499,783)
------------ ---------- ------------ ------------
Other income (expense):
Interest expense (74,118) (75,127) (420,475) (1,067,766)
Interest and other income (expense) 57,199 (2,765) 142,114 12,762
------------ ---------- ------------ ------------
Total other expense (16,919) (77,892) (278,361) (1,055,004)
------------ ---------- ------------ ------------
Loss before minority interest in net loss
of consolidated subsidiaries (4,862,938) (945,485) (8,778,768) (7,554,787)
Minority interest in net loss of
consolidated subsidiaries 20,039 2,006 29,128 63
------------ ---------- ------------ ------------
Net loss $ (4,842,899) $ (943,479) $ (8,749,640) $ (7,554,724)
============ ========== ============ ============
Loss per common share after
Preferred dividends $( 0.48) $( 0.21) $( 0.88) $( 2.03)
============ ========== ============ ============
Weighted average common shares outstanding 10,627,597 4,535,539 10,617,597 3,753,470
============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Appendix 1-2
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
----------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,749,640) $(7,554,724)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,019,938 525,191
Provision for doubtful accounts 503,498 90,863
Imputed interest on convertible notes 320,000 945,000
Acquired in-process research and
development - 4,777,943
Provision for asset valuation 213,944 -
Amortization of deferred stock option
compensation 200,000 -
Minority interest in net loss of
consolidated subsidiaries (29,128) (63)
Change in assets and liabilities net of
effects from purchase of FTI:
Accounts receivable (2,603,976) (79,192)
Inventory 369 (110)
Other assets 91,815 (191,395)
Other current assets (289,773) 2,673
Accounts payable and accrued expenses 4,282,225 617,499
------------ ------------
Net cash used by operating activities (5,040,728) (866,315)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (483,992) (3,576)
Proceeds received from maturity of
certificate of deposit - restricted - 60,000
Cash received from purchase of FTI 435,312 -
------------ ------------
Net cash provided by (used in) investing
activities (48,680) 56,424
------------ ------------
Cash flows from financing activities:
Repayment of note payable - related party - (117,832)
Proceeds from notes payable - other - 1,475,000
Repayment of notes payable - other (50,000) (174,575)
Proceeds from long-term debt 2,000,000 -
Repayment of long-term debt (117,501) (51,751)
Payment of capital lease obligations (89,431) (286,354)
Issuance of common stock 22,499 306,065
Minority interest distributions - (36,865)
------------ ------------
Net cash provided by financing activities 1,765,567 1,113,688
------------ ------------
Increase (decrease) in cash and cash equivalents (3,323,841) 303,797
Cash and cash equivalents at beginning of period 4,500,227 80,157
------------ ------------
Cash and cash equivalents at end of period $1,176,386 $383,954
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Appendix 1-3
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
Organization. The interim financial data are unaudited; however, in the opinion
of the management of Medcross, Inc. and Subsidiaries (the "Company"), the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of (a) the results of operations
for the three-month and six-month periods ended June 30, 1997 and June 30,
1996, (b) the financial position at June 30, 1997, and (c) cash flows for the
six-month periods ended June 30, 1997 and June 30, 1996. The financial
statements should be read in conjunction with the Company's annual report on
Form 10-KSB for the year ended December 31, 1996 and its quarterly report on
Form 10-QSB for the three months ended March 31, 1997.
The unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
for the three-month and six-month periods ended June 30, 1997 are not
necessarily indicative of those to be expected for the entire year.
Reclassification. Certain balances in the June 30, 1996 financial statements as
amended have been reclassified to conform to the current period presentation.
These changes had no effect on previously reported net loss, total assets,
liabilities or stockholders' equity.
Marketing services revenue. During the second quarter of 1997 the Company
launched a multi-level marketing (MLM) channel to market its telecommunication
services. Marketing services revenues from the MLM channel include revenues
recognized from independent representatives for training, promotional and
presentation materials.
Intangibles. The Company regularly evaluates whether events or circumstances
have occurred that indicate the intangible assets may not be recoverable. When
factors indicate the asset may not be recoverable, the Company uses an estimate
of the related undiscounted future cash flows compared to the carrying value of
intangibles to determine if an impairment exists. Adjustments are made if the
sum of the expected future net cash flows is less than carrying value. No such
adjustments were necessary in the periods being reported on.
Note 2 - Supplemental Cash Flow Information
In February 1996, the Company acquired all of the issued and outstanding stock
of I-Link Worldwide, Inc. in exchange for the issuance of an aggregate of
4,000,000 shares of common stock of the Company, of which 1,000,000 shares were
held in escrow as of December 31, 1996. In June 1997, the Company became
obligated to issue the remaining 1,000,000 shares of common stock (fair value of
$8,875,000) from escrow.
In April and June 1996, holders of certain promissory notes issued by the
Company converted $10,000 and $180,542, respectively, into 140,000 and 64,372,
respectively, shares of Common Stock.
In January 1997, the Company agreed to issue 400,000 shares of common stock to
acquire all of the issued and outstanding stock of Family Telecommunications
Inc. ("FTI") effective January 1, 1997.
Appendix 1-4
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Supplemental Cash Flow Information, continued
In April 1997, the Company issued warrants to purchase 175,000 shares of common
stock in connection with an $821,000 litigation settlement payable.
In June 1997, the Company issued warrants to purchase 500,000 shares of common
stock in connection with a $2,000,000 loan. The value of the warrants was
recorded as debt issuance costs.
Note 3 - Acquisition of Subsidiaries
Family Telecommunications Incorporated. On January 13, 1997, pursuant to the
terms of a Share Exchange Agreement for the acquisition of Family
Telecommunications Incorporated by Medcross, Inc. effective as of January 1,
1997 (the "Exchange Agreement"), the Company acquired the outstanding stock of
Family Telecommunications Incorporated, a Utah corporation ("FTI"), from the
stockholders of FTI, namely Robert W. Edwards, Jr. and Jerald L. Nelson. The
consideration for the transaction consists of an aggregate of 400,000 shares of
the Company's common stock to be issued by the Company upon approval by the
Company's shareholders of an amendment to the Articles of Incorporation
authorizing an increase in the number of shares of common stock from 20 million
to 50 million. The purchase price was determined upon the negotiated value of
the assets and operations of FTI. The acquisition has been accounted for using
the purchase method of accounting in the quarter ended March 31, 1997. FTI is an
FCC licensed long-distance carrier and provider of telecommunications services.
John W. Edwards, President, a Director and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the principal shareholder of FTI, are
brothers. There was no affiliation or relationship between the Company, its
affiliates, officers or directors or associates of such persons and FTI or any
if it's officers, directors or stockholders prior to the execution of the
Exchange Agreement except as set forth herein.
The acquisition cost of $2,415,000 (representing the fair value of the 400,000
shares to be issued) was allocated to the tangible net liabilities of $135,000
(based on their fair market value) with the excess acquisition cost over fair
value of assets acquired of $2,550,000 allocated to intangible assets. The
intangible assets are being amortized over periods ranging between three and ten
years. The fair values of assets acquired and liabilities assumed in conjunction
with this acquisition were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $435,312) $ 1,740,000
Long-term assets 3,716,000
Current liabilities (1,330,000)
Long-term liabilities (1,711,000)
--------------
Net purchase price $ 2,415,000
==============
</TABLE>
As part of the common stock acquisition of FTI, the Company assumed current and
long-term obligations in the amount of $1,991,000 as of December 31, 1996 to a
long-distance provider for FTI's line costs. The note was increased
approximately $700,000 for long-distance usage for January 1997. The note bears
interest at 7% per annum. The note calls for payments of $50,000 per month
beginning May 5, 1997 increasing to $75,000 on April 5, 1998 and $150,000 on
October 5, 1998 with the balance of $1,100,000 due on April 5, 1999. Remaining
principal payments under this specific note as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
June 30, 1998 $ 432,000
June 30, 1999 2,175,000
--------------
Total $ 2,607,000
==============
</TABLE>
Appendix 1-5
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of Subsidiaries, continued
Pro forma financial information. As discussed above, the Company acquired FTI
during the six months ended June 30, 1997. The acquisition was accounted for
using the purchase method of accounting. The consolidated financial statements
as presented include the operating results of FTI from the date of acquisition.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and FTI as if the acquisition had occurred
at March 20, 1996 (date of inception of FTI), with pro forma adjustments to give
effect to amortization of intangible assets.
<TABLE>
<CAPTION>
Three months ended
---------------------------------
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 3,569,000 $ 1,200,000
Net loss $ (4,843,000) $ (1,486,000)
Loss per share $ (0.48) $ (0.33)
<CAPTION>
Six months ended
---------------------------------
June 30, 1997 June 30, 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 6,315,000 $ 1,809,000
Net loss $ (8,750,000) $ (8,096,000)
Loss per share $ (0.88) $ (2.17)
</TABLE>
MiBridge, Inc. - Subsequent Event. On June 5, 1997, the Company entered into a
letter of intent with MiBridge, Inc. a New Jersey corporation ("MiBridge")
pursuant to which the Company entered into negotiations to acquire all of the
issued and outstanding stock of MiBridge from the principal shareholder. A final
agreement was signed on August 12, 1997, with closing anticipated in the third
quarter of 1997. The consideration ($8,250,000) for the transaction consisted
of: (1) an aggregate of 1,000 shares of preferred stock to be issued, which
preferred stock is convertible into such a number of common shares as shall
equal the sum of $6,250,000 divided by $9.25 which price was the closing bid
price of the Company's common stock on June 5, 1997 (the date a letter of intent
was signed by the Company and MiBridge) and (2) a note payable in the amount of
$2,000,000 payable in cash in quarterly installments over two years. The
acquisition will be accounted for using the purchase method of accounting in the
quarter ended September 30, 1997. MiBridge is the owner of patent-pending audio-
conferencing technology and is a leader in creating speech-encoding and
compression algorithms designed to produce superior audio quality and lower
delay over low-band networks.
Management estimates that the acquisition cost of $8,250,000 (representing the
fair value of the common stock into which the 1,000 shares of preferred stock
(to be issued) can be converted and the $2,000,000 note payable) will be
allocated to tangible net assets of approximately $355,000 (based on their
estimated fair value at final closing) with the balance of $7,895,000 allocated
to acquired technology ($1,450,000), acquired in-process research and
development ($4,240,000), employment contracts for the assembled workforce
($600,000) and excess acquisition cost over fair value of net assets acquired
($1,605,000). These assets are being amortized over three years, with the
exception of the excess acquisition cost over fair value of net assets
Appendix 1-6
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of Subsidiaries, continued
acquired which is being amortized over five years. The Company anticipates that
the acquired in-process research and development will be expensed upon
acquisition, as the research and development will not have reached technological
feasibility at the closing date. Based on management's best estimate of the
ultimate assets acquired and liabilities assumed at closing, the purchase price
in conjunction with this acquisition will be allocated as follows:
<TABLE>
<S> <C>
Current assets (including cash of $15,000) $ 453,000
Current liabilities (175,000)
Tangible long-term assets 77,000
Intangible long-term assets 3,655,000
In-process research and development 4,240,000
--------------
Net purchase price $ 8,250,000
==============
</TABLE>
Note 4 - Long-Term Debt
On June 6, 1997, the Company entered into a term loan agreement ("Loan
Agreement") and promissory note ("Note") with Winter Harbor , LLC ("Winter
Harbor") pursuant to which Winter Harbor agreed to loan to the Company the
principal sum of $2,000,000 ("the Loan") for capital expenditures and working
capital purposes. As further consideration for Winter Harbor's commitment to
make the Loan, the Company granted to Winter Harbor a warrant ("Loan Warrant")
to purchase up to five hundred thousand (500,000) shares of common stock of the
Company (the "Common Stock") at a purchase price of $4.97 per share, subject to
adjustment, pursuant to the terms of a Warrant Agreement between the parties.
The Loan Warrant expires on March 11, 2002, and contains demand and piggyback
registration rights and customary anti-dilution terms. The maturity date of the
note is October 15, 1998.
The fair value of the warrants issued in connection with the Loan has been
reflected as debt issuance costs of $3,815,000, which amount will be amortized
over the life of the Loan. The loan balance and unamortized debt issuance costs
are reflected in the financial statements as follows:
<TABLE>
<S> <C>
Long-term portion of note payable to
a long-distance provider $ 2,202,194
Long-term debt - other 22,920
Long-term debt - Winter Harbor 2,000,000
Debt issuance costs (3,615,000)
--------------
Long-term debt, net of debt issuance costs $ 610,114
==============
</TABLE>
On August 18, 1997 the Company amended the existing Note allowing for additional
borrowings of up to $3,000,000. The incremental borrowings under this amendment
have a maturity date of February 15, 1998. For every $1,000,000 drawn down on
this extension, the Company will issue 100,000 warrants at current market price.
All other provisions of this extension are the same as the Note discussed above.
Appendix 1-7
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Imputed Interest on Convertible Notes
Simultaneous with the closing of the Company's offering of Class C Preferred
Stock in September 1996, the Company issued an aggregate of $717,000 in
principal amount of Convertible Promissory Notes. The Company has recorded
interest expense (non-cash) of $320,000 related to these promissory notes in the
three months ended March 31, 1997. The interest expense is calculated as the
difference between the conversion price per common share per the promissory
notes as compared to the market price for the common stock on the date the notes
were issued. The interest expense was recognized over the period between the
date the promissory notes were issued and the date the promissory notes could
first be converted.
Note 6 - Commitments
In February 1996, the Company agreed to issue a maximum of 4,000,000 shares of
common stock to acquire the common stock of I-Link Worldwide Inc. As of June 30,
1997 the Company has issued 3,000,000 shares. The remaining 1,000,000 shares are
to be released upon the first to occur of the following:
(i) The monthly revenue derived from subscribers serviced by I-Link and
revenue derived from the sale of related products and/or services
equals or exceeds $1,000,000; or
(ii) The number of subscribers serviced by I-Link exceeds 100,000 one year
from the date of receipt by the Company of gross proceeds equal to
$4,000,000 from the sale of its securities pursuant to one or more
private or public offerings.
Revenues for June 1997 were in excess of $1,000,000, and accordingly, the
Company will issue the remaining 1,000,000 shares. The value of the common stock
to be issued is $8,875,000 (based on the closing market price of the common
stock on June 30, 1997) and has been recorded in the financial statements as an
intangible asset representing excess cost over fair value of net assets acquired
which is being amortized over five years.
Note 7 - Income Taxes
The Company recognized no income tax benefit for the losses generated in 1997
and 1996.
Note 8 - Loss Per Common Share After Preferred Dividends
Loss per common share is calculated as the net loss for the respective period
plus cumulative preferred stock dividends not paid in the current period of
$288,776 and $21,168 for the three months ended June 30, 1997 and 1996
respectively, and $577,923 and $53,322 for the six months ended June 30, 1997
and June 30, 1996, respectively, divided by the weighted average number of
common shares outstanding. Options, warrants and convertible preferred stock are
excluded from the calculation when their effect would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS and
makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
Appendix 1-8
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Options and Warrants
During the first six months of 1997, the Company granted options to purchase
3,545,000 shares of common stock to employees and consultants of the Company at
a price (ranging from $5.75 to $9.875) equal to the common stock price on the
day of grant. During the six months ended June 30, 1997, 20,000 options were
exercised to purchase common stock.
Included in the above grants, were 750,000 options granted to non-employees. The
fair market value of the options was recorded as deferred compensation for stock
options in the amount of $4,400,000. The deferred compensation is being
amortized over the vesting period of the options (primarily three years).
Note 10 - Changes in Stockholders' Equity
During the six months ended June 30, 1997 changes in stockholders' equity were
as follows:
Common stock increased by $140 related to the exercise of an option to purchase
20,000 shares of common stock (see note 9).
Additional paid-in capital increased due to the following:
* $303,251 which was associated with the balance of amortization of interest
expenses associated with issuance of convertible notes at a discount in 1996.
* $821,000 which was associated with issuance of warrants in connection with a
litigation settlement payable.
* $22,360 related to the exercise of an option to purchase 20,000 shares of
common stock (see note 9).
* $3,815,000 related to issuance of 500,000 warrants in connection with a debt
financing arrangement (see Note 4).
* $4,400,000 related to the issuance of options to non-employees (see note 9).
Common stock to be issued increased due to the following:
* $2,414,583 in relation to the acquisition of FTI. The amount has been
recorded as common stock to be issued as the Company does not presently
have authorized shares to issue to FTI (see note 3).
* $8,875,000 related to 1,000,000 shares of common stock to be issued in
connection with the acquisition of I-Link Worldwide (see Note 6).
Deferred compensation increased by $4,200,000 (net of $200,000 amortized during
the period ended June 30, 1997) related to the issuance of stock options to non-
employees (see note 9).
Accumulated deficit increased by $8,749,640 which is the net loss for
the first six months of 1997.
Appendix 1-9
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Restatement of previously reported amounts
Subsequent to its original filing of form 10-QSB for the period ended June 30,
1997, the Company determined that certain amounts as reported in the
consolidated financial statements included transactions relative to the
acquisition of MiBridge that should not have been included in the June 30, 1997
financial statements. Although the Company had entered into a letter of intent
on June 5, 1997 to acquire MiBridge, the final closing of the acquisition is not
expected until late August 1997 and accordingly should be recorded in the
quarter ending September 30, 1997. Therefore, the June 30, 1997 financial
statements have been restated as follows.
<TABLE>
<CAPTION>
Consolidated balance sheet:
As Originally
Reported Adjustments As Amended
-------------- ------------- --------------
Assets
------
<S> <C> <C> <C>
Cash and cash equivalents $ 1,341,391 $ (165,005) $ 1,176,386
Accounts receivable 4,291,492 (355,000) 3,936,492
Other current assets 199,574 (500) 199,074
Property and equipment, net 4,213,133 (50,175) 4,162,958
Intangible assets, net 15,381,165 (3,780,751) 11,600,414
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable and accrued expenses 7,322,627 (159,551) 7,163,076
Current portion of long-term debt -- related party 1,043,554 (1,000,000) 43,554
Long-term debt -- related party 1,000,000 (1,000,000) -
Preferred stock to be issued 6,250,000 (6,250,000) -
Accumulated deficit (39,933,306) 4,058,120 (35,875,186)
<CAPTION>
Consolidated statement of operations for the
six-month period ended June 30, 1997:
<S> <C> <C> <C>
Selling, general and administrative 5,093,935 (67,901) 5,026,034
Depreciation and amortization 1,089,348 (69,410) 1,019,938
Acquired in-process research and development 3,920,000 (3,920,000) -
Research and development 346,143 (809) 345,334
Net loss (12,807,760) 4,058,120 (8,749,640)
Loss per share (1.26) 0.38 (0.88)
<CAPTION>
Consolidated statement of operations for the
three-month period ended June 30, 1997:
<S> <C> <C> <C>
Selling, general and administrative 2,446,791 (67,901) 2,378,890
Depreciation and amortization 687,853 (69,410) 618,443
Acquired in-process research and development 3,920,000 (3,920,000) -
Research and development 235,055 (809) 234,246
Net loss (8,901,019) 4,058,120 (4,842,899)
Loss per share (0.86) 0.38 (0.48)
</TABLE>
Appendix 1-10
<PAGE>
APPENDIX 2
----------
FAMILY TELECOMMUNICATIONS, INCORPORATED
------
Financial Statements for the period
from the Date of Inception (March 20, 1996)
to December 31, 1996
<PAGE>
Report of Independent Accountants
---------------------------------
To the Shareholders of
Family Telecommunications, Incorporated:
We have audited the balance sheet of Family Telecommunications, Incorporated as
of December 31, 1996, and the related statements of operations and cash flows
for the period from the date of inception (March 20, 1996) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Telecommunications,
Incorporated as of December 31, 1996, and the results of its operations and its
cash flows for the period from the date of inception (March 20, 1996) to
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
March 11, 1997
Appendix 2-1
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
BALANCE SHEET
as of December 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 435,312
Accounts receivable (net of allowance for doubtful accounts of $781,787) 1,252,974
Accounts receivable - related party 30,726
Other current assets 20,696
-----------
Total current assets 1,739,708
-----------
Furniture and equipment:
Communications equipment 1,004,121
Office furniture and equipment 218,558
-----------
1,222,679
Less accumulated depreciation (150,261)
-----------
Total furniture and equipment, net 1,072,418
Deposits 28,491
-----------
Total assets $ 2,840,617
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 139,579
Accrued liabilities 322,778
Accrued wages - officers 144,000
Advances from related party 120,000
Settlement payable to marketing group 200,000
Notes payable 124,000
Long-term debt - current portion 280,000
-----------
Total current liabilities 1,330,357
Long-term debt 1,711,216
-----------
Total liabilities 3,041,573
-----------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Common stock, $.001 par value, 10,000 shares authorized,
4,000 issued and outstanding 4
Additional paid-in capital 1,036,915
Accumulated deficit (1,237,875)
-----------
Total stockholders' deficit (200,956)
-----------
Total liabilities and stockholders' deficit $ 2,840,617
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Appendix 2-2
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
STATEMENT OF OPERATIONS
For the period from March 20, 1996 (inception) to December 31, 1996
<TABLE>
<S> <C>
Revenues:
Long distance service revenues $ 3,880,457
-----------
Operating expenses:
Line costs 2,841,860
Commissions 460,030
Selling, general and administrative 1,352,732
Depreciation and amortization 150,261
Research and development 79,609
Bad debt expense 784,537
-----------
Total operating expenses 5,669,029
-----------
Operating loss (1,788,572)
-----------
Other income (expense):
Income from sales of communications hardware to a related
party, (net of $1,137,828 costs of goods sold) 585,541
Interest income 2,109
Interest expense (7,524)
Other expense (29,429)
-----------
Total other income, net 550,697
-----------
Net loss $(1,237,875)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
Appendix 2-3
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
STATEMENT OF CASH FLOWS
For the period from March 20, 1996 (inception) to December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(1,237,875)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 150,261
Provision for losses on accounts receivable 784,537
Increase (decrease) from changes in:
Receivables (2,068,237)
Other current assets (20,696)
Deposits (28,491)
Accounts payable and accrued liabilities 2,440,577
Accrued wages - officers 144,000
Settlement payable to marketing group 200,000
-----------
Net cash used in operating activities 364,076
-----------
Cash flows from investing activities:
Additions to furniture and equipment (112,764)
-----------
Net cash used in investing activities (112,764)
-----------
Cash flows from financing activities:
Proceeds from short term notes payable 104,000
Payments on short term notes payable (40,000)
Advances from related party 120,000
-----------
Net cash provided by financing activities 184,000
-----------
Increase in cash and cash equivalents 435,312
Cash and cash equivalents at beginning of year 0
-----------
Cash and cash equivalents at end of year $ 435,312
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,200
===========
Non-cash transactions:
Contribution of equipment and furniture by shareholders
in exchange for stock of the company $ 1,036,919
Additions to furniture and equipment financed
with trade accounts payable $ 13,000
Additions to furniture and equipment financed
with short-term note payable $ 60,000
</TABLE>
The accompanying notes are an integral part of the financial statements
Appendix 2-4
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------
Organization
------------
Family Telecommunications, Incorporated (the Company), a Utah corporation,
began operations on March 20, 1996. The Company provides long-distance
telephone services including 1-plus long distance service, toll free
services (800/888), worldwide calling card service, worldwide prepaid phone
card service, long distance cellular phone service, data line service and
T-span service. Through its Carrier Agreement with MCI Telecommunications
Corporation, the Company provides long-distance service in the 48
continental states. The Company is a switchless reseller (having no
equipment) in all states but Arizona where the Company provides service
through its own switches. This allows the Company to offer additional
services in its home state and surrounding states and other customized
services to its entire customer base.
The following is a summary of significant accounting policies followed by
the Company:
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts that are readily
convertible to cash.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Telecommunications equipment 5-7
Office equipment and furniture 3-7
</TABLE>
Maintenance and repairs, which are not considered betterments and do not
extend the useful life of assets, are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
Continued
Appendix 2-5
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES, Continued:
-----------------------------------------------
Research and Development
------------------------
Company-sponsored research and development costs related to both present
and future products are expensed currently.
Income Taxes
------------
The Company has elected to be taxed as a U.S. small business corporation
exempt from income taxes under Sub-Chapter S of the Internal Revenue Code.
Accordingly, the Company's shareholders are responsible for federal and
state income taxes on their respective portions of the Company's earnings.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk are primarily accounts receivable. In 1996 the Company
generated approximately 89% of its long-distance revenues from one
marketing group, although collections are made from each member of the
group. The Company performs credit evaluations of its large customers but
generally does not require collateral to support customer receivables.
The majority of the Company's cash and cash equivalents are held by three
financial institutions in Phoenix, Arizona. The Company has $175,000 which
exceeds the FDIC insurance limits.
Estimates
---------
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Continued
Appendix 2-6
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
------------------------------------------
The Company has estimated an allowance for doubtful accounts receivable in
the amount of $781,787 as of December 31, 1996. Management's estimate takes
into consideration current market conditions and the limited collection
experience of the Company since inception. Actual write-offs of
uncollectible accounts may differ from amounts estimated.
3. SETTLEMENT PAYABLE TO MARKETING GROUP:
-------------------------------------
The Company entered into an agreement during 1996 with a marketing group
wherein the group was to share in fees and profits related to telephone
usage by the group's members, net of commissions paid to the members. In
connection with this agreement, certain disagreements between the Company
and the marketing group existed at year end. Subsequent to December 31,
1996, the Company entered into a settlement agreement with the marketing
group, wherein the Company agreed to pay the marketing group $200,000 to
satisfy all liabilities to the group under the original agreement.
4. NOTES PAYABLE:
-------------
As of December 31, 1996, the Company has $124,000 in short-term notes
payable to various banks and individuals which are due in 1997. Two notes
totaling $100,000 are collateralized by some of the Company's furniture and
equipment and bear interest at rates ranging from 8 to 11.5 percent.
5. RELATED PARTY TRANSACTIONS:
--------------------------
The Company's principal shareholder, is a brother of the president of I-
Link Worldwide, Inc. ("I-Link") a subsidiary of Medcross, Inc. During the
period from March 20, 1996 (inception) to December 31, 1996, the Company
rendered long distance services and sold switching equipment to I-Link.
Revenues and expenses relating to these transactions are as follows:
<TABLE>
<S> <C>
Long distance revenues $ 5,026
Revenues from sale of switching equipment $ 1,723,369
Cost of switching equipment sold $ 1,137,828
</TABLE>
Continued
Appendix 2-7
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. RELATED PARTY TRANSACTIONS, Continued:
--------------------------
As of December 31, 1996 the Company had a receivable from I-Link for
services in the amount of $30,726 and an advance in the amount of $120,000
from I-Link for services to be rendered by the Company for I-Link
subsequent to year-end.
Subsequent to December 31, 1996, the Company entered into a share exchange
agreement for the acquisition of the Company by Medcross, Inc. (See Note
8 - Subsequent Events)
6. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
-------------------------------------------
At the inception of the Company, owners contributed assets valued at
$1,036,919 in exchange for 4,000 shares of the Company's common stock. The
contributed assets consisted primarily of telephone switching equipment and
office equipment. The value of the stock issued for the contributed assets
and the assets themselves were valued based on the fair market value of the
contributed assets at the date of contribution as there is no active
trading market in the stock of the Company.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Leases
------
The Company leases office space under non-cancelable operating leases.
Rental expense for 1996 was $73,000. The leases grant a security interest
in substantially all of the Company's furniture and equipment during the
term of the lease. Future minimum lease payments under these leases are as
follows:
<TABLE>
<S> <C>
1997 $ 109,000
1998 113,000
1999 119,000
2000 93,000
2001 35,000
--------
$ 469,000
========
</TABLE>
Continued
Appendix 2-8
<PAGE>
FAMILY TELECOMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
7. COMMITMENTS AND CONTINGENCIES, Continued:
-----------------------------
Employment Agreements
---------------------
The Company has employment agreements with six employees of the Company
providing for a salary continuation (usually five years) in the event of
termination for reasons other than cause. As of December 31, 1996, if all
of the employees under contract were to be terminated by the Company
without cause under these contracts, the Company's total future payments to
these employees would be approximately $1,400,000.
8. SUBSEQUENT EVENTS:
-----------------
Restructuring of Account Payable into Long-Term Debt
----------------------------------------------------
As of December 31, 1996 the Company had an account payable in the amount of
$1,991,216 to a long distance provider for the Company's line costs.
Subsequent to year-end the Company entered into an agreement wherein the
$1,991,216 payable and the Company's line charge for January 1997 of
approximately $700,000 were converted to a long-term note payable with
interest payable at 7%. No interest will be charged until May 5, 1997. The
note calls for payments of $50,000 per month beginning May 5, 1997
increasing to $75,000 on April 5, 1998 and $150,000 on October 5, 1998 with
a balloon payment of $1,100,000 due on April 5, 1999. Principal payments
under the note will be as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
1997 $ 280,000
1998 901,000
1999 1,519,000
----------
$ 2,700,000
==========
</TABLE>
Continued
Appendix 2-9
<PAGE>
FAMILY TELECOMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS, Continued
--------
8. SUBSEQUENT EVENTS, Continued:
-----------------
Restructuring of Account Payable into Long-Term Debt, Continued
----------------------------------------------------
Under terms of this agreement, the Company is also obligated to make
payments on current usage in the amount of $600,000 for February 1997 usage
(with a true-up payment 30 days after receipt of the February invoice) and
weekly payments for subsequent months current usage in the amount of
$125,000 for March and April 1997 and $150,000 for May 1997 and subsequent
usage periods. True-up payments for each month will be 30 days after
receipt of the respective month's invoice. If usage increases or decreases
more than 20% in any weekly or monthly period, the weekly payment will be
adjusted consistent with that usage.
Acquisition of the Company by Medcross, Inc.
-------------------------------------------
Subsequent to year-end and effective January 1, 1997, the Company entered
into a share exchange agreement (the "agreement") with Medcross, Inc.
(Medcross). Under the agreement, Medcross will acquire 100% of the
Company's outstanding shares of common stock in exchange for 400,000 shares
of common stock of I-Link subject to certain contingencies, approval by
Medcross shareholders at Medcross' next Shareholders' meeting of an
amendment to Medcross' Articles of Incorporation increasing the number of
authorized common shares of Medcross and entering into employment contracts
with Robert Edwards and Jerry Nelson.
Appendix 2-10
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
PRO FORMA COMBINED BALANCE SHEET
As of December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Medcross, Inc. FTI Adjustment Pro Forma
-------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,500,227 $ 435,312 $ 4,935,539
Accounts receivable less allowances of $1,433,806 780,907 1,283,700 $(120,000) (D) 1,944,607
Inventory less allowances of $260,033 557,036 - 557,036
Certificate of deposit - restricted 208,500 - 208,500
Prepaid expenses 47,472 - 47,472
Other current assets 11,411 20,696 32,107
----------- ---------- ----------
Total current assets 6,105,553 1,739,708 7,725,261
----------- ---------- ----------
Property and equipment
Office furniture, equipment and leasehold improvements 388,191 218,558 606,749
Network services furniture and equipment 2,110,996 1,004,121 (84,725) (B) 3,030,392
Medical equipment and vehicles 2,975,701 - 2,975,701
----------- ---------- ----------
5,474,888 1,222,679 6,612,842
Less accumulated depreciation (2,618,252) (150,261) 150,261 (B) (2,618,252)
----------- ---------- ----------
Net property and equipment 2,856,636 1,072,418 3,994,590
----------- ---------- ----------
Other assets:
Intangible assets, net 486,028 - 2,550,003 (A) 3,036,031
Certificate of deposit - restricted 1,761,312 - 1,761,312
Other assets 224,301 28,491 252,792
----------- ---------- ----------
Total other assets 2,471,641 28,491 5,050,135
----------- ---------- ----------
Total assets $ 11,433,830 $ 2,840,617 $ 16,769,986
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,379,451 $ 926,357 $(120,000) (D) $ 3,185,808
Accrued litigation settlement 821,000 - 821,000
Notes payable 1,095,000 124,000 1,219,000
Current portion of long-term debt 43,554 280,000 323,554
Current obligations under capital lease 187,047 - 187,047
------------ ----------- -----------
Total current liabilities 4,526,052 1,330,357 5,736,409
Long-term debt 44,128 1,711,216 1,755,344
Capital lease obligation 236,705 - 236,705
Minority interest in consolidated subsidiaries 328,328 - 328,328
------------ ----------- -----------
Total liabilities 5,135,213 3,041,573 8,056,786
------------ ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock 2,475,000 - 2,475,000
Common stock 74,253 4 2,796 (A,C) 77,053
Additional paid-in capital 30,874,910 1,036,915 1,374,868 (A,C) 33,286,693
Accumulated deficit (27,125,546) (1,237,875) 1,237,875 (C) (27,125,546)
------------ ----------- -----------
Total stockholders' equity 6,298,617 (200,956) 8,713,200
------------ ----------- -----------
Total liabilities and stockholders' equity $ 11,433,830 $ 2,840,617 $ 16,769,986
=========== ========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
Appendix 2-11
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Medcross, Inc. FTI Adjustment Pro Forma
-------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Health care service revenue, net $ 2,212,544 $ - $ - $ 2,212,544
Network service revenue 170,532 - - 170,532
Long distance service revenues - 3,880,457 (5,026) (D) 3,875,431
----------- ---------- ---------- -----------
Net operating revenue 2,383,076 3,880,457 6,258,507
----------- ---------- -----------
Operating costs and expenses:
Line costs - 2,841,860 2,841,860
Commissions - 460,030 460,030
Salaries and benefits 1,825,138 854,609 (5,026) (D) 2,674,721
Selling, general and administrative 2,863,963 498,123 3,362,086
Communications network expenses 1,120,779 - 1,120,779
Depreciation and amortization 1,094,004 150,261 272,600 (E) 1,516,865
Provision for inventory valuation 260,033 - 260,033
Repairs and maintenance 288,662 - 288,662
Provision for doubtful accounts 197,565 784,537 982,102
Research and development 347,504 79,609 427,113
Acquired in-process research and development expense 14,577,942 - 14,577,942
----------- ---------- -----------
Total operating costs and expenses 22,575,590 5,669,029 28,512,193
=========== ========== ===========
Operating loss (20,192,514) (1,788,572) (22,253,686)
----------- ---------- -----------
Other income (expense):
Sales of equipment - 585,541 (585,541) (D) -
Interest expense (2,191,629) (7,524) (2,199,153)
Interest income 147,322 2,109 149,431
Equity in net income (loss) of
unconsolidated subsidiaries (3,211) - (3,211)
Litigation settlement expense (821,000) - (821,000)
Other (8,108) (29,429) (37,537)
------------ ----------- -----------
Total other expense (2,876,626) 550,697 (2,911,470)
------------ ----------- -----------
Loss before minority interest in loss of
consolidated subsidiaries (23,069,140) (1,237,875) (25,165,156)
Minority interest in income of consolidated subsidiaries 4,900 - 4,900
----------- ---------- -----------
Net loss $(23,064,240) $(1,237,875) $(25,160,256)
=========== ========== ===========
Net loss per common share after preferred dividends $(6.53) $(6.55)
===== =====
</TABLE>
See notes to unaudited pro forma combined financial statements.
Appendix 2-12
<PAGE>
MEDCROSS, INC. AND
FAMILY TELECOMMUNICATIONS INCORPORATED (FTI)
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Preparation:
The unaudited pro forma combined balance sheet as of December 31, 1996
and the unaudited pro forma combined statements of operations for the year
ended December 31, 1996 give effect to the acquisition of 100% of the
outstanding common stock of Family Telecommunications Incorporated (FTI)
by Medcross, Inc. (the "Company") as if the acquisition, accounted for under
the purchase method of accounting, had occurred on the balance sheet date with
respect to the balance sheet and on March 20, 1996 (date of inception of FTI)
with respect to the statement of operations.
The pro forma financial statements have been prepared based upon the financial
statements of the Company and FTI as of and for the year ended December 31,
1996. These pro forma financial statements may not be indicative of the
results that actually would have occurred if the combination had been in
effect on the dates indicated or which may be obtained in the future. The
pro forma adjustments are based upon certain estimates which may
change as additional information becomes available. The pro
forma financial statements should be read in conjunction with
the audited financial statements for the Company and FTI.
NOTE 2 - Pro forma Adjustments:
The pro forma adjustments reflected in the pro forma financial
statements are summarized in items A to E below:
A. Pro forma adjustment reflects the purchase of all of the outstanding
common stock of FTI by the Company in return for the issuance of
400,000 shares of common stock of the Company to the stockholders of
FTI:
<TABLE>
<S> <C>
Common stock (400,000 shares
issued at $.007 par value with a
market value of $6.03 per share) $ 2,800
Additional paid-in capital 2,411,783
---------
Purchase price 2,414,583
Net liabilities assumed 135,420
---------
Excess (allocated to intangible assets and goodwill) $2,550,003
=========
</TABLE>
Allocation of the excess purchase price to intangible assets is as
follows: goodwill ($1,490,003), customer list ($520,000), and carrier
identification code and tariff registration status ($540,000).
Amortization lives of these intangible assets will be 10 years for
goodwill and carrier identification code and tariff registration
status and 3 years for the customer list. The allocation of excess
purchase price to these intangible assets is subject to final revisions
which may be material and if material then the amounts allocated to the
intangible assets, specifically goodwill, may be revised.
B. Pro forma adjustments to reflect the effect of purchase price
allocation adjustments to property and equipment.
C. Pro forma adjustments to remove FTI stockholders' equity accounts as of
December 31, 1996 as part of the purchase price allocation process.
Appendix 2-13
<PAGE>
D. Removal of the following intercompany transactions occurring during
1996:
. intercompany accounts receivable and payables ($120,000)
. intercompany sales of long distance service ($5,026)
. profit on intercompany sale of equipment resulting in gain to FTI
($585,541)
E. Pro forma adjustments to record amortization of intangible assets (see
item A above) and adjustment to depreciation of property and equipment
due to change in value as a result of purchase price allocations (see
item B above).
Appendix 2-14
<PAGE>
APPENDIX 3
MiBridge, Inc.
-------------
Financial Statements as of December 31, 1996 and
June 30, 1997 (unaudited) and for the period
from inception (March 18, 1996) through
December 31, 1996 and the six months
ended June 30, 1997 (unaudited)
<PAGE>
Report of Independent Accountants
---------------------------------
To the Stockholder of
MiBridge, Inc.:
We have audited the balance sheet of Mibridge, Inc. as of December 31, 1996, and
the related statements of operations, changes in stockholder's equity and cash
flows for the period from the date of inception (March 18, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MiBridge,
Inc. as of December 31, 1996, and the results of its operations and its
cash flows for the period from the date of inception (March 18, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Salt Lake City, Utah
August 6, 1997
Appendix 3-1
<PAGE>
MIBRIDGE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 165,005 $ 25,581
Accounts receivable 15,000 30,000
Costs and estimated earnings in excess of billing
on uncompleted contracts 340,000 248,500
Inventory - 20,644
Prepaid expenses - 94,520
Deferred income taxes - 7,443
------------ ------------
Total current assets 520,005 426,688
------------ ------------
Furniture and equipment:
Equipment 64,811 54,119
Office furniture 4,115 3,026
Less accumulated depreciation (18,751) (8,411)
------------ ------------
Total furniture and equipment 50,175 48,734
------------ ------------
Capitalized software development costs, net 17,693 7,433
Intangible assets 6,750 6,750
Other assets 3,100 2,125
------------ ------------
Total assets $ 597,723 $ 491,730
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ - $ 2,499
Accrued liabilities 39,883 20,852
Accrued director's fee payable - 49,000
Deferred revenue 27,500 5,000
Income taxes payable 64,168 133,628
------------ ------------
Total current liabilities 131,551 210,979
Deferred income taxes 11,952 9,696
------------ ------------
Total liabilities 143,503 220,675
------------ ------------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, no par value, authorized 10,000,000
shares, issued and outstanding 6,000,000 shares 1,000 1,000
Additional paid-in-capital 325,000 300,000
Deferred compensation - (244,445)
Retained earnings 128,220 214,500
------------ ------------
Total stockholder's equity 454,220 271,055
------------ ------------
Total liabilities and stockholder's equity $ 597,723 $ 491,730
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
Appendix 3-2
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF OPERATIONS
For the period from inception (March 18, 1996) to December 31, 1996 and
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Software sales and consulting $255,799 $290,700
Software development 241,500 528,500
------------ ------------
Total revenues 497,299 819,200
------------ ------------
Cost of sales:
Software sales and consulting 189,020 148,812
Software development 184,987 102,042
------------ ------------
Cost of sales 374,007 250,854
------------ ------------
Gross Margin 123,292 568,346
Operating expenses:
Selling, general and administrative 252,027 200,726
Depreciation and amortization 15,072 10,039
------------ ------------
Total operating expenses 267,099 210,765
------------ ------------
Net income (loss) before income taxes (143,807) 357,581
Income tax (provision) benefit 57,527 (143,081)
------------ ------------
Net income (loss) $(86,280) $214,500
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
Appendix 3-3
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the period from inception (March 18, 1996) to December 31, 1996 and
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Common Stock Total
------------ Additional Deferred Retained Stockholder's
Shares Amount Paid-in Capital Compensation Earnings Equity
------ ------ --------------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 18, 1996
(inception)
Original shares issued 6,000,000 $1,000 $ - $ - $ - $ 1,000
Stock options granted
on issued shares - - 300,000 (300,000) - -
Amortization of deferred
compensation - - - 55,555 - 55,555
Net income - - - - 214,500 214,500
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,000,000 1,000 300,000 (244,445) 214,500 271,055
Stock options granted
on issued shares - - 25,000 (25,000) - -
Amortization of deferred
compensation - - - 269,445 - 269,445
Net loss (86,280) (86,280)
--------------------------------------------------------------------------------------------
Balance at June 30, 1997
(unaudited) 6,000,000 $1,000 $325,000 $ - $128,220 $454,220
============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
Appendix 3-4
<PAGE>
MIBRIDGE, INC.
STATEMENTS OF CASH FLOWS
For the period from March 18, 1996 (inception) to December 31, 1996 and
for the six month period ending June 30, 1997 (unaudited)
--------
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (86,280) $ 214,500
Adjustments to reconcile net income
to net cash
Provided in operating activities:
Depreciation and amortization 15,072 10,039
Amortization of deferred compensation 269,445 55,555
Deferred taxes 9,699 2,253
Increase (decrease) from changes in:
Accounts receivable 15,000 (30,000)
Costs and estimated earnings in excess
of billings on uncompleted contracts (91,500) (248,500)
Inventory 20,644 (20,644)
Prepaid expenses 94,520 (94,520)
Other assets (975) (2,125)
Accounts payable (2,499) 2,499
Accrued liabilities and other payables (76,929) 208,480
--------- ---------
Net cash provided by operating activities 166,197 97,537
--------- ---------
Cash flows from investing activities:
Additions to furniture and equipment (11,781) (57,145)
Capitalized software development costs (14,992) (9,061)
Additions to intangible assets - (6,750)
--------- ---------
Net cash used in investing activities (26,773) (72,956)
--------- ---------
Cash flows from financing activities:
Proceeds from shareholder advance - 62,000
Repayment of shareholder advance - (62,000)
Common stock issued - 1,000
--------- ---------
Net cash provided by financing activities - 1,000
--------- ---------
Increase in cash 139,424 25,581
Cash at beginning of period 25,581 -
--------- ---------
Cash at end of period $ 165,005 $ 25,581
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ - $ 7,200
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
Appendix 3-5
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Business Information
--------------------
MiBridge, Inc. (the Company), a New Jersey corporation, began operations on
March 18, 1996. The Company develops communications software that supports
multimedia communications (voice, fax and audio) over the public switched
telephone network (PSTN), local area networks (LANs) and the Internet. The
Company creates speech encoding and compression algorithms designed to
produce superior audio quality and lower delay over low-bandwidth networks.
The interim financial data as of June 30, 1997 and for the six-month period
then ended are unaudited; however, in the opinion of management of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations, financial position and cash flows of the Company.
Inventories
-----------
Inventory consists of computer boards held for resale and is valued at the
lower of actual cost or market. Cost is determined by specific identification
of each unit.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the
following estimated useful lives:
Office equipment 3 years
Furniture 5 years
Maintenance and repairs, which are not considered betterments and do not
extend the useful life of assets, are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
Intangible Assets
-----------------
Intangible assets include certain legal expenditures for patent filing fees
relating to proprietary techniques developed by the Company. The patents are
pending; therefore, no amortization of patent filing fees is reflected in the
financial statements.
Continued
Appendix 3-6
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
------------------------------------------
Revenue Recognition
-------------------
Revenues are generally recognized as products are shipped or services are
performed. Initial software royalties are recognized upon delivery of the
master copy, as the Company is not required to provide any additional
services. As minimum software usage levels are exceeded by the customer, the
Company will receive additional royalties based on a per port usage.
Most software is sold with maintenance contracts that cover periods from one
to twelve months. Revenue related to these contracts is deferred and
recognized on a straight-line basis over the term of the maintenance
agreement.
Certain development projects are jointly funded by a customer. Revenues on
these long-term funded development contracts are recognized under the
percentage of completion method of accounting and are measured based upon the
level of effort expended on the project, compared to total billings allowed
by the contract. Estimated contract earnings are reviewed and revised
periodically as the work progresses. Estimated losses are charged against
earnings in the period in which such losses are identified. In exchange for
its participation in funding the project, the customer will receive joint
marketing rights and a portion of future revenues from the sale of the
developed technology based on a revenue sharing agreement. The amount of
future revenues to be received by the customer party ranges between 20 and 55
percent and depends upon who markets the product and the terms of the
specific contract. As of December 31, 1996, there were no sales of jointly
developed products.
Software Development Costs
--------------------------
The Company capitalizes software development costs when the project reaches
technological feasibility. Research and development costs related to software
development that has not reached technological feasibility are expensed as
incurred. Capitalized software development costs are amortized at the greater
of the straight-line method over the expected life of the product (maximum
three year period) or the ratio of current revenues for a product to the
total of current and anticipated future revenues. Capitalized software
development costs were $7,433 at December 31, 1996, net of accumulated
amortization of $1,628.
Continued
Appendix 3-7
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
------------------------------------------
Income Taxes
------------
The Company records deferred taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The Statement requires recognition of deferred tax assets and
liabilities for the temporary differences between the tax bases of assets and
liabilities and the amounts at which they are carried in the financial
statements based upon the enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
Concentration of Credit Risk
----------------------------
All of the Company's cash is held by one financial institution in New Jersey.
The Company has approximately $54,000 that exceeds the FDIC insurance limits
at December 31, 1996.
During the period from inception to December 31, 1996 approximately 86% of
the Company's revenues were related to one customer. Unbilled receivables
from this customer represented approximately 51% of total assets as of
December 31, 1996.
Estimates
---------
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Continued
Appendix 3-8
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. LONG-TERM CONTRACT ACCOUNTING
-----------------------------
Costs and estimated earnings in excess of billings on uncompleted contracts
consist of amounts of revenue recognized on contracts for which billings have
not been recorded. Billings in excess of costs and estimated earnings on
uncompleted contracts consist of amounts of billings recognized on contracts
in excess of costs.
Contract revenues and costs related to uncompleted contracts are included in
the accompanying balance sheet as of December 31, 1996 under the following
captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 248,500
Billings in excess of costs and estimated
earnings on uncompleted contracts -
---------
$ 248,500
=========
Costs incurred on long-term contracts $ 104,000
Estimated earnings 424,500
Billings to date (280,000)
---------
$ 248,500
=========
</TABLE>
3. INCOME TAXES
------------
The income tax provision for the period since inception to December
31, 1996 consists of the following:
<TABLE>
<S> <C>
Current federal income tax provision $ 109,094
Current state income tax provision 31,734
Deferred tax provision 2,253
---------
Income tax provision $ 143,081
=========
</TABLE>
Continued
Appendix 3-9
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. INCOME TAXES, continued
------------
The reported provision for income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income
before taxes primarily because of state taxes and certain non-deductible
meals and entertainment.
The components of the net deferred tax asset and liability as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Stock award compensation expense $ 22,189
Accrued director's fees 19,970
---------
Total deferred tax asset 42,159
=========
Deferred tax liability:
Excess tax depreciation (6,727)
Capitalized software development costs (2,969)
Prepaid salaries (34,716)
---------
Total deferred tax liability (44,412)
---------
Net deferred tax liability $ (2,253)
=========
</TABLE>
The net deferred tax liability as of December 31, 1996 is reflected in
the balance sheet as follows:
<TABLE>
<S> <C>
Current deferred tax asset $ 7,443
Long-term deferred tax liability (9,696)
---------
$ (2,253)
=========
</TABLE>
4. RELATED PARTY TRANSACTIONS
--------------------------
During 1996, the owner of the Company advanced a total of $62,000 to the
Company to fund operations. These advances were repaid during the period.
During the period ended December 31, 1996, the Company had sales of
$25,000 with Medcross, Inc. (see note 7).
Continued
Appendix 3-10
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. STOCKHOLDER'S EQUITY
--------------------
Common Stock
------------
At the inception of the Company, the owner contributed $1,000 in exchange for
6,000,000 shares of the Company's common stock.
Additional Paid in Capital - Stock Awards
-----------------------------------------
During the year, the sole shareholder of the Company granted certain
employees options to buy shares of stock owned by the shareholder. The awards
were granted to attract and retain qualified employees for the Company, and
accordingly, the Company has accounted for these awards as if they had been
made directly by the Company. The Company applies APB Opinion No. 25 and
related interpretations in accounting for stock compensation awards. Had
compensation cost for the Company's stock-based awards been determined based
on fair-value at the grant date consistent with the minimum value method
outlined by Statement of Financial Accounting Standard No. 123, the
difference would have been insignificant.
The number of options outstanding and the weighted average exercise
price per option are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
---------- ----------
<S> <C> <C>
Outstanding at beginning of year
Granted 900,000 $0.00
--------- ----------
Outstanding at end of year 900,000 $0.00
========= ==========
Options exercisable at year end - $0.00
========= ==========
</TABLE>
The awards were granted in equal amounts in May, June and August of 1996 and
vest annually over a three year period (weighted average remaining life of
2.4 years). Additional paid-in capital and deferred compensation recorded
during the year represent the difference between the exercise price of the
options and the value of the stock, which is based on management's best
estimate of the fair value of the Company at the stock option grant date.
Compensation expense is recognized on a straight-line basis over the vesting
period of the options. Vesting of the awards would be accelerated should the
Company be purchased.
Continued
Appendix 3-11
<PAGE>
MIBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
6. EMPLOYMENT AGREEMENTS
---------------------
The Company has employment agreements with seven employees of the Company
providing for a salary continuation (usually three years) in the event of
termination for reasons other than cause. As of December 31, 1996, if all of
the employees under contract at that date were to be terminated by the
Company without cause, the Company's total future payments to these employees
would be approximately $600,000.
7. ACQUISITION OF THE COMPANY BY MEDCROSS, INC.
--------------------------------------------
On June 5, 1997, the Company entered into a letter of intent with Medcross,
Inc. (Medcross) pursuant to which the Company entered into negotiations to
sell 100% of the Company's outstanding stock. A final agreement was signed on
August 12, 1997, with closing anticipated in the third quarter of 1997. Under
the finalized agreement, Medcross will acquire 100% of the Company's
outstanding shares of common stock in exchange for 1,000 shares of Medcross
Series D Preferred stock and a promissory note of $2,000,000, payable with
interest in quarterly installments over the two years. The preferred shares
are convertible at the option of the prior MiBridge shareholders into
Medcross common stock shares equal in number to $6,250,000 divided by the
lower of $9.25 or the average closing bid price of Medcross common stock for
the five consecutive trading days immediately preceding the conversion date.
Appendix 3-12
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA COMBINED BALANCE SHEET
as of June 30, 1997 (unaudited)
--------------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 992,267 $ 184,119 $ 15,000 $ - $ 1,191,386
Accounts receivable less allowance for
doubtful accounts of $1,069,389 2,417,210 2,114,740 435,000 (596,000) A 4,370,950
Inventory less allowance of $260,033 763,263 - - - 763,263
Certificate of deposit - restricted 198,640 - - - 198,640
Other current assets 191,461 7,613 3,000 - 202,074
------------ ------------ ---------- ------------ ------------
Total current assets 4,562,841 2,306,472 453,000 (596,000) 6,726,313
------------ ------------ ---------- ------------ ------------
Property and equipment:
Property and equipment 6,090,101 1,270,857 75,000 (19,000) F 7,416,958
Less accumulated depreciation (3,046,395) (151,605) (19,000) 19,000 F (3,198,000)
------------ ------------ ---------- ------------ ------------
Net property and equipment 3,043,706 1,119,252 56,000 - 4,218,958
------------ ------------ ---------- ------------ ------------
Other assets:
Intangible assets, net 9,319,136 2,281,278 7,000 3,648,000 C/F 15,255,414
Certificate of deposit - restricted 1,742,711 - - - 1,742,711
Investment in FTI 2,414,583 - - (2,414,583) D -
Other assets 83,837 40,228 21,000 - 145,065
------------ ------------ ---------- ------------ ------------
Total other assets 13,560,267 2,321,506 28,000 1,233,417 17,143,190
------------ ------------ ---------- ------------ ------------
Total assets $ 21,166,814 $ 5,747,230 $ 537,000 $ 637,417 $ 28,088,461
============ ============ ========== ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,256,609 $ 3,501,925 $ 175,000 $ (596,000) A $ 7,337,534
Notes payable 1,045,000 - - - 1,045,000
Current portion of long-term debt 43,554 408,429 - 1,000,000 C 1,451,983
Obligations under capital lease 187,047 - - - 187,047
------------ ------------ ---------- ------------ ------------
Total current liabilities 5,532,210 3,910,354 175,000 404,000 10,021,564
------------ ------------ ---------- ------------ ------------
Long-term debt (1,592,080) 2,202,194 - 1,000,000 C 1,610,114
Obligations under capital lease 147,274 - - - 147,274
Deferred taxes - - 12,000 (12,000) H -
Minority interest in consolidated subsidiary 299,198 - - - 299,198
------------ ------------ ---------- ------------ ------------
Total liabilities 4,386,602 6,112,548 187,000 1,392,000 12,078,150
------------ ------------ ---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock 2,475,000 - - 10,000 C 2,485,000
Common stock 74,393 - 1,000 (1,000) E 74,393
Common stock to be issued 11,289,583 - - - 11,289,583
Additional paid in capital 40,236,521 2,414,583 325,000 3,500,417 C/D/E 46,476,521
Deferred compensation (4,200,000) - - - (4,200,000)
Accumulated deficit (33,095,285) (2,779,901) 24,000 (4,264,000) C/E (40,115,186)
------------ ------------ ---------- ------------ ------------
Total stockholders' equity 16,780,212 (365,318) 350,000 (754,583) 16,010,311
------------ ------------ ---------- ------------ ------------
Total liabilities and stockholders' equity $ 21,166,814 $ 5,747,230 $ 537,000 $ 637,417 $ 28,088,461
============ ============ ========== ============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements
Appendix 3-13
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA STATEMENT OF OPERATIONS
for the six-month period ended June 30, 1997 (unaudited)
--------------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications service revenue $ - $4,414,825 $ - $ - $4,414,825
Health care service revenue 1,179,555 - - - 1,179,555
Marketing service revenue 720,490 - - - 720,490
Software sales and development - - 497,299 - 497,299
------------ ------------ ----------- ----------- -----------
Net operating revenue 1,900,045 4,414,825 497,299 - 6,812,169
------------ ------------ ----------- ----------- -----------
Operating costs and expenses:
Telecommunications network expense 1,496,349 5,569,441 - - 7,065,790
Marketing services costs 640,739 - - - 640,739
Selling, general and administrative 3,713,197 1,312,837 630,239 - 5,656,273
Provision for doubtful accounts 158,498 345,000 - - 503,498
Depreciation and amortization 684,333 335,605 10,340 502,167 G 1,532,445
Provision for asset valuation 213,944 - - - 213,944
Research and development 269,334 76,000 - - 345,334
------------ ------------ ----------- ----------- -----------
Total operating costs and expenses 7,176,394 7,638,883 640,579 502,167 15,958,023
------------ ------------ ----------- ----------- -----------
Operating loss (5,276,349) (3,224,058) (143,280) (502,167) (9,145,854)
------------ ------------ ----------- ----------- -----------
Other income (expense):
Interest expense (405,001) (15,474) - - (420,475)
Interest and other income 141,046 1,068 - - 142,114
------------ ------------ ----------- ----------- -----------
Total other income (expense) (263,955) (14,406) - - (278,361)
------------ ------------ ----------- ----------- -----------
Loss before minority interest in
loss of consolidated subsidiaries (5,540,304) (3,238,464) (143,280) (502,167) (9,424,215)
Minority interest in income of
consolidated subsidiaries 29,128 - - - 29,128
------------ ------------ ----------- ----------- -----------
Net loss before income taxes (5,511,176) (3,238,464) (143,280) (502,167) (9,395,087)
Income tax benefit - - 57,000 (57,000) H -
------------ ------------ ----------- ----------- -----------
Net loss $ (5,511,176) $(3,238,464) $(86,280) $(559,167) $(9,395,087)
============ ============ =========== =========== ===========
Net loss per common share after
preferred dividends $(0.57) $(0.91)
============ ===========
</TABLE>
See notes to unaudited pro forma combined financial statements
Appendix 3-14
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
PRO FORMA STATEMENT OF OPERATIONS
for the year ended December 31, 1997 (unaudited)
--------
<TABLE>
<CAPTION>
Pro Forma
Medcross FTI MiBridge Adjustment Pro Forma
------------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Health care service revenue $ 2,212,544 $ - $ - $ - $ 2,212,544
Network service revenue 170,532 - - - 170,532
Long distance service revenue - 3,880,457 - (5,026) B 3,875,431
Software sales and development - - 819,200 (25,000) B 794,200
------------ ------------ -------- ----------- ------------
Net operating revenue 2,383,076 3,880,457 819,200 (30,026) 7,052,707
------------ ------------ -------- ----------- ------------
Operating costs and expenses:
Telecommunications network expense 1,120,779 3,301,890 - - 4,422,669
Costs of sales -- software - - 250,854 - 250,854
Selling, general and administrative 4,977,763 1,352,732 200,726 (5,026) B 6,526,195
Provision for doubtful accounts 197,565 784,537 - - 982,102
Depreciation and amortization 1,094,004 150,261 10,039 959,183 G 2,213,487
Provision for asset valuation 260,033 - - - 260,033
Research and development 347,504 79,609 - (25,000) B 402,113
Acquired in-process research
and development expenses 14,577,942 - - - 14,577,942
------------ ------------ -------- ----------- ------------
Total operating costs
and expenses 22,575,590 5,669,029 461,619 929,157 29,635,395
------------ ------------ -------- ----------- ------------
Operating (loss) income (20,192,514) (1,788,572) 357,581 (959,183) (22,582,688)
------------ ------------ -------- ----------- ------------
Other income (expense):
Sales of equipment - 585,541 - (585,541) B -
Interest expense (2,191,629) (7,524) - - (2,199,153)
Interest income 147,322 2,109 - - 149,431
Equity in income (loss) of
unconsolidated subsidiaries (3,211) - - - (3,211)
Litigation settlement expense (821,000) - - - (821,000)
Other (8,108) (29,429) - - (37,537)
------------ ------------ -------- ---------- ------------
Total other income (expense) (2,876,626) 550,697 - (585,541) (2,911,470)
------------ ------------ -------- ---------- ------------
(Loss) income before minority interest in
loss of consolidated subsidiaries (23,069,140) (1,237,875) 357,581 (1,544,724) (25,494,158)
Minority interest in income of
consolidated subsidiaries 4,900 - - - 4,900
------------ ------------ -------- ----------- ------------
Net (loss) income before income taxes (23,064,240) (1,237,875) 357,581 (1,544,724) (25,489,258)
Provision for income taxes - - (143,081) 143,081 H -
------------ ------------ -------- ----------- ------------
Net (loss) income $(23,064,240) $( 1,237,875) $214,500 $(1,401,643) $(25,489,258)
============ ============ ======== =========== ============
Net loss per common share after
preferred dividends $(6.53) $(6.59)
============ ============
</TABLE>
See notes to unaudited pro forma combined financial statements
Appendix 3-15
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
1. BASIS OF PRESENTATION:
---------------------
The unaudited pro forma combined balance sheet as of June 30, 1997 and the
unaudited pro forma combined statements of operations for the six-month
period ended June 30, 1997 and the year ended December 31, 1996 give effect
to the acquisitions of 100% of the outstanding common stock of Family
Telecommunications Incorporated (FTI) and MiBridge, Inc. (MiBridge) by
Medcross, Inc. (the "Company") as if the acquisitions, accounted for under
the purchase method of accounting, had occurred on the balance sheet date
with respect to the balance sheet and on March 20, 1996 (date of inception
of FTI) and March 18, 1996 (date of inception of MiBridge) with respect to
the statements of operations.
FTI was acquired by the Company effective January 1, 1997. The acquisition
of MiBridge is expected to close in the third quarter of 1997.
The pro forma financial statements have been prepared based upon the
financial statements of the Company, MiBridge and FTI as of and for the
six-month period ended June 30, 1997 and for the year ended December 31,
1996. These pro forma financial statements may not be indicative of the
results that actually would have occurred if the combinations had been in
effect on the dates indicated or which may be obtained in the future. The
pro forma adjustments are based upon certain estimates that may change as
additional information becomes available. The pro forma financial
statements should be read in conjunction with the audited financial
statements for the Company, MiBridge and FTI.
2. PRO FORMA ADJUSTMENTS:
---------------------
The pro forma adjustments reflected in the pro forma financial statements
are summarized in items A to H below:
A. Pro forma adjustment to eliminate $596,000 in intercompany accounts
receivable and notes payable of the Company and FTI, respectively.
B. Pro forma adjustment to remove the following intercompany transactions:
(1) intercompany sales (between FTI and the Company) of long-distance
service ($5,026), (2) intercompany sales (between MiBridge and the
Company) of software ($25,000) and (3) profit on intercompany sale
(between the Company and FTI) of equipment resulting in a gain to FTI of
($585,541).
Appendix 3-16
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
-------
2. PRO FORMA ADJUSTMENTS, continued:
---------------------
C. Pro forma adjustment reflecting the purchase by the Company of all of
the outstanding common stock of MiBridge in return for issuance of 1,000
shares of Class D preferred stock of the Company and a note payable of
$2,000,000:
The purchase price allocations of FTI and MiBridge (estimate) are as
follows:
<TABLE>
<CAPTION>
FTI MiBridge Combined
---------- ---------- -----------
<S> <C> <C> <C>
Note payable $ - $2,000,000 $ 2,000,000
Common stock (400,000 shares
issued at $0.07 par value with a
market value of $6.03 per share) 2,800 - 2,800
Preferred stock (1,000 shares issued
at $10.00 par value with a total
market value of $6,250,000) - 10,000 10,000
Additional paid in capital 2,411,783 6,240,000 8,651,783
---------- ---------- -----------
Purchase price 2,414,583 8,250,000 10,664,583
Net liabilities assumed
(assets acquired) 135,420 (355,000) (219,580)
---------- ---------- -----------
Excess (allocated to intangible
assets, acquired in-process
research and development
and goodwill) $2,550,003 $7,895,000 $10,445,003
========== ========== ===========
</TABLE>
Allocation of the excess purchase price for MiBridge is anticipated to be
approximately as follows: goodwill ($1,605,000), workforce in place
($600,000), completed technology ($1,450,000) and in-process research and
development ($4,240,000). Goodwill is amortized over 5 years. All other
intangible assets are amortized over three years. Acquired in-process
research and development will be expensed at the acquisition date (expected
to be in the third quarter of 1997), but is not included in the pro forma
statements of operations as it represents a non-recurring charge. The
allocation of excess purchase price to these intangible assets and in-
process research and development is subject to final revisions which, if
material, the amounts allocated to the intangible assets, specifically
goodwill, may be revised.
Appendix 3-17
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
2. PRO FORMA ADJUSTMENTS, continued:
---------------------
Allocation of excess purchase price for FTI to intangible assets is as
follows: goodwill ($1,490,003), customer list ($520,000), and carrier
identification code and tariff registration status ($540,000). Goodwill and
carrier identification code and tariff registration status are being
amortized over 10 years. The customer list is being amortized over three
years. These intangible assets and related amortization are reflected in
the FTI column (as of and for the six-month period ended June 30, 1997) as
the acquisition was effective January 1, 1997. Accordingly, pro forma
adjustments relative to the acquisition of FTI are required only for the
combined statement of operations for the year ended December 31, 1996.
D. The historical balance sheet of FTI as presented includes the transactions
recorded at the acquisition date to give effect to the purchase price
allocation. The related investment in FTI ($2,414,583) by the Company is
being carried on the Company's books as "Investment in FTI" and on FTI's
books as additional paid-in capital. This pro forma adjustment is provided
to eliminate these intercompany accounts.
E. Pro forma adjustments to remove MiBridge estimated stockholder's equity
accounts as of the acquisition date as part of the purchase price
allocation process.
F. Pro forma adjustments to reflect the estimated effect of the purchase price
allocation adjustments to property and equipment of MiBridge.
G. Pro forma adjustments to record estimated amortization of intangible assets
(see item C above) of MiBridge and FTI. No pro forma adjustment is required
for the amortization of intangible assets of FTI for the six-month period
ended June 30, 1997 as these amounts are already included in the historical
amounts presented in the FTI column.
H. Pro forma adjustment to reflect the impact of filing a consolidated income
tax return and to eliminate the deferred tax liabilities of MiBridge as a
result of the purchase price allocation.
Appendix 3-18
<PAGE>
MEDCROSS, INC., FAMILY TELECOMMUNICATIONS
INCORPORATED (FTI) AND MIBRIDGE, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
--------
3. NET LOSS PER COMMON SHARE AFTER PREFERRED DIVIDENDS:
---------------------------------------------------
The pro forma net loss per common share for the six-month period ended June
30, 1997 is computed based on the weighted average number of common and
common equivalent shares outstanding during the period (10,617,597) and
assumes that the 400,000 shares to be issued in connection with the FTI
acquisition were outstanding for the entire period. The pro forma net loss
per common share for the year-ended December 31, 1996 is computed based on
the weighted average number of common and common equivalent shares
outstanding during the year (6,780,352) and assumes that the 400,000 shares
to be issued in connection with the FTI acquisition were outstanding from
March 20, 1996 (date of inception of FTI). Options, warrants and
convertible preferred stock (as in the case of the MiBridge acquisition)
are excluded from the calculation as their effect would be anti-dilutive.
The net loss per common share after preferred dividends includes $577,923
and $21,223,629 of cumulative preferred stock dividends not paid for the
six-month period ended June 30, 1997 and the year ended December 31, 1996,
respectively.
Appendix 3-19
<PAGE>
EXHIBIT A
AMENDMENT TO ARTICLE I
OF CERTIFICATE OF INCORPORATION
MEDCROSS, INC.
Article I of the Articles of Incorporation of Medcross, Inc. shall be
deleted and the following substituted therefor:
"Article I. The name of the corporation is I-Link Incorporated."
A-1
<PAGE>
EXHIBIT B
AMENDMENT TO ARTICLE III
OF CERTIFICATE OF INCORPORATION
OF MEDCROSS, INC.
Article III of the Corporation's Articles of Incorporation shall be
amended by the substitution of the following paragraph (a) for paragraph (a) of
Article III:
"(a) Fifty million (50,000,000) shares of common stock, having a par
value of $.007 per share (the "Common Stock"); and"
B-1
<PAGE>
EXHIBIT C
AMENDMENT TO ARTICLE III
OF CERTIFICATE OF INCORPORATION
OF MEDCROSS, INC.
Article III of the Corporation's Articles of Incorporation shall be
amended by the substitution of the following paragraph (b) for paragraph (b) of
Article III:
"(b) Ten million (10,000,000) shares of preferred stock, having a par
value of $10.00 per share (the "Preferred Stock"). The Preferred Stock may be
issued in one or more series. The Board of Directors shall have the authority to
divide the Preferred Stock into one or more series and, subject to the
provisions and limitations set forth herein, to determine the relative rights
and preferences of the shares of any series so established with regard to the
rate or manner of payment of dividends, whether such shares may be redeemed and,
if so, the redemption price and the terms and conditions of redemption, sinking
fund provisions, if any, for the redemption or purchase of such shares, the
terms and conditions, if any, on which such shares may be converted, and voting
rights, if any. Provided, however, except as to any rights and preferences as
determined by the Board of Directors as set forth above, all shares of such
Preferred Stock regardless of series shall be identical."
C-1
<PAGE>
EXHIBIT D
1997 RECRUITMENT STOCK OPTION PLAN
OF MEDCROSS, INC.
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.1 Medcross, Inc. (the "Company"), a Florida corporation,
hereby establishes a stock option plan to be named the 1997 Recruitment Stock
Option Plan (the "1997 Plan").
Section 1.2 The purpose of this 1997 Plan is to induce persons who are
officers, directors, employees and consultants of the Company or any of its
subsidiaries who are in a position to contribute materially to the Company's
prosperity to remain with the Company, to offer said persons incentives and
rewards in recognition of their contributions to the Company's progress, and to
encourage said persons to continue to promote the best interests of the Company.
This 1997 Plan provides for the grant of options to purchase shares of common
stock of the Company, par value $.007 per share (the "Common Stock") which
qualify as incentive stock options ("Incentive Options") under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), to persons who are
employees, as well as options which do not so qualify ("Non-Qualified Options")
to be issued to persons or consultants, including those who are not employees.
This 1997 Plan also provides for grants of stock appreciation rights ("SARs") in
connection with the grant of options under this 1997 Plan. Incentive Options and
Non-Qualified Options may be collectively referred to hereinafter as the
"Options" as the context may require.
Section 1.3 All options and other rights previously granted by the
Company under any other plan previously adopted by the Company shall continue to
be governed by such plan. All Options granted hereunder on or after the date
that this 1997 Plan has been approved and adopted by the Company's board of
directors (the "Board of Directors") shall be governed by the terms and
conditions of this 1997 Plan unless the terms of such Option specifically
indicate that it is not to be so governed.
ARTICLE II
ADMINISTRATION
Section 2.1 All determinations under this 1997 Plan concerning the
selection of persons eligible to receive awards under this 1997 Plan and with
respect to the timing, pricing and amount of an award under this 1997 Plan shall
be made by the administrator (the "Administrator") of this 1997 Plan. The
Administrator shall be either: (a) the Board of Directors or (b) in the
discretion of the Board of Directors by a committee (the "Committee") of the
Board of Directors of two or more members of the Board of Directors, each of
whom is a "Non-Employee Director" as such term is defined by Rule 16b-3 (as such
rule may be amended from time to time, "Rule 16b-3") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In such case, a majority
of the total number of members of the Committee shall be necessary to constitute
a quorum; and (i) the affirmative act of a majority of the members present at
any meeting at which a quorum is present, or (ii) the approval in writing by a
majority of the members of the Committee shall be necessary to constitute action
by the Committee.
D-1
<PAGE>
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this 1997 Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
that any provision of this 1997 Plan or action by the Administrator fails to so
comply, it shall be deemed to be null and void, to the extent permitted by law
and deemed advisable by the Administrator.
Section 2.2 The provisions of this 1997 Plan relating to Incentive
Options are intended to comply in every respect with Section 422 of the Code
("Section 422") and the regulations promulgated thereunder. In the event that
any future statute or regulation shall modify Section 422, this 1997 Plan shall
be deemed to incorporate by reference such modification. Any stock option
agreement relating to the grant of any Incentive Option pursuant to this 1997
Plan, which option is outstanding and unexercised at the time that any modifying
statute or regulation becomes effective, shall also be deemed to incorporate by
reference such modification, and no notice of such modification need be given to
the Optionee (as hereinafter defined). Any stock option agreement relating to an
Incentive Option shall provide that the Optionee (as hereinafter defined) hold
the stock received upon exercise of such Incentive Option for a minimum of two
years from the date of grant of the Incentive Option and one year from the date
of exercise of such Incentive Option, absent the written approval, consent or
waiver of the Administrator.
Section 2.3 If any provision of this 1997 Plan is determined to
disqualify the shares of Common Stock purchasable upon exercise of an Incentive
Option granted under this 1997 Plan from the special tax treatment provided by
Section 422, such provision shall be deemed to incorporate by reference the
modification required to qualify such shares of Common Stock for said tax
treatment.
Section 2.4 The Company shall grant Options under this 1997 Plan in
accordance with determinations made by the Administrator pursuant to the
provisions of this 1997 Plan. All Options granted pursuant to this 1997 Plan
shall be clearly identified as Incentive Options or Non-Qualified Options. The
Administrator may from time to time adopt (and thereafter amend or rescind) such
rules and regulations for carrying out this 1997 Plan and take such action in
the administration of this 1997 Plan, not inconsistent with the provisions
hereof, as it shall deem proper. The Board of Directors or, subject to the
supervision of the Board of Directors, the Committee, as the Administrator,
shall have plenary discretion, subject to the express provisions of this 1997
Plan, to determine which officers, directors, employees and consultants shall be
granted Options, the number of shares subject to each Option, the time or times
when an Option may be exercised (whether in whole or in installments), whether
Rights under Section 7.6 hereof shall be granted, the terms and provisions of
the respective option agreements (which need not be identical), including such
terms and provisions which may be amended from time to time as shall be
required, in the judgment of the Administrator, to conform to any change in any
law or regulation applicable hereto, and to make all other determinations deemed
necessary or advisable for the administration of this 1997 Plan. The
interpretation and construction of any provision of this 1997 Plan by the
Administrator (unless otherwise determined by the Board of Directors) shall be
final, conclusive and binding upon all persons.
Section 2.5 No member of the Administrator shall be liable for any
action or determination made in good faith with respect to administration of
this 1997 Plan or the Options granted hereunder. A member of the Administrator
shall be indemnified by the Company, pursuant to the Company's bylaws, for any
expenses, judgments or other costs incurred as a result of a lawsuit filed
against such member claiming any rights or remedies arising out of such member's
participation in the administration of this 1997 Plan.
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ARTICLE III
TOTAL NUMBER OF SHARES TO BE OPTIONED
Section 3.1 There shall be reserved for issuance or transfer upon
exercise of Options to be granted from time to time under this 1997 Plan an
aggregate of [4,400,000] shares of Common Stock of the Company (subject to
adjustment as provided in Article VIII hereof). The shares issued upon exercise
of any Options granted under this 1997 Plan may be shares of Common Stock
previously issued and reacquired by the Company at any time or authorized but
unissued shares of Common Stock, as the Board of Directors from time to time may
determine.
Section 3.2 In the event that any Options outstanding under this 1997
Plan for any reason expire or are terminated without having been exercised in
full or shares of Common Stock subject to Options are surrendered in whole or in
part pursuant to Rights granted under Section 7.6 hereof (except to the extent
that shares of Common Stock are issued as payment to the holder of the Option
upon such surrender) the unpurchased shares of Common Stock subject to such
Option and any such surrendered shares of Common Stock may again be available
for transfer under this 1997 Plan.
Section 3.3 No Options shall be granted pursuant to this 1997 Plan to
any Optionee after the tenth anniversary of the date that this 1997 Plan is
adopted by the Board of Directors.
ARTICLE IV
ELIGIBILITY
Section 4.1 Non-Qualified Options may be granted pursuant to this 1997
Plan to officers, directors, employees and consultants of the Company (or any of
its subsidiaries) selected by the Administrator, and Incentive Options may be
granted pursuant to this 1997 Plan only to employees (including officers and
directors who are also employees) of the Company (or any of its subsidiaries)
selected by the Administrator. Persons granted Options pursuant to this 1997
Plan are referred to herein as "Optionees." For purposes of determining who is
an employee with respect to eligibility for Incentive Options, Section 422 shall
govern. The Administrator may determine (in its sole discretion) that any person
who would otherwise be eligible to be granted Options shall, nonetheless, be
ineligible to receive any award under this 1997 Plan.
Section 4.2 The Administrator will (in its discretion) determine the
persons to be granted Options, the time or times at which Options shall be
granted, the number of shares of Common Stock subject to each Option, the terms
of a vesting or forfeiture schedule, if any, the type of Option issued, the
period during which such Options may be exercised, the manner in which Options
may be exercised and all other terms and conditions of the Options; provided,
--------
however, no Option will be granted which has terms or conditions inconsistent
- -------
with those stated in Articles V and VI hereof. Relevant factors in making such
determinations may include the value of the services rendered by the respective
Optionee, his or her present and potential contributions to the Company, and
such other factors which are deemed relevant in accomplishing the purpose of
this 1997 Plan.
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ARTICLE V
TERMS AND CONDITIONS OF OPTIONS
Section 5.1 Each Option granted under this 1997 Plan shall be evidenced
by a stock option certificate and agreement (the "Stock Option Certificate and
Agreement") in a form consistent with this 1997 Plan, provided that the
following terms and conditions shall apply:
(a) The price at which each share of Common Stock covered by an Option may
be purchased shall be set forth in the Stock Option Certificate and Agreement
and shall be determined by the Administrator, provided that the option price for
any Incentive Option shall not be less than the "fair market value" of the
shares of Common Stock at the time of grant determined in accordance with
Section 5.1(b) below. Notwithstanding the foregoing, if an Incentive Option to
purchase shares of Common Stock is granted pursuant to this 1997 Plan to an
Optionee who, on the date of the grant, directly or indirectly owns more than
ten percent (10%) of the voting power of all classes of capital stock of the
Company (or its parent or subsidiary), not including the shares of Common Stock
obtainable upon exercise of the Option, the minimum exercise price of such
Option shall be not less than one hundred ten percent (110%) of the "fair market
value" of the shares of Common Stock on the date of grant determined in
accordance with Section 5.1(b) below.
(b) The "fair market value" shall be determined by the Administrator,
which determination shall be binding upon the Company and its officers,
directors, employees and consultants. The determination of the fair market value
shall be based upon the following: (i) if the shares of Common Stock are not
listed and traded upon a recognized securities exchange and there is no report
of stock prices with respect to the shares of Common Stock published by a
recognized stock quotation service, on the basis of the recent purchases and
sales of the shares of Common Stock in arms-length transactions; or (ii) if the
shares of Common Stock are not then listed and traded upon a recognized
securities exchange or quoted on the NASDAQ Stock Market, and there are reports
of stock prices by a recognized quotation service, upon the basis of the last
reported sale or transaction price of such stock on the date of grant as
reported by a recognized quotation service, or, if there is no last reported
sale or transaction price on that day, then upon the basis of the mean of the
last reported closing bid and closing asked prices for such stock on that day or
on the date nearest preceding that day; or (iii) if the shares of Common Stock
shall then be listed and traded upon a recognized securities exchange or quoted
on the NASDAQ Stock Market, upon the basis of the last reported sale or
transaction price at which shares of Common Stock were traded on such recognized
securities exchange on the date of grant or, if the shares of Common Stock were
not traded on such date, upon the basis of the last reported sale or transaction
price on the date nearest preceding that date. The Administrator shall also
consider such other factors relating to the fair market value of the shares of
Common Stock as it shall deem appropriate.
(c) For the purpose of determining whether an Optionee owns more than ten
percent (10%) of the voting power of all classes of stock of the Company, an
Optionee is considered to own those shares which are owned directly or
indirectly through brothers and sisters (including half-blooded siblings),
spouse, ancestors and lineal descendants; and proportionately as a shareholder
of a corporation, a partner of a partnership, and/or a beneficiary of a trust or
an estate that owns shares of the Company.
(d) Notwithstanding any other provision of this 1997 Plan, in accordance
with the provisions of Section 422(d) of the Code, to the extent that the
aggregate fair market value (determined at the time the Option is granted) of
the shares of Common Stock of the Company with respect to which Incentive
Options (without reference to this provision) are exercisable for the first time
by any individual in any calendar year
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under any and all stock option plans of the Company, its subsidiary corporations
and its parent (if any) exceeds $100,000, such Options shall be treated as Non-
Qualified Options.
(e) An Optionee may, in the Administrator's discretion, be granted more
than one Incentive Option or Non-Qualified Option during the duration of this
1997 Plan, and may be issued a combination of Non-Qualified Options and
Incentive Options; provided, however, that non-employees are not eligible to
receive Incentive Options.
(f) The duration of any Option and any Right related thereto shall be
within the sole discretion of the Administrator; provided, however, that any
Incentive Option granted to a ten percent (10%) or less stockholder or any
Non-Qualified Option shall, by its terms, be exercised within ten years after
the date the Option is granted and any Incentive Option granted to a greater
than ten percent (10%) stockholder shall, by its terms, be exercised within five
years after the date the Option is granted.
(g) An Option and any Right related thereto shall not be transferable by
the Optionee other than by will, or by the laws of descent and distribution. An
Option may be exercised during the Optionee's lifetime only by the Optionee.
(h) The Administrator may impose such other or further conditions on any
transaction under the 1997 Plan, including without limitation, the grant or
award of any Option or the exercise or other disposition thereof, as it, in its
discretion, may deem necessary or advisable in order to exempt the transaction
from Section 16(b) of the Exchange Act, including without limitation thereto,
the approval or ratification of the transaction by shareholders or a six-month
restriction on disposition of the Option or the Common Stock issuable upon
exercise thereof.
ARTICLE VI
EMPLOYMENT OR SERVICE OF OPTIONEE
Section 6.1 If the employment or service of an Optionee is terminated
for cause, the option rights of such Optionee, both accrued and future, under
any then outstanding Non-Qualified or Incentive Option shall terminate
immediately. "Cause" shall mean incompetence in the performance of duties,
disloyalty, dishonesty, theft, embezzlement, unauthorized disclosure of patents,
processes or trade secrets of the Company, individually or as an employee,
partner, associate, officer or director of any organization. The determination
of the existence and the proof of "cause" shall be made by the Administrator
and, subject to the review of any determination made by the Administrator, such
determination shall be binding on the Optionee and the Company.
Section 6.2 If the employment or service of the Optionee is terminated
by either the Optionee or the Company for any reason other than for cause,
death, or for disability, as defined in Section 22(e)(3) of the Code, the option
rights of such Optionee under any then outstanding Non-Qualified or Incentive
Option shall, subject to the provisions of Section 5.1(h) hereof, be exercisable
by such Optionee at any time prior to the expiration of the Option or within
three months after the date of such termination, whichever period of time is
shorter, but only to the extent of the accrued right to exercise the Option at
the date of such termination.
Section 6.3 In the case of an Optionee who becomes disabled, as defined
by Section 22(e)(3) of the Code, the option rights of such Optionee under any
then outstanding Non-Qualified or Incentive Option shall, subject to the
provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any time
prior to
D-5
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the expiration of the Option or within one year after the date of termination of
employment or service due to disability, whichever period of time is shorter,
but only to the extent of the accrued right to exercise the Option at the date
of such termination.
Section 6.4 In the event of the death of an Optionee, the option rights
of such Optionee under any then outstanding Non-Qualified or Incentive Option
shall be exercisable by the person or persons to whom these rights pass by will
or by the laws of descent and distribution, at any time prior to the expiration
of the Option or within three years after the date of death, whichever period of
time is shorter, but only to the extent of the accrued right to exercise the
Option at the date of death. If a person or estate acquires the right to
exercise a Non-Qualified or Incentive Option by bequest or inheritance, the
Administrator may require reasonable evidence as to the ownership of such
Option, and may require such consents and releases of taxing authorities as the
Administrator may deem advisable.
Section 6.5 The Administrator may also provide that an employee must be
continuously employed by the Company for such period of time as the
Administrator, in its discretion, deems advisable before the right to exercise
any portion of an Option granted to such employee will accrue, and may also set
such other targets, restrictions or other terms relating to the employment of
the Optionee which targets, restrictions, or terms must be fulfilled or complied
with, as the case may be, prior to the exercise of any portion of an Option
granted to any employee.
Section 6.6 Options granted under this 1997 Plan shall not be affected
by any change of duties or position, so long as the Optionee continues in the
service of the Company.
Section 6.7 Nothing contained in this 1997 Plan, or in any Option
granted pursuant to this 1997 Plan, shall confer upon any Optionee any right
with respect to continuance of employment or service by the Company nor
interfere in any way with the right of the Company to terminate the Optionee's
employment or service or change the Optionee's compensation at any time.
ARTICLE VII
PURCHASE OF SHARES
Section 7.1 Except as provided in this Article VII, an Option shall be
exercised by tender to the Company of the full exercise price of the shares of
Common Stock with respect to which the Option is exercised and written notice of
the exercise. The right to purchase shares of Common Stock shall be cumulative
so that, once the right to purchase any shares of Common Stock has accrued, such
shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. A partial exercise of an Option shall
not affect the right of the Optionee to exercise the Option from time to time,
in accordance with this 1997 Plan, as to the remaining number of shares of
Common Stock subject to the Option. The purchase price of the shares shall be in
United States dollars, payable in cash or by certified bank check.
Notwithstanding the foregoing, in lieu of cash, an Optionee may, with the
approval of the Administrator, exercise his or her Option by tendering to the
Company shares of Common Stock of the Company owned by him or her and having an
aggregate fair market value at least equal to the full exercise price. The fair
market value of any shares of Common Stock so surrendered shall be determined by
the Administrator in accordance with Section 5.1(b) hereof.
Section 7.2 Except as provided in Article VI above, an Option may not be
exercised unless the holder thereof is an officer, director, employee, or
consultant of the Company at the time of exercise.
D-6
<PAGE>
Section 7.3 No Optionee, or Optionee's executor, administrator, legatee,
or distributee or other permitted transferee, shall be deemed to be a holder of
any shares of Common Stock subject to an Option for any purpose whatsoever
unless and until a stock certificate or certificates for such shares are issued
to such person under the terms of this 1997 Plan. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Article VIII
hereof.
Section 7.4 If: (i) the listing, registration or qualification of the
Options issued hereunder, or of any securities issuable upon exercise of such
Options (the "Subject Securities") upon any securities exchange or quotation
system or under federal or state law is necessary as a condition of or in
connection with the issuance or exercise of the Options, or (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance or exercise of the Options, the Company shall
not be obligated to deliver the certificates representing the Subject Securities
or to accept or to recognize an Option exercise unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained. The Company will take reasonable action to so list, register, or
qualify the Options and the Subject Securities, or effect or obtain such consent
or approval, so as to allow for their issuance.
Section 7.5 An Optionee may be required to represent to the Company as
a condition of his or her exercise of Options issued under this 1997 Plan that:
(i) the Subject Securities acquired upon exercise of his or her Option are being
acquired by him or her for investment purposes only and not with a view to
distribution or resale, unless counsel for the Company is then of the view that
such a representation is not necessary and is not required under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable statute,
law, regulation or rule; and (ii) that the Optionee shall make no exercise or
disposition of an Option or of the Subject Securities in contravention of the
Securities Act, the Exchange Act or the rules and regulations thereunder.
Optionees may also be required to provide (as a condition precedent to exercise
of an Option) such documentation as may be reasonably requested by the Company
to assure compliance with applicable law and the terms and conditions of this
1997 Plan and the subject Option.
Section 7.6 The Administrator may, in its discretion, grant in
connection with any Option, at any time prior to the exercise thereof, the right
(previously defined as an "SAR" or collectively, the "SARs") to surrender all or
part of the Option to the extent that such Option is exercisable and receive in
exchange an amount (payable in cash, shares of Common Stock valued at the then
fair market value, or a combination thereof as determined by the Administrator)
equal to the difference (the "Spread") between the then fair market value of the
shares of Common Stock issuable upon the exercise of the Option (or portions
thereof surrendered) and the option price payable upon the exercise of the
Option (or portions thereof surrendered). Such SARs may be included in an Option
only under the following conditions: (a) the SARs will expire no later than the
expiration of the underlying Option; (b) the SARs may be for no more than one
hundred percent (100%) of the Spread; (c) the SARs are transferable only when
the underlying Option is transferable and under the same conditions; (d) the
SARs may be exercised only when the underlying Option is eligible to be
exercised; and (e) the SARs may be exercised only when the Spread is positive,
i.e., when the market price of the stock subject to the Option exceeds the
exercise price of the Option.
Section 7.7 An Option may also be exercised by tender to the Company of
a written notice of exercise together with advice of the delivery of an order to
a broker to sell part or all of the shares of Common Stock subject to such
exercise notice and an irrevocable order to such broker to deliver to the
Company (or its transfer agent) sufficient proceeds from the sale of such shares
to pay the exercise price and any withholding taxes. All documentation and
procedures to be followed in connection with such a "cashless exercise" shall be
approved in advance by the Administrator.
D-7
<PAGE>
ARTICLE VIII
CHANGE IN NUMBER OF OUTSTANDING SHARES OF
STOCK, ADJUSTMENTS, REORGANIZATIONS, ETC.
Section 8.1 In the event that the outstanding shares of Common Stock of
the Company are hereafter increased or decreased or changed into or exchanged
for a different number of shares or kind of shares or other securities of the
Company or of another corporation by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, combination of
shares, or a dividend payable in capital stock, appropriate adjustment shall be
made by the Administrator in the number and kind of shares for the purchase of
which Options may be granted under this 1997 Plan, including the maximum number
that may be granted to any one person. In addition, the Administrator shall make
appropriate adjustments in the number and kind of shares as to which outstanding
Options, or portions thereof then unexercised, shall be exercisable, to the end
that the Optionee's proportionate interest shall be maintained as before the
occurrence to the unexercised portion of the Option and with a corresponding
adjustment in the option price per share. Any such adjustment made by the
Administrator shall be conclusive.
Section 8.2 The grant of an Option pursuant to this 1997 Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
Section 8.3 Upon the dissolution or liquidation of the Company, or upon
a reorganization, merger or consolidation of the Company as a result of which
the outstanding securities of the class then subject to Options hereunder are
changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the Company
to an association, person, party, corporation, partnership, or control group as
that term is construed for purposes of the Exchange Act, this 1997 Plan shall
terminate, and all outstanding Options theretofore granted hereunder shall
terminate, unless provision be made in writing in connection with such
transaction for the continuance of this 1997 Plan and/or for the assumption of
Options theretofore granted, or the substitution for such Options of options
covering the stock of a successor employer corporation, or a parent or a
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices, in which event this 1997 Plan and options theretofore granted
shall continue in the manner and under the terms so provided. If this 1997 Plan
and unexercised Options shall terminate pursuant to the foregoing sentence, all
persons owning any unexercised portions of Options then outstanding shall have
the right, at such time prior to the consummation of the transaction causing
such termination as the Company shall designate, to exercise the unexercised
portions of their Options, including the portions thereof which would, but for
this Section 8.3 not yet be exercisable.
ARTICLE IX
DURATION, AMENDMENT AND TERMINATION
Section 9.1 The Board of Directors may at any time terminate this 1997
Plan or make such amendments hereto as it shall deem advisable and in the best
interests of the Company, without action on the part of the shareholders of the
Company unless such approval is required pursuant to Section 422 of the Code or
the regulations thereunder or other federal or state law; provided, however,
-------- -------
that no such termination or amendment shall, without the consent of the
individual to whom any Option shall theretofore have been granted, materially
adversely affect or impair the rights of such individual under such Option.
Pursuant to Section 422(b) of the Code, no Incentive Option may be granted
pursuant to this 1997 Plan after
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<PAGE>
ten years from the date this 1997 Plan is adopted or the date this 1997 Plan is
approved by the shareholders of the Company, whichever is earlier.
ARTICLE X
RESTRICTIONS
Section 10.1 Any Options and shares of Common Stock issued pursuant to
this 1997 Plan shall be subject to such restrictions on transfer and limitations
as shall, in the opinion of the Administrator, be necessary or advisable to
assure compliance with the laws, rules and regulations of the United States
government or any state or jurisdiction thereof. In addition, the Administrator
may in any Stock Option Certificate and Agreement impose such other restrictions
upon the disposition or exercise of an Option or upon the sale or other
disposition of the shares of Common Stock deliverable upon exercise thereof as
the Administrator may, in its sole discretion, determine. By accepting an award
pursuant to this 1997 Plan, each Optionee shall thereby agree to any such
restrictions.
Section 10.2 Any certificate issued to evidence shares of Common Stock
issued pursuant to an Option shall bear such legends and statements as the
Committee, the Board of Directors or counsel to the Company shall deem advisable
to assure compliance with the laws, rules and regulations of the United States
government or any state or jurisdiction thereof. No shares of Common Stock will
be delivered pursuant to exercise of the Options granted under this 1997 Plan
until the Company has obtained such consents or approvals from such regulatory
bodies of the United States government or any state or jurisdiction thereof as
the Committee, the Board of Directors or counsel to the Company deems necessary
or advisable.
ARTICLE XI
FINANCIAL ASSISTANCE
Section 11.1 The Company is vested with authority under this 1997 Plan to
assist any employee to whom an Option is granted hereunder (including any
officer or director of the Company or any of its subsidiaries who is also an
employee) in the payment of the purchase price payable on exercise of such
Option, by lending the amount of such purchase price to such employee on such
terms and at such rates of interest and upon such security (or unsecured) as
shall have been authorized by or under authority of the Board of Directors. Any
such assistance shall comply with the requirements of Regulation G promulgated
by the Board of the Federal Reserve System, as amended from time to time, and
any other applicable law, rule or regulation.
ARTICLE XII
APPLICATION OF FUNDS
Section 12.1 The proceeds received by the Company from the issuance and
sale of Common Stock upon exercise of Options granted pursuant to this 1997 Plan
are to be added to the general funds of the Company and used for its corporate
purposes as determined by the Board of Directors.
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<PAGE>
ARTICLE XIII
EFFECTIVENESS OF PLAN
Section 13.1 This 1997 Plan shall become effective upon adoption by the
Board of Directors, and approval by the Shareholders and Options may be issued
hereunder from and after that date subject to the provisions of Section 3.3
above. This 1997 Plan must be approved by the Company's shareholders in
accordance with the applicable provisions (relating to the issuance of stock or
options) of the Company's governing documents and state law or, if no such
approval is prescribed therein, by the affirmative vote of the holders of a
majority of the votes cast at a duly held shareholders meeting at which a quorum
representing a majority of all the Company's outstanding voting stock is present
and voting (in person or by proxy) or, without regard to any required time
period for approval, by any other method permitted by Section 422 of the Code
and the regulations thereunder.
IN WITNESS WHEREOF, pursuant to the approval of this 1997 Plan by the Board
of Directors, this 1997 Plan is executed and adopted subject to Shareholder
approval as of the [____] day of [_______________], 1997.
ATTEST: MEDCROSS, INC.
By: By:
--------------------------------- ---------------------------------
Secretary Its:
--------------------------------
[CORPORATE SEAL]
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<PAGE>
PROXY
ANNUAL MEETING OF SHAREHOLDERS OF
MEDCROSS, INC.
ON ____________, 1997
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Clay Wilkes, John W. Edwards, Henry Y.L. Toh, R.
Huston Babcock and Joseph A. Cohen and each or any of them proxies, with power
of substitution, to vote all shares of the undersigned at the Annual Meeting of
Shareholders to be held on ____________, 1997, at [____] a.m. at [______________
___________], or at any adjournment thereof, upon the matters set
forth in the Proxy Statement for such meeting, and in their discretion, on such
other business as may properly come before the meeting.
1. TO ELECT TWO CLASS III DIRECTORS TO SERVE FOR THREE YEARS AND UNTIL THEIR
SUCCESSORS HAVE BEEN DULY ELECTED AND SHALL QUALIFY.
[_] FOR THE NOMINEES LISTED BELOW [_] WITHHOLD AUTHORITY to vote for
the nominees listed below
(INSTRUCTION: To withhold authority to vote for the nominee strike a line
through the nominee's name below:)
John W. Edwards R. Huston Babcock
2. TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO CHANGE THE COMPANY'S NAME TO I-LINK INCORPORATED.
[_] FOR [_] AGAINST [_] ABSTAIN
3. TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF PREFERRED
STOCK FROM 500,000 SHARES OF PREFERRED STOCK, $10.00 PAR VALUE, TO
10,000,000 SHARES OF PREFERRED STOCK, $10.00 PAR VALUE, TO PERMIT THE
CONVERSION OF CONVERTIBLE NOTES ISSUED IN SEPTEMBER 1996, THE ISSUANCE OF
CLASS D PREFERRED STOCK AND CLASS M PREFERRED STOCK AND FOR OTHER GENERAL
CORPORATE PURPOSES.
[_] FOR [_] AGAINST [_] ABSTAIN
4. TO APPROVE AND ADOPT AN AMENDMENT OF THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 20 MILLION SHARES OF COMMON STOCK, $.007 PAR VALUE, TO 50 MILLION
SHARES OF COMMON STOCK, $.007 PAR VALUE, TO PERMIT THE ISSUANCE OF SHARES
IN CONNECTION WITH THE COMPANY'S ACQUISITION OF FAMILY TELECOMMUNICATIONS
INCORPORATED, THE ISSUANCE OF OPTIONS AND WARRANTS AND FOR OTHER GENERAL
CORPORATE PURPOSES.
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
5. TO APPROVE THE ADOPTION OF THE 1997 RECRUITMENT STOCK OPTION PLAN WHICH
PROVIDES FOR THE ISSUANCE OF INCENTIVE STOCK OPTIONS, NON-QUALIFIED STOCK
OPTIONS AND STOCK APPRECIATION RIGHTS.
[_] FOR [_] AGAINST [_] ABSTAIN
Dated:
----------------------------- ---------------------------------
Signature
---------------------------------
Signature if held jointly
NOTE: When shares are held by joint tenants, both should sign. Persons signing
as Executor, Administrator, Trustee, etc. should so indicate. Please sign
exactly as the name appears on the proxy.
IF NO CONTRARY SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,
2, 3, 4 AND 5.
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE.
