<PAGE>
As filed with the Securities and Exchange Commission on September 8, 1997
Registration No. 333-17861
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
MEDCROSS, INC.
(Name of small business issuer in its charter)
Florida 4822 59-2291344
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code No.)
13751 S. Wadsworth Park Drive, Suite 200, Draper, UT 84020 (801/576-5000)
(Address and telephone number of registrant's principal executive offices)
----------------------------------
John W. Edwards
Chairman of the Board, President and Chief Executive Officer
Medcross, Inc.
13751 S. Wadsworth Park Drive, Suite 200
Draper, Utah 84020
(801) 576-5000
(Name, address and telephone number of agent for service)
Copies to:
Ralph V. De Martino, Esquire
De Martino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, D.C. 20036-2492
Phone: (202) 659-0494
Fax: (202) 659-1290
-------------------------------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Proposed Proposed
Title of each Class of Securities to be Amount to be Maximum Maximum Amount of
Registered Registered Offering Price Aggregate Registration Fee
Per Unit * Offering Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.007 par value (1) 331,126 1.51 500,000.00 151.52
Common Stock, $.007 par value (2) 14,314,199 5.00 71,570,995.00 21,688.16
Common Stock, $.007 par value (3) 7,706,468 -- -- --
Common Stock, $.007 par value (4) 925,000 2.50 2,312,500.00 700.76
Common Stock, $.007 par value (5) 120,000 4.00 480,000.00 145.45
Common Stock, $.007 par value (6) 100,000 1.00 100,000.00 30.30
Commonwealth Warrants 750,000 -- 0 0
E&M Warrant 80,000 -- 0 0
Mandarino Warrant 40,000 -- 0 0
Settlement Warrant 331,126 -- 0 0
Hardy Group Warrant 175,000 -- 0 0
- ----------------------------------------------------------------------------------------------------------------
Total Registration Fee: 22,716.19 (7)
================================================================================================================
</TABLE>
* Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c). The proposed offering price or shares
issued and outstanding is based upon the average of the high and low bid
prices reported on NASDAQ on September 4, 1997.
(1) Represents shares of Common Stock issuable upon exercise of the
Settlement Warrant. Pursuant to Rule 416 under the Securities Act, this
Registration Statement covers any additional shares of Common Stock
which may become issuable by reason of the adjustment provisions of such
warrants.
(2) Represents (a) 70,000 shares of Common Stock issued upon conversion of
certain principal of 10% Convertible Promissory Notes, (b) 3,206,122
shares of Common Stock issued in connection with the acquisition of I-
Link Worldwide, Inc., (c) 5,760,000 shares of Common Stock issuable upon
conversion of Class C Convertible Cumulative Redeemable Preferred Stock,
(d) 286,800 shares of Common Stock issuable upon conversion of Class C
Preferred Stock in the event of conversion of Convertible Promissory
Notes issued in September 1996, (e) 3,858,844 shares of Common Stock
subject of options granted by Four M International, Ltd., (f) 183,542
shares of Common Stock issuable upon conversion of Class B Preferred
Stock and exercise of options granted by R. Huston Babcock, (g) 913,891
shares of Common Stock held by certain affiliates of Commonwealth
Associates and others acquired pursuant to options granted by Walnut
Capital Corp., Windy City, Inc. and Canadian Imperial Bank and (h)
35,000 shares of Common Stock issued upon conversion of a portion of the
Non-Negotiable 10% Convertible Promissory Note (Series II) issued to
Joseph Wong. Pursuant to Rule 416 under the Securities Act, this
Registration Statement covers any additional shares of Common Stock
which may become issuable by reason of the respective adjustment
provisions, if any, of such securities.
(3) Represents shares of Common Stock which may be resold by the respective
holders of such shares, including (a) 331,126 shares of Common Stock
issuable upon exercise of the Settlement Warrants, (b) 5,760,000 shares
of Common Stock issuable upon conversion of Class C Convertible
Cumulative Redeemable Preferred Stock, (c) 286,800 shares of Common
Stock issuable upon conversion of Class C Preferred Stock in the event
of conversion of Convertible Promissory Notes issued in September 1996,
(d) 750,000 shares of Common Stock issuable upon exercise of Placement
Agent's Common Stock Warrant and Consultant's Warrant issued to
Commonwealth Associates, (e) 183,542 shares of Common Stock issuable
upon conversion of Class B Preferred Stock and exercise of options
granted by R. Huston Babcock, (f) 100,000 shares of Common Stock
issuable upon exercise of the Cook Option, (g) 80,000 shares of Common
Stock issuable upon exercise of the E&M Warrant, (h) 40,000 shares of
Common Stock issuable upon exercise of the Mandarino Warrant and (i)
175,000 shares of Common Stock issuable upon exercise of the Hardy Group
Warrant. Pursuant to Rule 457(g), no additional fee is therefore
payable.
(4) Represents an aggregate of 750,000 shares of Common Stock issuable upon
exercise of Placement Agent's Common Stock Warrant and Consultant's
Warrant issued to Commonwealth Associates and 175,000 shares issuable
upon exercise of Hardy Group Warrants. Pursuant to Rule 416 under the
Securities Act, this Registration Statement covers any additional shares
of Common Stock which may become issuable by reason of the adjustment
provisions of such warrants.
(5) Represents 80,000 shares of Common Stock issuable upon exercise of
the E&M Warrant and 40,000 shares of Common Stock issuable upon exercise
of the Mandarino Warrant. Pursuant to Rule 416 under the Securities Act,
this Registration Statement covers any additional shares of Common Stock
which may become issuable by reason of the adjustment provisions of such
warrants.
(6) Represents shares of Common Stock issuable upon exercise of Common Stock
Purchase Option granted to Scott Cook.
(7) Previously paid.
----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
PROSPECTUS
MEDCROSS, INC.
331,126 shares of Common Stock issuable upon exercise of Settlement Warrants
8,083,857 shares of previously issued and outstanding Common Stock
6,046,800 shares of Common Stock issuable upon conversion of Class C Preferred
Stock Warrants to Purchase 750,000 shares of Common Stock
750,000 shares of Common Stock issuable upon exercise of Commonwealth Warrants
183,542 shares of Common Stock issuable upon Conversion of Class B Preferred
Stock Option to Purchase 100,000 Shares of Common Stock
100,000 shares of Common Stock issuable upon exercise of Cook Option Warrants to
Purchase 80,000 shares of Common Stock 80,000 shares of Common Stock issuable
upon exercise of E&M RP Trust Warrants Warrants to Purchase 40,000 shares of
Common Stock
40,000 shares of Common Stock issuable upon exercise of Mandarino Warrants
Warrants to Purchase 175,000 shares of Common Stock
175,000 shares of Common Stock issuable upon exercise of Hardy Group Warrants
This Prospectus relates to (i) 331,126 shares of Common Stock (the "Settlement
Shares") issuable upon exercise of a Common Stock Purchase Warrant (the
"Settlement Warrant") issued to JW Charles Financial Services, Inc. ("JW
Charles") in November 1994; (ii) the offer and sale by the holders thereof of an
aggregate of 8,083,857 shares (the "Shares") of common stock, par value $.007
per share (the "Common Stock") previously issued by Medcross, Inc., a Florida
corporation (the "Company") (a) to I-Link, Ltd., a Utah limited partnership, in
connection with the Company's acquisition of I-Link Worldwide, Inc. ("I-Link")
as to 3,206,122 of the Shares, including the distribution of such shares by
I-Link, Ltd. to its beneficial holders and the subsequent offer, transfer and/or
sale by such holders; (b) to the holders of 10% Convertible Notes (the "10%
Notes") issued in February 1996 as to 70,000 of the Shares; (c) to the holder of
a Non-Negotiable 10% Convertible Promissory Note (Series II) (the "Series II
Note") upon the conversion of a portion thereof as to 35,000 of the Shares; (d)
the offer and sale of up to 3,858,844 shares (the "Four M Shares") of Common
Stock owned by Four M International, Ltd. ("Four M"), which shares are subject
of options (the "Four M Options") or heretofore subject of such Four M Options;
and (e) the offer and sale of up to 913,891 shares of Common Stock acquired by
the holders of such shares (the "Kanter Shares") pursuant to options (the
"Kanter Options") granted by Walnut Capital Corp., Windy City, Inc. and Canadian
Imperial Bank, for which entities Joel Kanter served as representative; (iii)
the issuance to and the offer and sale by the holders thereof of up to 6,046,800
shares of Common Stock (the "Conversion Shares") issuable upon conversion of
240,000 shares of outstanding Class C Convertible Cumulative Redeemable
Preferred Stock, $10.00 par value per share (the "Class C Preferred Stock") and
issuable upon conversion of up to 11,950 shares of Class C Preferred Stock
issuable upon conversion by the holders thereof of up to $717,000 in principal
amount of Convertible Promissory Notes (the "Convertible Notes") assuming
certain conditions
(continued overleaf)
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
DILUTION. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is September __, 1997
1
<PAGE>
are met; (iv) the offer and sale of up to 250,000 Placement Agent's Warrants to
purchase Common Stock and 500,000 Consultant's Warrants to purchase Common Stock
(collectively, the "Commonwealth Warrants") issued to Commonwealth Associates
("Commonwealth") in connection with the Company's offering in 1996 of the Class
C Preferred Stock and Convertible Notes (the "Class C Offering"), including the
distribution of certain of the Commonwealth Warrants, and/or shares of Common
Stock issuable upon exercise of such Commonwealth Warrants, to certain employees
of Commonwealth Associates; (v) the issuance to and the offer and sale by the
holders thereof of up to 750,000 shares of Common Stock (the "Commonwealth
Shares") issuable upon exercise of the Commonwealth Warrants; (vi) the issuance
to and the offer and sale of up to 183,542 shares (the "Babcock Shares") of
Common Stock issuable to R. Huston Babcock upon conversion of outstanding shares
of Class B Preferred Stock, $10.00 par value (the "Class B Preferred Stock") and
upon exercise of options to purchase 91,777 shares of Common Stock issued by R.
Huston Babcock (the "Babcock Options"); (vii) the issuance to and the
offer and sale of up to 100,000 shares (the "Cook Shares") of Common Stock
issuable to Scott Cook upon exercise of the Common Stock Purchase Option to
Purchase Common Stock of Medcross, Inc. (the "Cook Option"); (viii) the offer
and sale of warrants to purchase up to 80,000 shares of Common Stock issued to
E&M RP Trust (the "E&M Warrants"); (ix) the issuance to and the offer and sale
by the holders thereof of up to 80,000 shares of Common Stock (the "E&M Shares")
issuable upon exercise of the E&M Warrants; (x) the offer and sale of warrants
to purchase up to 40,000 shares of Common Stock issued to Joseph Mandarino (the
"Mandarino Warrants"); (xi) the issuance to and the offer and sale by the
holders thereof of up to 40,000 shares of Common Stock (the "Mandarino Shares")
issuable upon exercise of the Mandarino Warrants; (xii) the offer and sale of
warrants to purchase up to 175,000 shares of Common Stock issued to the Hardy
Group (the "Hardy Group Warrants"); and (xiii) the issuance to and the offer and
sale by the holders thereof of up to 175,000 shares of Common Stock (the "Hardy
Group Shares") issuable upon exercise of the Hardy Group Warrants. The
Settlement Shares, the Shares, the Conversion Shares, the Commonwealth Warrants,
the Commonwealth Shares, the Babcock Shares, the Babcock Options, the Four M
Options, the Kanter Options, the Cook Shares, the E&M Warrants, the E&M Shares,
the Mandarino Warrants, the Mandarino Shares, the Hardy Group Warrants and the
Hardy Group Shares are sometimes collectively referred to as the "Securities."
Holders of the Settlement Warrants and/or Settlement Shares, the Shares
(including those limited partners of I-Link, Ltd. as set forth in footnote 15 of
the Selling Security Holders table hereinbelow), the Conversion Shares, the
Commonwealth Warrants and/or the Commonwealth Shares, the Four M Options, the
Babcock Options and/or the Babcock Shares, the Kanter Options, the Cook Shares,
the E&M Warrants and/or the E&M Shares, the Mandarino Warrants and/or the
Mandarino Shares, the Hardy Group Warrants and/or the Hardy Group Shares may be
referred to hereinafter as "Selling Securityholders." See "Description of
Securities" and "1996 Offerings."
On September 4, 1997 the closing sale price of the Company's Common
Stock as reported by the Nasdaq SmallCap Market ("Nasdaq") on such date was
$5.00.
So long as the Registration Statement of which this Prospectus forms
a part is effective and the disclosure set forth herein is current, the Selling
Securityholders may sell the Securities publicly and may sell their Settlement
Warrants, their Cook Options, their Kanter Options, their Four M Options, their
Commonwealth Warrants, their E&M Warrants, their Mandarino Warrants and/or their
Hardy Group Warrants publicly or exercise such Settlement Warrants, Cook
Options, Kanter Options, Four M Options, Commonwealth Warrants, E&M Warrants,
Mandarino Warrants and/or their Hardy Group Warrants and either (i) hold the
Settlement Shares and/or the Cook Shares and/or the Kanter Options and/or the
Four M Options and/or the Commonwealth Shares and/or the E&M Shares and/or the
Mandarino Shares and/or the Hardy Group Shares or (ii) resell the Settlement
Shares and/or the Cook Shares and/or the Kanter Shares, and/or the Four M
Options and/or the Commonwealth Shares and/or the E&M Warrants and/or the E&M
Shares and/or the Mandarino Warrants and/or the Mandarino Shares and/or the
Hardy Group Warrants and/or the Hardy Group Shares publicly. To the extent that
Four M Options may lapse prior to exercise, the subject Four M Shares may be
offered and sold by Four M to the public pursuant to this Prospectus. The
Securities offered by this Prospectus may be sold from time to time by the
Selling Securityholders. The distribution of the Securities by the Selling
Securityholders may be effected in one or more transactions that may take place
on the over-the-counter market including ordinary broker's transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of such securities as principals at market prices prevailing at the time
of sale at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders in connection with sales
of such Securities.
2
<PAGE>
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered and any profits realized or commission received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act. The Company will receive the proceeds, if any, from the exercise
of the Settlement Warrants, the Commonwealth Warrants, the Cook Options, the E&M
Warrants, the Mandarino Warrants and the Hardy Group Warrants, but will not
receive any of the proceeds from the resale of the Settlement Shares, the
Shares, the Conversion Shares, the Commonwealth Shares, the Babcock Shares, the
Cook Shares, the E&M Shares, the Mandarino Shares or the Hardy Group Shares by
Selling Securityholders. All costs incurred in the registration of the
Securities offered hereby will be borne by the Company. See "Use of Proceeds"
and "Selling Securityholders."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, files reports, proxy statements and other information
including annual and quarterly reports on Forms 10-KSB and 10-QSB (File No.
0-17973) (the "1934 Act Filings") with the Securities and Exchange Commission
(the "Commission"). The Company filed with the Commission in Washington, D.C. a
Registration Statement on Form SB-2 under the Securities Act with respect to the
securities described herein. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information about the Company and the securities described herein,
reference is made to the Registration Statement and to the exhibits filed
therewith. The statements contained in this Prospectus with respect to the
contents of any agreement or other document referred to herein are not
necessarily complete and, in each instance, reference is made to a copy of such
agreement or document as filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by reference to the provisions of
the relevant documents. The Registration Statement, including the exhibits
thereto, and the Company's 1934 Act Filings may be inspected at: (i) the public
reference facilities of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and (ii) the offices of the
Commission located at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, Illinois 60661, and (iii) the offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may also be obtained upon request and payment of the appropriate fee
from the Public Reference Section of the Commission located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
the Commission maintains a website on the Internet that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's website is
http://www.sec.gov.
The Company will provide without charge to each person who receives
this Prospectus, upon written or oral request of such person, a copy of any
information which has been incorporated by reference herein (not including
exhibits to the information incorporated by reference unless the exhibits are
themselves specifically incorporated by reference). Such requests should be made
to Medcross, Inc., 13751 S. Wadsworth Park Drive, Suite 200, Draper, Utah 84020,
Attention: Secretary.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to,
and should be read in conjunction with, the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus.
Each prospective investor is urged to read this Prospectus in its entirety.
The Company
Medcross, Inc., a Florida corporation (the "Company") was formed in
1983. On February 23, 1996, the Company acquired (the "I-Link Acquisition")
I-Link Worldwide Inc., a Utah corporation (subsequently renamed I-Link Systems,
Inc.), and effective January 1, 1997, the Company acquired (the "FTI
Acquisition") Family Telecommunications Incorporated, a Utah corporation
(subsequently renamed I-Link Communications, Inc., and for clarity and ease of
reference, sometimes referred to herein as "FTI"). In June 1997, the Company
formed its marketing subsidiary, I-Link Worldwide, LLC. These three subsidiaries
are collectively referred to herein as "I-Link." See "The Company." I-Link is in
the business of delivering communications capabilities to business and
residential customers via both a proprietary data communication network,
established by I-Link, that operates in the same manner as the Internet (the
"I-Link Intranet") and existing switched telecommunications networks. I-Link
seeks to provide communications solutions and enhanced capabilities to users of
traditional telecommunications services, at substantial cost savings through
utilization of the I-Link Intranet and other existing data communications
networks, as well as through volume purchasing of capacity on traditional
switched telecommunications networks. I-Link has developed patent-pending
technology and has deployed a national network infrastructure of communications
equipment and dedicated lines that enables it to route traditional
telecommunications services over the I-Link Intranet in a manner that is
transparent to the user, utilizing the user's existing telecommunications
equipment.
With its acquisition of FTI, a regional long-distance
telecommunications carrier with nation-wide delivery of telecommunications
services over traditional switched telecommunications networks, the Company in
January 1997 launched its marketing efforts and began to obtain customers for
its long-distance telecommunications services through I-Link. In June 1997, the
Company launched its multi-level sales program through its wholly-owned
subsidiary, I-Link Worldwide, LLC, to market the I-Link communications services
to the residential and small business markets. Through its marketing activities
and through strategic acquisitions of existing customer bases, I-Link will
aggressively seek to enlarge its overall customer base. The I-Link services will
initially be delivered across existing switched telecommunications networks;
then, as I-Link reaches targeted customer-base size in given geographic areas,
customer traffic in those areas will be moved from the traditional switched
telecommunications networks to the network of dedicated lines I-Link has
established and over which its proprietary technology is deployed (the I-Link
Intranet). The move from the traditional switched telecommunications network to
the I-Link Intranet is transparent to the customer and will result in a
significant reduction in the cost of delivering the services, both increasing
profitability and permitting I-Link to offer increased savings to its customers,
as well as differentiating I-Link and its services in a highly commoditized
market. I-Link believes this strategy of building customer bases in geographic
areas on traditional switched networks and transitioning the traffic to the
I-Link Intranet as the size of the customer base increases will result in the
most cost effective nation-wide deployment of the I-Link Intranet.
For a discussion of the recent acquisition of MiBridge, Inc. see
"The Company" and "Recent Transactions."
Medcross, Inc. is also an owner and operator of medical diagnostic
and therapeutic facilities and equipment including MRI, kidney lithotripsy, and
ultrasound. The Company is also a joint venture partner with China National
Equipment and Supplies Import and Export Shenyang Corporation, which exports
medical equipment to China. See "Business of the Medical Imaging Division."
The Company's corporate offices are located at 13751 S. Wadsworth
Park Drive, Suite 200, Draper, Utah 84020; telephone: (801) 576-5000.
4
<PAGE>
Securities Offered
Each share of Common Stock of the Company comprising the Settlement
Shares, the Shares, the Conversion Shares, the Commonwealth Shares, the Babcock
Shares, the Cook Shares, the E&M Shares, the Mandarino Shares and the Hardy
Group Shares has a par value of $.007 and entitles the holder thereof to equal
ratable rights to dividends from funds legally available therefor when, as and
if declared by the Board of Directors, to share ratably in all of the assets of
the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company and to have
one non-cumulative vote per share upon all matters which stockholders may vote
at all meetings of stockholders. Holders of shares of Common Stock do not have
preemptive, subscription or conversion rights and there are no redemption or
sinking fund provisions applicable thereto. See "Description of Securities."
The 331,126 Settlement Shares are issuable by the Company upon the
exercise of the Settlement Warrants at an exercise price of $1.51 at any time
prior to November 3, 1999 by the holders of the Settlement Warrants. Such
warrants were issued to JW Charles in November 1994 pursuant to a Financial
Consulting Agreement dated as of November 1, 1994 between the Company and
Corporate Management Group, Inc. For a description of litigation commenced by JW
Charles against the Company, see "Legal Proceedings." Pursuant to the settlement
of such litigation (the "JW Charles Settlement"), the Settlement Warrants were
obtained by a group of investors (the "Hardy Group"), two of whom are officers
of the Company. See "Description of Securities--Settlement Warrant" and "Certain
Relationships and Related Transactions."
The 175,000 Hardy Group Shares are issuable by the Company upon the
exercise of the Hardy Group Warrants at an exercise price of $2.50 per share at
any time prior to April 29, 2007 by the holders of the Hardy Group Warrants. The
Hardy Group Warrants were issued to the members of the Hardy Group in April 1997
pursuant to the JW Charles Settlement. See "Description of Securities--
Settlement Warrant" and "Certain Relationships and Related Transactions."
Of the 8,083,857 Shares covered by this Prospectus, (i) 4,000,000
shares of Common Stock were issued to the holders thereof in consideration for
the Company's acquisition (the "I-Link Acquisition") in February 1996 of the
issued and outstanding shares of common stock of I-Link (793,878 of which have
since been sold or transferred); (ii) 350,000 of such Shares were issued upon
conversion in August 1996 of a portion of the principal amount of 10% Promissory
Notes (the "10% Notes") offered and sold by the Company in February 1996 (the
"10% Notes Offering") in conjunction with the I-Link Acquisition (280,000 of
which have since been sold or transferred) and (iii) 70,000 of such Shares were
issued to each of Trident I, LLC and Joseph Wong upon conversion of Series III
and Series II Notes, respectively, issued in February 1996 (an aggregate of
105,000 of which have since been sold or transferred). Outstanding Four M Shares
are owned by Four M as to an aggregate of 3,112,723 shares and may be acquired
by holders of the Four M Options, including certain affiliates of the Company,
Commonwealth and affiliates of Commonwealth from Four M at purchase prices
varying from $1.79 to $2.45 per share. Additional Four M Options to purchase an
aggregate of 802,847 shares have been exercised by the holders thereof (of which
56,726 shares were subsequently sold or transferred). The 978,891 Kanter Shares
were issued to affiliates of Commonwealth and others upon exercise of options
granted to such persons by Walnut Capital Corp., Windy City, Inc. and Canadian
Imperial Bank, for which entities Joel Kanter ("Kanter"), a former director of
the Company, served as representative (65,000 of which Kanter Shares have since
been sold or transferred). See "The Company," "1996 Offerings," "Certain
Relationships and Related Transactions" and "Description of Securities."
Of the 6,046,800 Conversion Shares, an aggregate of 5,760,000
Conversion Shares are issuable upon conversion of outstanding shares of Class C
Preferred Stock issued in August and September 1996 and an aggregate of 286,800
Conversion Shares are issuable upon the conversion of Class C Preferred Stock
issuable upon conversion of the aggregate of $717,000 in principal amount of
Convertible Notes issued in September 1996. The Convertible Notes automatically
convert into 11,950 shares of Class C Preferred Stock upon the amendment of the
Company's Articles of Incorporation to increase the authorized shares of Common
Stock and Preferred Stock and designation of
5
<PAGE>
at least 11,950 shares of Class C Preferred Stock. See "1996 Offerings,"
"Description of Securities--Class C Preferred Stock" and "Description of
Securities--Convertible Promissory Notes."
The Commonwealth Warrants were issued to Commonwealth in August 1996
pursuant to a Selling Agent's Agreement and a Consulting Agreement entered into
in connection with the Class C Offering. The Commonwealth Warrants entitle the
holder to purchase an aggregate of 750,000 shares of Common Stock (previously
defined as the "Commonwealth Shares") at an exercise price of $2.50 subject to
adjustment, at any time from March 1, 1997 until August 20, 2001. The Company
has been informed by Commonwealth that Commonwealth intends to transfer interest
in 262,793 of such warrants to certain Commonwealth employees. See "Description
of Securities--Commonwealth Warrants" and "1996 Offerings."
The 183,542 Babcock Shares are issuable upon conversion of Class B
Preferred Stock and 91,777 of such Babcock Shares may be acquired by Benchmark
Equity Group, Inc. ("Benchmark"), the holder of the Babcock Option from R.
Huston Babcock, at an exercise price of $1.79 per share commencing July 1, 1996.
See "Description of Securities--Babcock Shares."
The 100,000 Cook Shares are issuable by the Company upon the
exercise of the Cook Option by Scott Cook ("Cook"), the holder of the Cook
Option, at an exercise price of $1.00 per share commencing January 1, 1996
through December 31, 1999. See "Description of Securities--Cook Option."
The 80,000 E&M Shares are issuable by the Company upon the exercise
of the E&M Warrants by the holder thereof at an exercise price of $4.00 per
share at any time prior to June 9, 1999. See "Description of Securities--E&M
Warrants."
The 40,000 Mandarino Shares are issuable by the Company upon the
exercise of the Mandarino Warrants by the holder thereof at an exercise price of
$4.00 per share at any time prior to June 1999. See "Description of Securities--
Mandarino Warrants."
Substantially all of the Securities are subject of "lock-up"
agreements with Commonwealth restricting the offer and sale of the Securities
without the prior written approval of Commonwealth. See "Description of
Securities" and "Risk Factors--Release of Lockup."
<TABLE>
<S> <C>
Common Stock Outstanding Prior to Offering and Exercise of the Settlement 11,652,597/(1)/
Warrants, the Commonwealth Warrants, the Cook Option, the E&M Warrants, the
Mandarino Warrants and the Hardy Group Warrants
Common Stock Outstanding Assuming Conversion of the Class C Preferred Stock, 19,334,065/(2)/
Including the Class C Preferred Stock Issuable Upon Conversion of the Convertible
Notes, Exercise of the Settlement Warrants and the Commonwealth Warrants,
Conversion of the Class B Preferred Stock and Issuance of the Common Stock,
Exercise of the Cook Option, Exercise of the E&M Warrants, Exercise of the
Mandarino Warrants and Exercise of the Hardy Group Warrants
Estimated Net Proceeds from the Exercise of the Settlement Warrants, the $3,242,500/(3)/
Commonwealth Warrants, the Cook Option, the E&M Warrants, the Mandarino
Warrants and the Hardy Group Warrants
Nasdaq Symbol ILNK
</TABLE>
- -----------------------------
(1) Does not include: (a) 331,126 shares of Common Stock issuable upon
exercise of the Settlement Warrants; (b) 183,542 shares of Common
Stock issuable upon conversion of the Class B Preferred Stock; (c)
any of the 6,046,800 shares of Common Stock issuable upon conversion
of the outstanding Class C Preferred Stock and
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<PAGE>
the shares of Class C Preferred Stock issuable in the event of
conversion of the Convertible Notes; (d) options to purchase
6,028,619 shares of Common Stock granted to officers and directors
of the Company and options to be issued to officers of I-Link; (e)
1,685,000 shares of Common Stock reserved for issuance pursuant to
stock options granted to other employees; (f) 750,000 shares of
Common Stock issuable upon exercise of Commonwealth Warrants issued
to Commonwealth; (g) 30,000 shares of Common Stock issuable upon
exercise of warrants issued or to be issued in connection with
certain bridge loans; (h) 100,000 shares of Common Stock issuable
upon exercise of the Cook Option; (i) 80,000 shares of Common Stock
issuable upon exercise of the E&M Warrants; (j) 40,000 shares of
Common Stock issuable upon exercise of the Mandarino Warrants; (k)
175,000 shares of Common Stock issuable upon exercise of the Hardy
Group Warrants; and (l) 400,000 shares of Common Stock issuable in
connection with the FTI Acquisition.
(2) Does not include: (a) options to purchase 6,028,619 shares granted
to or to be granted to officers and directors of the Company and
options issued or to be issued to officers of I-Link; (b) 1,685,000
shares of Common Stock reserved for issuance pursuant to stock
options granted to other employees; (c) 30,000 shares of Common
Stock issuable upon exercise of warrants to be issued in connection
with certain bridge loans; (d) 400,000 shares of Common Stock
issuable in connection with the FTI Acquisition; (e) shares of
Common Stock issuable upon conversion of the Series D Preferred
Stock to be issued in connection with the MiBridge acquisition; and
(f) shares of Common Stock issuable upon conversion of the Series M
Preferred Stock issuable to Winter Harbor, L.L.C. See "Recent
Transactions."
(3) Assumes maximum gross cash proceeds of $3,392,500 from the exercise
of all the Settlement Warrants, the Commonwealth Warrants, the Cook
Option, the E&M Warrants, the Mandarino Warrants and the Hardy Group
Warrants, less estimated filing, legal, printing, accounting and
miscellaneous expenses of $150,000, and assumes that no cashless
exercise of the Commonwealth Warrants will occur. See "Description
of Securities--Settlement Warrants," "Description of
Securities--Commonwealth Warrants," "Description of Securities--Cook
Option," "Description of Securities--E&M Warrants," "Description of
Securities--Mandarino Warrants," and "Description of
Securities--Hardy Group Warrants."
Use of Proceeds
The Company will not receive any of the proceeds from the offer and
sale of the Settlement Shares, the Shares, the Conversion Shares, the Babcock
Shares, the Cook Shares, the Commonwealth Shares, the E&M Shares, the Mandarino
Shares or the Hardy Group Shares. The Settlement Warrants have been previously
issued to JW Charles (and subsequently transferred to the Hardy Group), the
Commonwealth Warrants have been previously issued to and are being offered for
sale by Commonwealth, the Cook Option has previously been issued to Cook, the
E&M Warrants have been previously issued to and are being offered for sale by
E&M, the Mandarino Warrants have been previously issued to and are being offered
for sale by Mandarino and the Hardy Group Warrants have been previously issued
to and are being offered for sale by the Hardy Group. The Company will receive
the proceeds, if any, from the exercise of the Settlement Warrants, the
Commonwealth Warrants, the Cook Option, the E&M Warrants, the Mandarino Warrants
and the Hardy Group Warrants, which proceeds will be used for working capital
purposes. See "Use of Proceeds."
RISK FACTORS
THE SECURITIES DESCRIBED HEREIN ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. SUCH SECURITIES SHOULD BE PURCHASED ONLY BY PROSPECTIVE
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH
PROSPECTIVE INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH
ELSEWHERE HEREIN AND IN THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS
AND THE NOTES THERETO.
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<PAGE>
Release of Lockup
Substantially all of the Securities subject of the Registration
Statement of which this Prospectus forms a part are subject to restrictions on
sale or transfer without the prior written consent of Commonwealth for a period
of one year through September 6, 1997. There can be no assurance as to which
Securities Commonwealth, in the exercise of its sole discretion, may release
from such restrictions or the timing of any such release. The release of such
Securities pursuant to the terms of such restrictions on September 6, 1997 may
have an adverse affect on the market for the Company's Common Stock. See "1996
Offerings."
Ongoing Capital Requirements; Need to Raise Additional Financing
The conduct of the Company's business and the continued
implementation of its business plans and operations (including those of I-Link)
will require the availability of additional funds in the future. While the
Company currently has no material commitments for capital or other expenditures,
other than as set forth herein, it is the Company's intention to continue to
implement the growth of its business and expand its operations (including those
of I-Link). The Company will require additional financing in order to fund the
cash flow operating deficit of I-Link, to expand its business and to discharge
outstanding indebtedness. If needed, there can be no assurance that the Company
will be able to successfully negotiate or obtain additional financing. Nor can
there be any assurance that, if available, such financing will be on terms
favorable or acceptable to the Company or its securityholders. The Company has a
line of credit (the "Line of Credit") with First Union National Bank ("FUNB").
As of June 30, 1997, there was $240,000 outstanding thereunder. The Company had
been for months in violation of certain financial covenants contained in the
loan agreement governing the Line of Credit, including covenants relating to:
(i) cash balances; (ii) consolidated equity; (iii) debt-to-equity ratios; and
(iv) cash flow coverage ratios. However, FUNB waived such non-compliance through
June 30, 1996. The Company agreed to secure alternative financing to repay
amounts outstanding under the Line of Credit by June 30, 1996. The Company was
unable to secure such financing, so that the Company is obligated to repay
amounts outstanding under the Line of Credit in increments of $10,000 per month
commencing July 1, 1996, pursuant to the Company's agreement with FUNB, subject
to negotiation of the terms of a balloon payment. The Company is currently in
violation of cash flow coverage ratios and past days sales on accounts
receivable covenants. In June 1997, the Company entered into an agreement with
Winter Harbor, L.L.C. pursuant to which it borrowed $2,000,000 at an annual
interest rate of prime plus 2%. In August 1997, such agreement was amended and
the Company borrowed an additional $3,000,000 on similar terms. See "Recent
Transactions-Transactions with Winter Harbor, L.L.C.; Series M Preferred Stock."
In the event that the Company needs additional financing, the absence thereof or
the lack of availability thereof on favorable terms could have a material
adverse impact on the Company.
Negative Effect of Amortization Expense on Financial Results
The excess of fair market value of the shares issued in the I-Link,
FTI and MiBridge Acquisitions over the fair value of the net tangible assets
purchased was recorded by the Company as intangible assets. Subsequently,
certain related amortization expense was also realized. Further, the Company
recorded acquired in-process research and development expense of $14,577,942 in
the fiscal year ended December 31, 1996. The Company anticipates recording
approximately $4,240,000 of in-process research and development in the third
quarter of 1997, which is related to the Company's acquisition of MiBridge.
Reliance on Key Personnel
The Company's operations including those of I-Link are dependent
upon the continued efforts and employment of its senior management. The officers
of the Company have the principal responsibility for management of the Company
and are responsible for making recommendations to the Board of Directors which
exercises final authority over business decisions. While the Company and I-Link
have entered into employment agreements with senior management, the loss of the
services of any of the officers or directors could be detrimental to the Company
and I-Link.
8
<PAGE>
Furthermore, the future performance of I-Link, FTI and MiBridge
depends in significant part upon their ability to attract and retain key
technical, systems and sales personnel, most of whom are not bound by an
employment agreement. Competition for such personnel is intense and there can be
no assurance that I-Link will be able to retain its key technical, systems and
sales personnel or that it will be able to attract highly qualified personnel in
the future.
Growth Strategy and Acquisition Activities
The Company's ability to achieve planned levels of growth and the
timing thereof will be materially impacted by its ability to acquire business
communication companies and related businesses. The Company intends to acquire
such additional companies with cash and equity securities such as common stock
or preferred stock, and/or debt instruments. To the extent that the Company
issues equity securities in connection with acquisitions, the equity interest of
its then current stockholders will be diluted. There can be no assurance,
however, that the Company will be able to acquire such additional companies or
that it will be able to use its securities in connection with such purchases or
that it will have the necessary capital resources to purchase such companies.
Although the Company believes that its acquisition strategy will make it
attractive to acquisition candidates, there can be no assurance that the Company
will successfully implement its acquisition program. See "The Company."
Potential Liability in Connection with Acquisitions
The Company could become subject to liabilities arising from any
acquisition which it has effected or may hereafter effect in the event that the
Company assumes unknown or contingent liabilities or in the event that such
liabilities are imposed on the Company under theories of successor liability. If
the Company becomes subject to such a liability of sufficient magnitude, such
liability could have a material adverse effect on the financial condition and
results of operations of the Company. See "The Company."
Expectation of Growth
The Company plans to expand I-Link's network, which expansion will
require additional capital expenditures. There is no assurance that such capital
will be available or that it will be available on terms beneficial to the
Company. Moreover, the Company's ability to effectively achieve growth will
require it to implement and improve operational, financial and management
information systems and to train, motivate and manage employees, as well as to
successfully market its products and services. These demands require the
addition of new management personnel and the development of additional expertise
by existing management. Failure to enhance customer support resources adequately
to support increases in subscribers, or to adequately expand and enhance
telecommunications infrastructure, may adversely affect the Company's ability to
successfully conduct I-Link's business in the future. There can be no assurance
that customer support or other resources will be sufficient to achieve future
growth or that the Company will be able to implement in whole or in part the
planned expansion. Any failure to do so could have a material adverse effect on
the Company's future operating results. See "Business of I-Link."
I-Link Business Competition
The market for business communications services is extremely
competitive. The Company believes that its ability to compete in I-Link's
business successfully will depend upon a number of factors, including the
pricing policies of competitors and suppliers; the capacity, reliability,
availability and security of I-Link's Intranet infrastructure; market presence
and channel development; the timing of introductions of new products and
services into the industry; ease of access to and navigation of the Internet or
other such Data Communication Networks; the Company's ability in the future to
support existing and emerging industry standards; the Company's ability to
balance network demand with the fixed expenses associated with network capacity;
and industry and general economic trends.
While the Company believes there is currently no competitor in the
North American market providing the same type of capabilities in the same manner
as I-Link will offer using the I-Link Intranet, there are many companies
9
<PAGE>
that offer business communications services, and therefore compete with the
Company at some level. These range from large telecommunications companies and
carriers such as AT&T, MCI, Sprint and LDDS, to smaller, regional resellers of
telephone line access. These companies, as well as others, including
manufacturers of hardware and software used in the business communications
industry, could in the future develop products and services that could compete
with those of the Company on a more direct basis. These entities are far better
capitalized than the Company and control significant market share in their
respective industry segments. In addition, there may be other businesses that
are attempting to introduce products similar to the Company's for the
transmission of business information over the Internet. There is no assurance
that the Company will be able to successfully compete with these market
participants. See "Business of I-Link."
Dependence on Suppliers
I-Link relies on other companies to provide data communications
capacity via leased telecommunications lines. A significant portion of the
leased telecommunications lines used by I-Link are currently provided by AT&T.
Further, the Company uses MCI for the supply of inbound and outbound telephone
services. As of June 30, 1997, the Company owed AT&T $826,000 and MCI
approximately $4,900,000. If AT&T or MCI are unable or unwilling to provide or
expand their current levels of service to the Company in the future, the
Company's operations could be materially adversely affected. Moreover, there are
significant billing disputes between the Company and MCI. Management has
established reserves in connection with the same that it views to be adequate.
There can be no assurance that the disputes will be resolved in favor of the
Company, or that the dollar amount of any adverse resolution would be fully
covered by such reserves. Although leased telecommunications lines are available
from several alternative suppliers, there can be no assurance that the Company
could obtain substitute services from other providers at reasonable or
comparable prices or in a timely fashion. The Company is also subject to risks
relating to potential disruptions in such telecommunications services. No
assurance can be given that significant interruptions of telecommunications
services to the Company will not occur in the future. See "Business of
I-Link--I-Link's Contractual Obligations."
I-Link is also dependent on certain third party suppliers of
hardware components. Although I-Link currently attempts to maintain a minimum of
two vendors for each required product, certain components used by I-Link in
providing networking services are currently acquired from only one source.
I-Link may from time to time experience delays in the receipt of certain
hardware components. A failure by a supplier to deliver quality products on a
timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could materially adversely affect the
Company's ability to integrate, conduct and implement expansion of I-Link's
business.
Software and Service Development; Technological Change
The Company's success in I-Link's business is highly dependent upon
its ability to develop new software and services that meet changing customer
requirements. The market for I-Link's services is characterized by rapidly
changing technology, evolving industry standards, emerging competition and
frequent new software and service introductions. There can be no assurance that
the Company can successfully identify new service opportunities and develop and
bring new software and services to the market in a timely manner, or that
software, services or technologies developed by others will not render I-Link's
software, services or technologies noncompetitive or obsolete in the future. The
Company's pursuit of technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
the services currently provided by I-Link to alternate access devices and
conduits.
Dependence on Network Infrastructure; Risk of System Failure; Security Risks
Key to the quality of I-Link services and the future success of the
Company is the capacity, reliability and security of its network infrastructure
to support the services. The Company must expand and adapt network
infrastructure as the number of users and the amount of information they wish to
transfer increases and to meet changing customer requirements. The expansion and
adaptation of the network infrastructure will require substantial financial,
operational and management resources. There can be no assurance, however, that
the Company will be able
10
<PAGE>
to expand or adapt the network infrastructure to meet additional demand or
subscribers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all, or that the Company will be able to deploy
successfully the contemplated network expansion. Any failure of the Company to
expand the network infrastructure, as needed, on a timely basis or to adapt to
changing subscriber requirements or evolving industry standards could have a
material adverse effect on the Company's overall business, financial condition
and results of operations in the future.
New and Uncertain Business
I-Link is a young business enterprise that is subject to all of the
risks that present themselves to early stage companies, including but not
limited to limited infrastructure, managerial resources, capitalization and
market share. There can be no assurance that I-Link will be able to successfully
compete with larger, more mature, better capitalized enterprises.
In order to realize subscriber growth, the Company must be able to
replace terminating subscribers and attract additional subscribers. However, the
sales and marketing expenses and subscriber acquisition costs associated with
attracting new subscribers are substantial. Accordingly, the Company's ability
to improve operating margins will depend in part on the ability to retain
subscribers. The Company plans to invest significant resources in the
telecommunications infrastructure, customer support resources, sales and
marketing expenses and subscriber acquisition costs. There can be no assurance
that the Company's future efforts in this area will improve subscriber
retention. Since the market for the Company's services is new and the utility of
available services is not well understood by new and potential subscribers, it
is not possible to predict future subscriber retention rates. See "Business of
I-Link."
Certain Related Party 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 bears interest at one percent over
the prime rate of interest established by Southwest Bank of Texas, N.A.
Subsequently, the Company and MNI modified the Note such that the principal
amount due of $175,682 (as of December 31, 1996) was to be discharged as
follows: (i) a principal payment of $88,000 originally due December 31, 1996
will be paid in 21 equal monthly payments of approximately $4,600 beginning
March 10, 1997; and (ii) the remaining principal amount of $87,682 plus interest
at 10.5% per annum will be paid at the rate of $4,200 per month. 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. 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. Benchmark is also party to certain options to purchase shares
of Common Stock owned by Four M and to options to purchase shares of Common
Stock owned by R. Huston Babcock. Commonwealth and certain affiliates and
associates of Commonwealth purchased certain shares of Common Stock from an
affiliate of the Company, purchased shares of Class C Preferred Stock from the
Company and were granted certain options by Four M. T6-G Limited Partnership and
I-Link entered into a consulting agreement for two years commencing upon the
successful completion of at least $4,000,000 in funding. The agreement required
the payment of a total of $70,000 payable monthly over 24 months. In addition,
I-Link discharged its promissory note to T6-G Limited Partnership by the payment
of $300,000 from the proceeds of the Class C Offering, which sums were
designated by T6-G Limited Partnership for the purchase of Class C Preferred
Stock. In August 1996, John Edwards and William H. Flury loaned I-Link $125,000
and $100,000, respectively, which sums were repaid from the proceeds of the
Class C Offering together with original issue discounts of $6,250 and $5,000,
respectively. In addition, the Company agreed to issue warrants to purchase
25,000 and 5,000 shares to Mr. Edwards and to Mr. Flury exercisable at $4.87 and
$2.50 per share, respectively. In September 1996, the Company advanced the sum
of $685,000 to FTI to be used by FTI to
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acquire from Harris Corporation certain items of telecommunications switches
known as "Harris switches." Effective January 1, 1997, the Company acquired the
outstanding stock of FTI. The majority owner of FTI is Robert W. Edwards, Jr.,
brother of John Edwards, the Company's Chairman, President and CEO. In
connection with the execution of the Settlement Agreement, the Settlement
Warrant was purchased by a group of investors which includes David E. Hardy and
Karl S. Ryser, Jr., both of whom are officers of the Company (the "Hardy
Group"), in consideration for payment by the Hardy Group of six hundred thousand
dollars ($600,000) to JW Charles in satisfaction of the amounts owed to JW
Charles under the Settlement Agreement. As additional compensation for the Hardy
Group's commitment to purchase the Settlement Warrant, the Company, among other
things, issued to the Hardy Group new warrants to purchase an aggregate of
175,000 shares of Common Stock. See "The Company," "1996 Offerings" and "Certain
Relationships and Related Transactions."
Dependence on Telecommunications Service Providers
AT&T and MCI are currently the sole providers of the long-distance
telecommunications services that the Company resells to its customers. The
future business prospects of the Company are particularly dependent on the
continuous and reliable use of AT&T and MCI's networks. Changes in tariffs,
regulations, or policies by AT&T and MCI may adversely affect the Company's
ability to continue to offer long-distance service on what it considers to be
commercially reasonable or profitable terms. See "Business of I-Link."
Potential Adverse Effects of Rate Changes
I-Link bills its customers for the various long-distance
telecommunications services used by such customers. The total billing to each
customer is generally less than the telephone charges for the same long-distance
service that the customer would pay to a primary seller of such services, such
as AT&T or MCI. I-Link's ability to undersell such primary seller arises as a
result of the volume discount offered to I-Link in accordance with the terms of
its contract with AT&T and MCI. The Company believes I-Link's lower customer
bills is one of the most important factors in its ability to attract and retain
customers. Therefore, narrowing of the differential between the rates charged to
the Company's customers and the cost of the bulk-rate long-distance
telecommunications services purchased by I-Link for resale to such customers
would have a significant adverse effect on I-Link. To the extent this
differential decreases, the savings I-Link is able to obtain for its customers
would decrease and I-Link would lose customers and face increased difficulty in
attracting new customers, and the Company's operating results would also be
adversely affected. See "Business of I-Link."
Competition in the Switched Network Market
I-Link's competition in the switched network market is all other
long-distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom, and
local regional Bell companies. With these carriers controlling the majority of
the market share throughout the U.S., the majority of the potential customers to
which I-Link's products and services are marketed to are customers of one of
these carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources. There can be no assurance that I-Link
will be able to successfully compete with such carriers. See "Business of
I-Link."
Failure to Meet AT&T and MCI Minimum Purchase Requirements; Contingent
Liabilities
The Company has entered into contract tariffs with AT&T and MCI for
both outbound and inbound long-distance service. In July 1995, the Company
signed a five-year negotiated contract tariff with AT&T, effective September 1,
1995, for the supply of inbound and outbound telephone service with volume
discounts which obligated the Company for a minimum quarterly purchase
requirement of $1,500,000. Also included within the contract tariff is a
requirement that a specified minimum proportion of each quarter's usage relate
to "new business" (i.e., currently non-AT&T business). The contract provides
that failure to achieve the new minimum will require payment of the
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<PAGE>
shortfall by the Company. Under the contract tariff, the Company is obligated to
make payments equal to its minimum purchase requirements for the outstanding
term of the agreement if there is an early termination of the plan. The Company
is currently negotiating a new contract tariff with AT&T under which new pricing
and new minimum purchase requirements are to be established. In February 1996,
the Company signed a four-year negotiated contract with MCI for the supply of
inbound and outbound telephone service with MCI with volume discounts in return
for minimum annual purchase requirements rising to $4,500,000 per quarter after
the first 15 months of service under the contract. Failure to achieve the
minimum will require shortfall payments by the Company. There is a dispute
between the Company and MCI as to whether the Company is currently satisfying
such commitments. There can be no assurance that the Company will be able to
achieve the required levels of sales.
Reliance on Independent Sales Agents
The Company markets its services through independent sales
representatives and independent marketing organizations. The independent
marketing organizations presently account for approximately 80% of the Company's
long-distance sales volume. Should the services of one or more of these
independent marketers be interrupted or become unavailable to the Company, and
in the event that the Company is unable to promptly replace such marketing
efforts, the financial results of the Company could be adversely affected. See
"Business--Marketing and Sales."
Technological Change and New Services
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The impact of such changes in service and standards on the Company
has been limited due to its selling only MCI long-distance services. The Company
believes that its future success will depend in part on its ability to
anticipate such changes and to offer on a timely basis market responsive
services that meet these evolving industry standards, especially if at some
future time the Company should cease selling MCI service. There can be no
assurance that the Company will have sufficient resources to introduce new
services that would satisfy an expanded range of customer needs.
Customer Attrition
The Company believes that a high level of customer attrition is
common in the direct dial, long-distance industry. Although the level of
attrition experienced by I-Link lies within the range anticipated in its
budgets, I-Link does not have a long history of operations and accordingly, the
level of customer attrition experienced to date may not be indicative of future
attrition levels. In addition, there can be no assurance that any steps taken by
I-Link to counter increased customer attrition will be successful.
Dependence Upon Third Party Transmission Facilities
The future profitability of the Company is based upon its ability to
transmit its customers' long distance telephone calls on a cost effective basis
over transmission facilities leased from facilities based long distance carriers
that compete with the Company. The Company owns only a limited portion of the
transmission facilities needed to complete all of its customers' long distance
telephone calls. Accordingly, the Company is vulnerable to changes in its lease
arrangements and the Company's direct dial long distance telephone business and
the profitability thereof is dependent upon its ability to enter into cost
effective lease arrangements, both long and short term, with facilities based
carriers for the transmission of calls. While the Company believes that it has
ample access to transmission facilities at attractive rates and expects to
continue to have such access, there can be no assurance that leased capacity
will continue to be available at cost-effective rates.
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Equipment Failures; Natural Disaster
Although the Company carries "commercial property/business interruption"
insurance, such insurance does not include coverage of certain natural
disasters. A major equipment failure or a natural disaster affecting any one of
the Company's switching facilities could have a material adverse effect on the
Company's operations.
Government Regulation
Certain of the Company's operations are subject to regulation by the
Federal Communications Commission ("FCC") under the Communications Act of 1934,
as amended (the "Communications Act"). In addition, certain of the Company's
businesses are subject to regulation by state public utility or public service
commissions. Changes in the regulation of, or the enactment or changes in
interpretation of legislation affecting, the Company's operations could have a
material adverse effect on the Company and the value of the Common Stock.
Recently, the Federal Government enacted the Telecommunications Act of 1996 (the
"Telecommunications Act"), which, among other things, allows the Regional Bell
Operating Companies ("RBOCs") and others to enter the long distance business.
Entry of the RBOCs or other entities, such as electric utilities and cable
television companies, into the long-distance business may have a negative impact
on the Company or its customers. The Company anticipates that certain of such
entrants will be strong competitors because, among other reasons, they may enjoy
one or more of the following advantages: they may (i) be well capitalized;
(ii) already have substantial end user customer bases; or (iii) enjoy cost
advantages relating to local loops and access charges. The introduction of
additional strong competitors into the switched long-distance business would
mean that the Company would face substantially increased competition. This could
have a material adverse effect on the Company and the value of the Common Stock.
In addition, the Telecommunications Act provides that state proceedings may in
certain instances determine access charges the Company is required to pay to the
local exchange carriers. No assurance can be given that such proceedings will
not result in increases in such rates. Such increases could have a material
adverse effect on the Company or its customers and on the value of the Common
Stock. See "Business of I-Link - Government Regulation."
FTI's activities are regulated by the public utility commissions of the
various states in which the Company operates. Also, decisions by the FCC with
respect to the permissible business activities or pricing practices may have an
adverse impact on FTI's operations. FTI could be subject to complaints seeking
damages and other relief filed by parties claiming to be harmed by FTI's failure
to file tariffs. Moreover, any significant change in regulations by state
governmental agencies could significantly increase FTI's costs or otherwise have
an adverse impact on FTI's activities and on its expansion efforts. The FCC has
recently taken or is currently considering action on various proposals,
including proposals relating to interstate access transport services, public
filing of rates, proprietary calling cards and billed party preference.
Additionally, legislation has recently been enacted in Congress further
liberalizing the telecommunications industry, specifically by permitting the
Bell Operating Companies (BOCs) to provide service in the long-distance market
and allowing the long-distance carriers such as AT&T, MCI and the Company into
the local markets. Although safeguards have been inserted into the legislation
to ensure fair competition, there can be no assurance that the entry of the BOCs
into the long-distance market will not have a material adverse effect on the
Company's business. See "Business of I-Link-Regulation."
Government Regulation of Internet-Related Business
I-Link's intranet services are not currently subject to direct
regulation by the FCC or any other agency, other than regulations applicable to
businesses generally. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on its or I-Link's
business.
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Government Regulation of Medical Business
Various aspects of the Company's current medical business are subject to
government regulations at the federal, state and local level. Failure to comply
with existing regulations or the enactment of restrictive laws or regulations
could impair the Company's operations. While the Company believes that its
operations comply with applicable regulations, the Company has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretations of such laws will not adversely affect the Company's operations.
The Company employs radiologic technologists in its operations, each of
whom must be licensed by the appropriate state authority. Many states have a
requirement known as a Certificate of Need ("CON") requirement that impedes a
company's ability to operate without governmental approval.
To the extent that medical facilities rely on Medicare and Medicaid
reimbursement for the services rendered by the Company to their patients,
changes in Medicare and Medicaid reimbursement regulations and policies affect
the Company. During the past several years, there has been increasing pressure
from federal and state regulatory and legislative bodies to prevent physicians
from referring patients to diagnostic imaging facilities in which they have an
ownership interest. Many prominent physicians, legislators, medical ethicists,
and others feel that ownership of imaging facilities can impair a physician's
judgment about the need for a diagnostic test. Studies have shown that
physicians who have ownership interests in imaging facilities tend to refer more
patients for diagnostic testing than physicians who have no ownership interest.
The above-described regulations and dynamics may adversely affect the revenue
per scan obtained by the Company as well as the number of scans performed.
On the federal level, a physician self-referral bill passed Congress and
was signed into law by President Clinton in 1993. The self-referral law bans
physicians from referring Medicare patients to imaging and almost any other type
of diagnostic or therapeutic outpatient medical facility in which they have
ownership or financial interests, effective January 1, 1995. Many states,
including Florida, Illinois, Minnesota, New York and New Jersey, have passed
laws regarding physician self referral. Some simply require disclosure of
ownership, while others restrict physicians from referring to facilities in
which they have any ownership interest.
The legislature of the State of Florida enacted the Patient Self-
Referral Act of 1992, effective April 8, 1992 (the "Florida SRA"). Such act
prohibits physician self-referral to health care entities in which such
physicians have financial interests, effective October 1, 1994. Management
believes these legislative and regulatory actions have had no material adverse
effect upon the Company's operations to date. However, the Florida SRA also
imposes a fee cap, effective July 1, 1992, limiting the technical and
professional fees of all providers of "clinical laboratory services, physical
therapy services, comprehensive rehabilitative services, diagnostic imaging
services, and radiation therapy services" to no more than 115% of the Medicare
limiting charge for non-participating physicians. The statute specifically
excludes hospitals and physician group practices from the fee cap provision and
does not apply to patients eligible for Medicaid or Medicare reimbursement.
Several lawsuits have been filed by various providers against the State
of Florida in both federal and state court alleging, among other things, that
the fee cap provision violates the Equal Protection Clause of the U.S.
Constitution and seeking to enjoin the State of Florida from enforcing the fee
cap provision. In July 1992, the United States District Court for Northern
District of Florida granted a permanent injunction in a case entitled Panama
City Medical Center, Ltd., et. al vs. Robert B. Williams, et. al (File No. 92-
40198-WS).
The ultrasound services provided by the Company are related specifically
to urology. Approximately 80% of the Company's patients are covered by Medicare.
Therefore, changes in Medicare reimbursement rules and regulations may have a
significant impact on the profitability of the Company's ultrasound operations.
Reimbursement rates for procedures are set annually. The 1996 reimbursement
rates for the procedures primarily performed by the Company were increased from
between 1.7% to 2.1% over 1995's reimbursement rates.
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Health Care Industry Competition
It is common for hospitals, physicians, physician groups, and others in
the health care field to form ventures to own and operate medical equipment. The
Company is in competition with such groups. There are many companies offering
general business consulting services. The companies that may compete with the
Company in the future and that currently offer consulting services may be larger
and have far greater financial resources than the Company. Also, if the cost of
a particular medical device is reduced and the utilization by physicians
increases, more hospitals will be able to afford to acquire their own equipment
rather than receive service on a shared basis. See "Business of the Medical
Imaging Division."
New Medical Technology and Obsolescence
The medical equipment field is generally characterized by rapidly
changing technology. Early obsolescence of expensive equipment or technological
change could have an adverse effect on the Company. Therefore, the cost of MRI
systems and other medical equipment may be significantly lower in the future,
allowing persons who purchase equipment in the future to charge less for similar
services and therefore compete on a favorable basis.
Exposure to Tort Liability in Medical Industry
The Company operates medical equipment used to perform procedures on or
diagnose disease in patients. The Company is exposed to tort liability in the
event of harm to patients due to the negligence of the Company, its agents, and
employees. The Company currently maintains professional liability insurance
coverage in the amount of $1,000,000. The Company also maintains an umbrella
policy covering, among other things, workers' compensation, general, and
automobile liability in an amount of $9,000,000 in coverage. Although the
Company has never had a liability claim filed against it, any claims could have
a material adverse effect on the Company. In addition, there is no assurance
that the Company will be able to continue to maintain such insurance coverage in
the future.
The Company acts as general partner of a limited partnership controlled
by the Company that directly owns, controls and operates the Company's medical
facilities. As such, the Company is exposed to general liability for torts
committed by such partnership and its agents and employees and for contracts
entered into by those partnerships. In addition, to the extent that the Company
is a general partner of limited partnerships that offer and sell limited partner
interests, the Company is exposed to liability under the Securities Act, the
Exchange Act and various state securities laws.
Dilution
Holders of Common Stock of the Company will suffer dilution in the event
that any of the Company's outstanding convertible securities, including
outstanding shares of Preferred Stock, warrants and options are converted by the
holders thereof. See "Description of Securities" and "Recent Transactions."
Additional dilution may result in the event of the exercise of warrants and
options, including options granted pursuant to the Company's stock option and
purchase plans and employment agreements.
Dividends
The Company has not paid any dividends on any of its outstanding
securities to date and, other than as set forth herein, does not anticipate
paying any dividends on its securities in the foreseeable future. As of June 30,
1997, accrued and unpaid dividends on all shares of Preferred Stock totaled
$885,522. The Company currently intends to retain all working capital and
earnings, if any, to finance the operations of its businesses and to expand its
businesses.
Dividends on the Class C Preferred Stock will be payable when, as and if
declared by the Board of Directors, to the extent permissible under the Florida
Business Corporation Act, to the holders of the Class C Preferred Stock in cash
or, at the option of the Company as determined by the Board of Directors, in
shares of Common Stock.
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Dividends may be paid in shares of Common Stock only if such shares have been
registered under the Securities Act; however, the dividend shares will still be
restricted from public sale for 12 months from September 6, 1996, without the
prior written consent of Commonwealth. In connection with the Winter Harbor,
L.L.C. equity investment in the amount of $12,100,000, the Company will issue a
new series of preferred stock ("Series M Preferred Stock"). The Series M
Preferred Stock will be entitled to receive cumulative dividends in the amount
of 10% per annum. The Company's future cash flow and legal capital may be
insufficient to enable the Company to pay dividends. See "Description of
Securities-Preferred Stock" and "Recent Transactions--Transactions with Winter
Harbor, L.L.C.; Series M Preferred Stock."
Future Issuances of Stock by the Company; Potential Anti-Takeover Effect
The Company has authorized capital stock of 20,000,000 shares of Common
Stock, $.007 par value per share and 500,000 shares of preferred stock, $10.00
par value per share (the "Preferred Stock"). As of August 29, 1997, there were
11,652,597 shares of Common Stock and 7,500 shares of Class B Preferred Stock
issued and outstanding, 240,000 shares of Class C Preferred Stock issued and
outstanding and an additional 11,950 shares of Class C Preferred Stock are
issuable upon the conversion of the Convertible Notes. One thousand shares of
Class D Preferred Stock are to be issued in connection with the MiBridge
Acquisition. In fiscal 1996, 200,000 shares of Class A Preferred Stock were
converted into 4,894,461 shares of Common Stock and a portion of the principal
of the 10% Notes was converted into 350,000 shares of Common Stock. Although,
other than as disclosed herein, there are no present plans, agreements or
undertakings with respect to the Company's issuance of any shares of stock or
related convertible securities, the issuance of any of such securities by the
Company could have anti-takeover effects insofar as such securities could be
used as a method of discouraging, delaying or preventing a change in control of
the Company. Such issuance could also dilute the public ownership of the
Company. Inasmuch as the Company may, in the future, issue authorized shares of
Common Stock or Preferred Stock without prior stockholder approval, there may be
substantial dilution to the interests of the Company's stockholders. However,
given that the Company is authorized to issue more stock, there can be no
assurance that the Company will not do so. In addition, a stockholder's pro rata
ownership interest in the Company may be reduced to the extent of the issuance
and/or exercise of any options or warrants relating to the Common Stock or
Preferred Stock. The issuance of additional shares of Common Stock may have the
effect of rendering more difficult or discouraging an acquisition or change in
control of the Company. See "Description of Securities." For information
relating to Series M Preferred Stock contemplated to be issued to Winter Harbor,
L.L.C., see "Risk Factors - Authorization of Preferred Stock."
The Company proposes to increase its authorized number of shares of
Common Stock to 50,000,000 and its number of authorized shares of Preferred
Stock to 10,000,000 and expects to solicit shareholder approval of the same
shortly. Officers and directors of the Company have agreed to vote an aggregate
of 5,783,774 shares of Common Stock in favor of such proposal. Pending the
solicitation of the necessary stockholder approval and as a condition to the
first closing of the Class C Offering, securityholders, including officers and
directors of the Company and I-Link, owning options to purchase an aggregate of
4,153,501 shares of Common Stock have agreed not to exercise any options owned
by them unless and until the shareholders of the Company approve an increase in
authorized capital stock.
Future Sales of Stock by Stockholders
As of August 29, 1997, 8,739,633 shares of Common Stock, all of the
shares of Class B Preferred Stock, and all of the shares of Class C Preferred
Stock issued and outstanding were "restricted securities" as that term is
defined under the Securities Act and in the future may only be sold in
compliance with Rule 144 promulgated under the Securities Act or pursuant to an
effective registration statement. Rule 144 provides, in essence, that a person
(including a group of persons whose shares are aggregated) who has satisfied a
one-year holding period for such restricted securities may sell within any
three-month period, under certain circumstances, an amount of restricted
securities which does not exceed the greater of 1% of that class of the
Company's outstanding securities or the average weekly trading volume of that
class of securities during the four calendar weeks prior to such sale. In
addition, pursuant to Rule 144, persons who are not affiliated with the Company
and who have held their restricted securities for at least two years are not
subject to the quantity limitations or the manner of sale restrictions of the
rule. As of the date hereof, substantially all of the Company's restricted
securities are available for resale pursuant to Rule 144 or have registration
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rights and are included in the Registration Statement of which this Prospectus
forms a part, which will allow such shares to be freely resold into the market.
Certain of the officers, directors and affiliates of the Company, I-Link,
Benchmark and Commonwealth have agreed with Commonwealth to lock up their shares
of Common Stock for twelve months from September 6, 1996. Commonwealth intends
to allow certain 10% Noteholders who used their note repayments to purchase
Class C Preferred Stock in the Class C Offering to sell a sufficient amount of
Shares or Conversion Shares following registration thereof as will equal in
value the principal amount of the note repayments used to purchase such Class C
Preferred Stock. In addition, the shares of Common Stock issuable upon
conversion of the Class C Preferred Stock or issuable in lieu of cash dividends
thereon, cease to be, pursuant to the Articles of Incorporation, subject of a
one-year lockup on September 6, 1997; until then they may not be publicly sold
without the prior written consent of Commonwealth.
In the event that the shares of Common Stock which are not currently
salable become salable by means of registration, eligibility for sale under
Rule 144 or otherwise and the holders of such securities elect to sell such
securities in the public market, there is likely to be a negative effect on the
market price of the Company's securities and on the ability of the Company to
obtain additional equity financing. In addition, to the extent that such
securities enter the market, the value of the Company's securities in the
over-the counter market may be reduced. No predictions can be made as to the
effect, if any, that sales of such securities (or the availability of such
securities for sale) will have on the market price of any of such securities
which may prevail from time to time. Nevertheless, the foregoing could adversely
affect such prevailing market prices.
Authorization of Preferred Stock
The Company's Amended and Restated Articles of Incorporation, as further
amended (the "Articles of Incorporation"), authorize the issuance of up to
500,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without stockholder approval, issue shares of Preferred Stock
with dividend, liquidation, conversion, voting or other rights which are senior
to the Shares or which could adversely affect the voting power or other rights
of the holders of outstanding shares of Preferred Stock or Common Stock. In
addition, the issuance of additional shares of Preferred Stock may have the
effect of rendering more difficult, or discouraging, an acquisition of the
Company or changes in control of the Company. Although, other than as set forth
herein, the Company does not currently intend to issue any additional shares of
Preferred Stock, there can be no assurance that the Company will not do so in
the future. See "Risk Factors--Future Issuances of Stock by the Company;
Potential Anti-Takeover Effect," "Risk Factors--Certain Provisions of Articles
of Incorporation and Bylaws" and "Description of Securities--Preferred
Stock."
The Company intends to increase its authorized number of shares of
Common Stock to at least 50,000,000 shares and its authorized number of shares
of Preferred Stock to 10,000,000 shares. The Company expects to solicit the
necessary shareholder approval to effect such increases as soon as practicable.
Officers, directors and certain other shareholders of the Company representing
or owning (as of August 8, 1997, the record date for the next meeting of
shareholders) 5,783,774 shares (49.7%) of the outstanding shares of Common Stock
have agreed to vote or direct the vote for the approval of such increases.
Immediately upon amendment of the Company's Articles of Incorporation and
designation of additional shares of Class C Preferred Stock, the Convertible
Notes will automatically convert to 11,950 shares of Class C Preferred Stock.
Moreover, the Company has agreed to accept a $12,100,000 equity investment from
Winter Harbor, L.L.C. in consideration of the issuance of Class M Preferred
Stock which in turn will be convertible into shares of Common Stock. Until such
shareholders' meeting or a written consent to action can be effected in
accordance with applicable law, the Company is without sufficient number of
authorized shares (i) to accommodate the adjustment of the Class C Preferred
Stock Conversion Price below $2.06 so that no adjustment will be effected unless
and until the Company's authorized shares is increased; (ii) to allow further
conversion of the Class D Preferred Stock issued to the former MiBridge
shareholders into shares of Common Stock; and (iii) to conclude the Winter
Harbor, L.L.C. investment. See "Description of Securities" and "Recent
Transactions."
The Company has agreed to accept a $12,100,000 equity investment from
Winter Harbor, L.L.C. in consideration of the issuance of Class M Preferred
Stock which in turn will be convertible into shares of Common Stock. The Class M
Preferred Stock will provide for 10% cumulative preferred dividends, would have
the right to veto the payment of dividends on any other class of stock, would
have a liquidation preference senior to all other class of stock, and would be
convertible into shares of common stock at the lower of $2.75 per share of
common stock, subject to adjustment, or 50% of the average closing bid price of
the Common Stock in the ten trading days preceding the fifth anniversary of
issuance of the Class M Preferred stock. In addition, the Class M Preferred
Stock will have the right to elect two directors, 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.
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Continued Nasdaq Listing
The Common Stock is traded on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol "ILNK." Prior to March 8, 1996, the Common
Stock was traded under the symbol "MDCR". While the Common Stock is currently
listed for quotation on Nasdaq, there can be no assurance given that the Company
will be able to continue to satisfy the requirements for maintaining quotation
on Nasdaq or that such quotation will otherwise continue. If, for any reason,
the Common Stock becomes ineligible for continued listing and quotation, holders
of the Company's securities may have difficulty selling their securities should
they desire to do so.
Under the rules of the National Association of Securities Dealers,
Inc. ("NASD"), in order to qualify for continued listing on Nasdaq, a company
must have, among other things, $2,000,000 in total assets, $1,000,000 in total
capital and surplus, and a minimum bid price of $1.00 per share. The minimum bid
price shall not be required, however, if a company maintains market value of
public float of $1,000,000 and capital and surplus of $2,000,000. (The NASD has
adopted new continued listing standards which are now being phased in. The new
standards include six tests: (1) net tangible assets of at least $2,000,000 or
market capitalization of at least $35,000,000 or net income in two of the
previous three years of at least $500,000; (2) 500,000 or more publicly trading
shares; (3) market value of public float of at least $1,000,000; (4) minimum bid
price of $1.00; (5) not fewer than two marketmakers; and (6) not fewer than 300
shareholders. Such new standards are not expected to apply to the Company for a
period of approximately six months from the date of this Prospectus). Although
the Company was able initially to satisfy the requirements for listing of its
securities on Nasdaq, the Company may be unable to continue to satisfy the
requirements for maintaining quotation of its securities thereon, and trading,
if any, in the Company's securities would be conducted in the over-the-counter
market in what are commonly referred to as the "pink sheets" of the National
Quotation Bureau, Inc. or on the NASD OTC Electronic Bulletin Board. As a
result, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the price of such securities.
"Penny Stock" Regulations
The Commission has adopted regulations which define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, and information on the limited market in penny stocks. In addition,
the broker-dealer must obtain a written acknowledgement from the customer that
such disclosure information was provided and must retain such acknowledgement
for at least three years. Further, monthly statements must be sent to the
customer disclosing current price information for the penny stock held in the
account. While many Nasdaq-listed securities would otherwise be covered by the
definition of penny stock, transactions in a Nasdaq-listed security would be
exempt from all but the sole marketmaker provision for: (i) issuers who have
$2,000,000 in tangible assets ($6,000,000 if the issuer has not been in
continuous operation for three years); (ii) transactions in which the customer
is an institutional accredited investor; and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a Nasdaq-listed
security directly with a Nasdaq marketmaker for such securities would be subject
only to the disclosure with respect to commissions to be paid to the broker-
dealer and the registered representative. The foregoing rules may materially
adversely affect the liquidity for the market of the Company's securities. Such
rules may also affect the ability of broker-dealers to sell the Company's
securities and may impede the ability of holders of the Company's securities to
sell such securities in the secondary market.
Certain Provisions of Articles of Incorporation and Bylaws
As previously noted, pursuant to the Articles of Incorporation, the
Board of Directors has the authority to issue up to 500,000 shares of Preferred
Stock without action by the stockholders in one or more series having such
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preferences, rights and other provisions as the Board of Directors may designate
in providing for the issuance of such series. In addition, the Company intends
to seek shareholder approval of the amendment of the Company's Articles of
Incorporation to increase the authorized Preferred Stock to 10,000,000 shares.
The Articles of Incorporation and Bylaws contain provisions which may discourage
certain transactions which involve an actual or threatened change in control of
the Company. See "Description of Securities--Anti-Takeover Measures."
Classification of the Board of Directors
The Board of Directors of the Company is classified into three
classes. Members of each class serve for staggered three year terms, with
members of one class coming up for election each year. The classification of the
Board of Directors may make it difficult for shareholders to effect a change in
management. See "Management."
Voting Control
Four M International, Ltd. (previously defined as "Four M") owns
3,112,723 shares of Common Stock or approximately 26.7% of the outstanding
voting securities of the Company. Four M has granted options to sell part or all
of its holding in the Company to affiliates of I-Link and associated persons
and/or customers of Commonwealth. Furthermore, I-Link, Ltd. owns an aggregate of
284,854 shares of Common Stock or approximately 2.4% of the outstanding voting
securities. GNET Enterprises, Inc. is the general partner of I-Link, Ltd. of
which Clay Wilkes, a director of the Company, is the sole shareholder. The
officers and directors of the Company may be deemed to beneficially own an
aggregate of 5,637,138 shares or approximately 39.7% of the outstanding voting
securities. Therefore, by virtue of their ownership of the Company's issued and
outstanding Common Stock, the officers and directors of the Company have the
ability to substantially influence the election of directors and, consequently,
influence the Company's business and affairs. See "Security Ownership of Certain
Beneficial Owners and Management."
Lack of Patent Protection
The Company does not currently hold any patents, although I-Link has
filed patent applications for its technology for fax and voice communications
over an internet environment. To the extent any technology included in such
products is patentable, if any, there can be no assurance that any patent will
in fact be issued or that such patents will be effective to protect the
Company's products from duplication by other developers. In addition, there can
be no assurance that the Company will be able to afford the expense of any
litigation that may be necessary to enforce its right under any patent.
New Products
New products are subject to substantial risks, including high costs of
introduction, market acceptance and duplication by other developers. See "Risk
Factors--I-Link Business Competition" and "Business of I-Link."
Contemplated Issuances of Stock and Options to FTI Shareholders, Employees and
Consultants
Pursuant to the FTI agreement, subject to satisfaction of certain
conditions, the Company has agreed to issue an aggregate of 400,000 shares of
Common Stock to the stockholders of FTI. In addition, the Company approved the
grant to Clay Wilkes, a Director of the Company, and Alex Radulovic, Senior
Engineer of I-Link, of options to purchase 1,500,000 and 500,000 shares,
respectively, the vesting of which would occur on June 30, 2001; provided that
the vesting shall accelerate in increments of 25% in the event that the average
closing bid price per share of
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Common Stock for five (5) consecutive trading days equals or exceeds $10, $15,
$20 and $25, respectively, upon the graduated achievement of Common Stock prices
of $10, $15, $20 and $25, and exercisable to the extent vested commencing
June 30, 1997 at a price of $7.00 per share. As of the date hereof, 25% of each
of such options has vested. The options lapse on June 30, 2002. Previously, the
Company agreed to issue options to purchase 1,000,000 shares of Common Stock at
an exercise price of $7.00 per share to John Edwards, Chairman of the Board and
President of the Company, and in consideration of Mr. Edwards' salary reduction
from $175,000 to $96,000, the Company has agreed to grant to Mr. Edwards
additional options to purchase 250,000 shares of Common Stock at an exercise
price equal to $4.875. 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. 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. 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. 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 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. See
"Management," "Executive Compensation-Employment Agreements," "Certain
Transactions" and "Recent Transactions - Transactions with Winter Harbor L.L.C.;
Series M Preferred Stock."
Limited Authorized Capital
The number of shares of the Company's unissued and unreserved shares of
Common Stock is negligible. Management intends to solicit the shareholder
approval necessary to increase the number of the Company's authorized shares of
Common Stock and Preferred Stock, but there can be no assurance that such effort
will be successful. 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. In addition, (i) certain officers and directors will be
unable to exercise options or receive any value therefrom; (ii) the Class D
Preferred Stock issued to the former shareholders of MiBridge may not be able to
be converted into Common Stock; and (iii) the proposed Winter Harbor, L.L.C.
equity investment in the Company may not be converted into Common Stock. See
"The Company" and "Management's Discussion and Analysis."
Dilutive Impact of Outstanding Options, Warrants and Convertible Securities
The holders of outstanding options, warrants and convertible securities
have the opportunity to profit from a rise in the market price of the Common
Stock, if any, without assuming the risk of ownership, with a resulting dilution
in the interest of other shareholders. The Company may find it more difficult to
raise additional equity capital if it should be needed for the business of the
Company while such options and warrants are outstanding. At any time at which
the holders thereof might be expected to exercise them, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by such options and warrants. The holders of such options and
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<PAGE>
warrants have the right to require registration under the Securities Act of the
shares of Common Stock that are issuable upon exercise of such options and
warrants and have certain demand and/or "piggy-back" registration rights. The
cost to the Company of effecting any such registration may be substantial.
Restrictions on Commonwealth Market-Making Activities
Commonwealth may be precluded in accordance with Regulation M under the
Exchange Act from engaging in market making activities for up to five (5) days
prior to and during the period in which it is engaged in the exercise of or sale
of the Commonwealth Warrants. As a result, Commonwealth may be unable to
continue to provide a market for the Company's Common Stock.
Current Prospectus Requirement; Blue Sky Restrictions on Exercise Options and
Warrants
The holder or holders of the Settlement Warrants and/or the Commonwealth
Warrants and/or the Cook Option and/or the E&M Warrants and/or the Mandarino
Warrants and/or the Hardy Group Warrants will have the right to sell or exercise
such warrants only if a current prospectus relating to such securities and/or
the shares underlying such securities is then in effect and only if such
securities are qualified for sale or exempt under applicable state securities or
"blue sky" laws of the states in which the holder or holders of such Warrants
reside. There can be no assurance that the Company will be able to keep this
Prospectus or any prospectus covering any such securities current, although the
Company will use its best efforts to do so. Also, certain exemptions in the blue
sky laws of certain states may permit the holders of such Warrants to transfer
such Warrants or holders thereof may move to states in which the shares
underlying such Warrants are not registered or qualified during the period such
Warrants are exercisable. The Company may decide not to seek or may be unable to
obtain qualification of the issuance of such Common Stock in all of the states
in which the ultimate holders of the Settlement Warrants, the Commonwealth
Warrants, the Cook Options, the E&M Warrants, the Mandarino Warrants or the
Hardy Group Warrants reside. In such event, the Settlement Warrants, the
Commonwealth Warrants, the Cook Option, the E&M Warrants, the Mandarino Warrants
and/or the Hardy Group Warrants may expire and have no value if they cannot be
exercised.
Forward-Looking Statements
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis" and "Business" are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct.
THE COMPANY
Medcross, Inc. (previously defined as the "Company") was incorporated in
Florida on April 21, 1983. On November 30, 1990, the Company closed on its
limited partnership offering of Medcross Imaging, Ltd. ("Medcross Imaging").
Medcross Imaging was formed for the purpose of purchasing a Philips T-5 MRI
mounted in a mobile van to provide services to health care facilities on the
southwest coast of Florida and commenced operations in February 1991. During May
and June 1992, in a series of individual transactions, the Company acquired an
additional 26.75% ownership interest in Medcross Imaging. Prior to the
acquisitions, the Company had ownership interests in Medcross Imaging of 41.5%,
80.75%, and 81.75%, respectively. In June 1993, the Company purchased Waters
Edge Scanning Associates, Ltd. renamed "Tampa MRI" after the acquisition. In
October 1994, the Company closed on an acquisition of a 75% ownership interest
in Urological Ultrasound Services of Tampa Bay (UUSTB) from Urology Ultrasound,
Inc. Prior to the acquisition, the Company owned the other 25% ownership
interest in UUSTB. The acquisition was accounted for under the purchase method
of accounting. UUSTB was organized on September 9, 1987 and is in the business
of providing mobile ultrasound services to urological patients in west central
Florida. The Company immediately transferred all assets and liabilities of the
partnership to Urological Ultrasound Services of Tampa Bay,
22
<PAGE>
Inc., a wholly owned subsidiary of the Company, formed for the purpose of this
acquisition. Prior to the acquisition, the Company recorded its share of income
and loss on its 25% ownership interest in UUSTB using the equity method. On
May 1, 1995, the Company transferred all of the assets and liabilities of
Urological Ultrasound Services of Tampa Bay, Inc. to Tampa MRI. On February 23,
1996, the Company closed its acquisition of all of the issued and outstanding
common stock of I-Link Worldwide Inc., a Utah corporation (subsequently renamed
I-Link Systems, Inc. and referred to herein as "I-Link") from I-Link, Ltd., a
Utah limited partnership, in exchange for the issuance of an aggregate of
4,000,000 shares of Common Stock of the Company. Prior to the acquisition, the
assets and liabilities of I-Link, Ltd. were transferred to I-Link (which had no
prior activity) at their historical cost. The acquisition was accounted for
under the purchase method of accounting.
Pursuant to the terms of the I-Link Purchase Agreement, 1,400,000 of the
4,000,000 shares of Common Stock of the Company issuable thereunder were issued
upon closing of the I-Link Acquisition and 2,600,000 of such shares of Common
Stock were issued and placed in escrow. Subsequently, 80,046 shares were
released from escrow. An additional 1,519,954 were to be and have been released
upon the receipt of the Company of at least $4 million in proceeds from a debt
or equity offering. As a result of the Class C Offering, such shares were
released and 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.
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.(heretofore defined
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
approval by the Company's shareholders of an amendment to the Articles of
Incorporation authorizing an increase in the number shares of Common Stock from
20 million to 50 million. 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 the two shareholders of
FTI, are brothers.
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 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
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<PAGE>
Series D Preferred Stock will be subject to approval by the Company's
shareholders of an increase in the number of shares of the Company's authorized
capital stock. Certain MiBridge financial statements are contained in "Financial
Statements."
Employees
As of August 29, 1997, the Company employed 135 full-time employees,
including six persons in management and twelve administrative personnel. The
Company is not a party to any collective bargaining agreement and the Company's
employees are not represented by any labor union. The Company considers its
relationship with its employees to be good. The Company's success depends in
large part upon its ability to attract, develop, motivate and retain highly
skilled employees, of which there can be no assurance.
The Company's corporate offices are located at 13751 S. Wadsworth Park
Drive, Suite 200, Draper, Utah 84020; telephone: (801) 576-5000.
USE OF PROCEEDS
The Securities subject hereto have been previously issued to or are
issuable to the Selling Securityholders and are being offered for sale by the
Selling Securityholders. Consequently, the Company will not receive any of the
proceeds from the sales of the Settlement Shares, the Shares, the Conversion
Shares, the Commonwealth Shares, the Babcock Shares, the Cook Shares, the E&M
Shares, the Mandarino Shares or the Hardy Group Shares. The Company will receive
the proceeds, if any, from the exercise of the Settlement Warrants, the
Commonwealth Warrants, the Cook Options, the E&M Warrants, the Mandarino
Warrants and the Hardy Group Warrants, but will not receive any of the proceeds
from the resale of the Commonwealth Warrants, the E&M Warrants, the Mandarino
Warrants, and/or the Hardy Group Warrants or the sale by the holders of the
Settlement Shares, the Commonwealth Shares, the Cook Shares, the E&M Shares, the
Mandarino Shares or the Hardy Group Shares by Selling Securityholders. Proceeds,
if any, from the exercise of the Settlement Warrants, the Commonwealth Warrants,
the Cook Option, the E&M Warrants, the Mandarino Warrants and/or the Hardy Group
Warrants will be used for working capital purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997.
<TABLE>
<CAPTION>
June 30, 1997
June 30, 1997 Pro Forma(2)
------------- -------------
<S> <C> <C>
Stockholders' Equity:
Class B Preferred Stock, $10.00 par value;
22,500 shares authorized; and
7,500 shares outstanding/(1)/................. $ 75,000 $ 75,000
Class C Preferred Stock, $10.00 par value;
240,000 shares authorized; and 240,000
shares outstanding/(1)/....................... 2,400,000 2,400,000
Common Stock, $.007 par value;
20,000,000 shares authorized; and
11,652,597 shares outstanding................. 74,393 74,393
Additional Paid-In Capital............................ 40,236,521 40,236,521
Common Stock to be Issued............................. 11,289,583 11,289,583
Class D Preferred Stock to be Issued.................. -- 6,250,000
Deferred Compensation from Stock Options.............. (4,200,000) (4,200,000)
Accumulated Deficit................................... (35,875,186) (40,115,186)
------------ ------------
Total Capitalization.......................... $ 14,000,311 $ 16,010,311
============ ============
</TABLE>
24
<PAGE>
- -------------------------------
(1) As of June 30, 1997, the liquidation value per share of Class B
Preferred Stock was $12.87 and the liquidation value per share of Class
C Preferred Stock was $60.00.
(2) Pro forma information has been prepared to include the anticipated
effect of the MiBridge Acquisition as if the acquisition had occurred on
June 30, 1997. Pro forma adjustments (comprised of $6,250,000 in Class D
Preferred Stock to be issued and $4,240,000 adjustment to accumulated
deficit for in-process research and development expense) are based upon
certain estimates that may change as additional information becomes
available.
DIVIDEND POLICY
Other than as set forth herein, the Company does not currently
anticipate paying any dividends on its securities in the foreseeable future. As
of June 30, 1997, accrued and unpaid dividends on all shares of Preferred Stock
totaled $885,522. The Company currently intends to retain all working capital
and earnings, if any, to finance the operations of its businesses and to expand
its businesses.
Dividends on the Class C Preferred Stock may be paid in shares of Common
Stock (the "Dividend Shares") at the option of the Company provided that the
Dividend Shares are the subject of a registration statement which has been
declared effective under the Securities Act. See "Description of
Securities--Class C Preferred Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained herein are not based on historical facts,
but are forward-looking statements that are based upon assumptions about future
conditions that may not occur. Among many factors that could cause actual
results to differ materially are the following: the Company's ability to manage
expected rapid growth; competition in the long distance telecommunications and
ancillary industries; the Company's ongoing relationship with its long distance
carriers and vendors; dependence upon key personnel; subscriber attrition;
federal and state governmental regulation of the long distance
telecommunications and internet industries; the Company's ability to maintain,
operate and upgrade its information systems and network; and the Company's
success in the offering of other enhanced service products.
Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements. The
Company's ability to consummate such transactions and achieve such results is
subject to certain risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the existence of demand for and acceptance of
the Company's products and services, regulatory approvals and developments,
economic conditions, the impact of competition and pricing results of financing
efforts and other factors affecting the Company's business that are beyond the
Company's control. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
Forward-Looking Information
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When used
in this document, the words "anticipate," "believe," "estimate," "expect," and
"intended" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current view of the Company respecting future events and are subject
to certain risks, uncertainties noted. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
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<PAGE>
FISCAL YEAR 1995 AND 1996
Results of Operation
The following table represents the net operating revenue and operating
profit of the Company for each category of service offered. The net operating
revenue and operating profits shown are net of inter-company transactions that
were eliminated in consolidation.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET OPERATING REVENUE
Diagnostic Imaging $ 1,967,384 $ 2,486,708
Sales and Services of Medical Equipment -- 337,889
Network Services 170,532 --
Management and Other 245,160 298,356
------------ ------------
$ 2,383,076 $ 3,122,953
============ ============
OPERATING PROFIT (LOSS)
Diagnostic Imaging $ 41,615 $ 322,314
Sales and Services of Medical Equipment (284,615) (171,083)
Communications Network (19,501,391) --
Management and Other (448,123) (644,986)
------------ ------------
$(20,192,514) $ (493,755)
============ ============
</TABLE>
Consolidated Operating Results
Operating results for 1996 are not comparable to 1995 due to the inclusion
of operating results of I-Link acquired on February 13, 1996. Accordingly,
operating results of 1996 include I-Link while operating results of 1995 did not
include I-Link.
Net operating revenue of the Company decreased 23.7% in 1996 as compared to
1995. This was a result of decreased revenue of diagnostic imaging services,
foreign operations, and management and other services, offset by the inclusion
of network services of I-Link. Salaries and benefits increased to $701,798 in
1996 as compared to 1995. Salaries and benefits of $945,030 are attributable to
the inclusion of I-Link in 1996, offset by decreases for diagnostic imaging,
foreign operations and management and other services of $26,590, $59,132 and
$157,510, respectively. Selling, general and administrative expenses increased
$1,664,444 in 1996 compared to 1995. This increase was due to the inclusion of
I-Link, offset by a decrease in expense from diagnostic imaging, foreign
operations and management and other services of $58,218, $146,012 and $104,075,
respectively. Cost of goods sold in 1995 was entirely related to the sale and
service of CT equipment in China. The increase in communications network expense
of $1,120,779 in 1996, related to the business of I-Link. These expenses include
communication lines, links, facility costs and hardware maintenance associated
with the operation of the I-Link network. Depreciation and amortization expense
increased $628,984 in 1996. The increase was primarily due to depreciation of I-
Link assets. Provision for inventory valuation of $260,033 relates to an
inventory valuation allowance for the Company's inventory located in China and
represents the Company's best estimate of the reserve necessary to reflect the
inventory at its net realizable value. The decrease in repairs and maintenance
expenses was mainly related to diagnostic imaging services. The provision for
doubtful accounts decreased $167,528. The decrease was primarily attributable to
$66,000 related to diagnostic imaging services and $127,000 for doubtful
accounts from foreign operation in 1995, which did not recur in 1996. Acquired
in-process research and development expenses of $14,577,942 in 1996 relate to
the acquisition of in-process research and development acquired when the Company
purchased I-Link. The acquired in-process research and development was expensed
as technological feasibility had not been established and the technology had no
alternative future use. Research and development expenses of $347,504 in 1996
related to the Company's continued research and development associated with the
acquired technology.
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<PAGE>
The increase in interest expense of $2,031,206 was primarily
attributable to interest expense (non-cash) on convertible promissory notes and
warrants issued with other notes and is calculated as the difference between the
aggregate conversion price per common share per the promissory notes or warrants
as compared to the market price of the common stock on the date the promissory
notes or warrants were issued.
The increase in interest income of $136,605 was related to increased
cash balances related to proceeds from the sale of preferred stock by the
Company during 1996.
Litigation settlement expense of $821,000 recognized in 1996 was
associated with the Company's settlement of the JW Charles litigation. The
expense (non-cash) directly relates to the issuance of 175,000 warrants to
purchase common stock at an exercise price less than fair market value of the
common stock at the date of issuance. These will be issued in association with
the settlement of the JW Charles litigation.
Diagnostic Imaging. Net operating revenue from diagnostic imaging
services decreased $519,324 (20.9%) in 1996 compared to 1995. MRI revenue of
Tampa MRI (a subsidiary of the Company) accounted for $184,616 of the decrease.
This decrease is mainly related to a 20.8% decrease in the average revenue per
procedure offset by a minimal increase in the number of procedures performed in
1996 compared to 1995. Tampa MRI has obtained and will continue its efforts to
obtain managed care contracts. The participation in the managed care environment
has caused a decrease in the revenue per procedure; however, these decreases
have been partially offset by increases in the number of procedures performed.
In addition to the increased participation in managed health care contracts,
during the fourth quarter of 1996, Tampa MRI has contracted with several
companies that lease time from Tampa MRI, which has also decreased the revenue
per procedure. Currently, approximately 50% of the time of Tampa MRI is leased
by such companies. While the combination of these two factors (the increase in
managed care contracts and the increase in the amount of time that is leased to
third party companies) has decreased the revenue per procedure, the referral
base has significantly broadened. MRI revenue of Medcross Imaging, Ltd.
decreased $322,973 in 1996 compared to 1995. This decrease was caused by a
decrease in the average revenue per procedure of 28.1%. The decrease in the
average revenue per procedure of Medcross Imaging, Ltd. is due to the decrease
of the per procedure charges to the hospital clients pursuant to service
contracts placed into effect on October 1, 1995. These contracts extended the
service period to the hospitals from February 29, 1996 to February 28, 1997.
While the charge per procedure was reduced, each hospital had specific monthly
minimum quotas. There was no material change in the number of procedures
performed in 1996 as compared to 1995. The contracts extended to February 28,
1997 were not renewed and the Company intends to pursue the retail MRI segment
of the market. There is no assurance that the Company will be able to do so.
The revenue of the ultrasound operations decreased 3.8% in 1996 as
compared to 1995. This decrease was caused by a decrease in the number of
procedures performed, offset by an increase in the average revenue per patient.
During the fourth quarter of 1996, the Company has been providing ultrasound
services to a local hospital during certain surgical procedures. The amount of
time needed to perform surgery is substantially longer than the amount of time
taken to perform the other ultrasound procedures; however, the rates at which
the Company is reimbursed is greater than the other ultrasound procedures. This
has caused the decrease in the number of procedures performed and an increase in
the average revenue per procedure. Management believes that participation in
surgical procedures will increase, therefore increasing the average revenue per
procedure.
The operating profit from diagnostic imaging services decreased
$280,699 in 1995 as compared to 1996. This decrease included a decline in
operating profit from MRI services of $296,008, slightly offset by the operating
profit from ultrasound services of $15,309. The decrease in operating profit was
caused by the decrease in net operating revenue described above, offset by the
decrease in total operating expenses for diagnostic imaging services of $238,625
in 1996 as compared to 1995. Operating expenses from Medcross Imaging, Ltd.,
Tampa MRI and ultrasound services decreased $72,180, $139,401, and $27,044,
respectively, in 1996 compared to 1995.
Foreign Sales and Service of Medical Equipment. The Company sells
and services used and refurbished computerized tomography (CT) scanners in the
People's Republic of China through its own office in Beijing and a joint venture
company, Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of
which it owns 51%. On May 31, 1995, the Beijing office was closed and the
27
<PAGE>
responsibilities for the parts depot and the remaining inventory have been
transferred to SMHME. The purchasers in China regarding maintenance of scanners,
parts depot, etc have raised various issues. The Company received $125,000 in
payments through December 31, 1995. However, the Company has elected to fully
reserve for all remaining amounts due to the Beijing office for the four
scanners installed. This resulted in an expense of $126,910 in 1995 and an
overall allowance for doubtful accounts of $315,753 as of December 31, 1996. In
1996, the Company has written down the CT scanner inventory of the Beijing
operations to what management believes is its fair market value. This resulted
in a valuation expense of $260,033 in 1996. The Company has held discussions
regarding the sale of the Beijing operations. No decision has been made.
Management and Other. Net operating revenue from management and
other activities decreased by $53,196 in 1996 as compared to 1995. A portion of
the decrease was related to the management contract with Bay Area Renal Stone
Center (BARSC). This contract accounted for $27,475 in management fees in 1995
and no management fees in 1996. In August 1995, the Company's management
contract with BARSC was terminated. The annual management fee revenue based upon
contracts currently in effect is $305,160. The net operating loss for management
and other activities decreased 30.5% in 1996 compared to 1995. This decreased
loss is related to the decrease in total operating expenses of 26.5% to $693,286
in 1996 from $943,342 in 1995. This decrease was offset by the reduced revenue
described above. Salaries and benefits decreased $157,510 in 1996 compared to
1995 and other operating expenses decreased $104,075 in 1996 as compared to
1995.
Communications Network and Related Services -- I-Link. The operating
revenue of network and related services from I-Link was $170,532 for 1996. The
net operating loss from network and related services was $19,501,391 for 1996,
primarily due to research and development costs of $14,925,446. Of this amount
$14,577,942 was related to acquired in-process research and development. Other
I-Link expenses are primarily related to the development and deployment of its
communication products. These expenses include software research and
development, network maintenance and expenses relating to sales and marketing,
finance and accounting, information systems, and administrative personnel.
Liquidity and Capital Resources
Cash and cash equivalents as of December 31,1996 were $4,500,227 as
compared to $79,316 as of December 31, 1995. This increase was primarily due to
a private placement of preferred stock in 1996. Cash flow used by operations
during 1996 was $4,840,285 compared to cash flow provided by operations in 1995
of $319,362. The working capital position of the Company was $2,400,501 at
December 31, 1996. The increased cash flow used by operations was primarily due
to expenses associated with the establishment of the I-Link communication
network.
Net cash used by investing activities in 1996 was $2,573,486 as
compared to net cash provided of $4,283 in 1995. The increase in cash used by
investing activities was primarily attributable to the purchase of property and
equipment associated with the establishment of the I-Link communications network
and purchase of restricted certificates of deposit required as deposit for
leases entered into by I-Link relating to its facilities and communication
network. Other investing activity expenditures during 1996 related to the
purchase of additional equipment for I-Link.
Financing activities provided net cash of $11,834,681 in 1996 as
compared to cash used by financing activities in 1995 of $603,252. The increase
in cash provided was due to the net proceeds of $12,290,000 from the issuance of
preferred stock and $356,000 from the exercise of warrants and options. In 1996
the Company had proceeds of $2,502,333 from the issuance of notes payable as
compared to $218,000 in 1995. The Company repaid $2,991,356 of notes payable and
long-term debt in 1996 as compared to $521,871 in 1995.
SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1997
1997 Operations
Prior to 1997 the Company's primary source of revenue was related to
health care services. The primary expenses of the Company prior to 1997 were
related to delivery of health care services and the development of a proprietary
data communications network. With the Company's acquisition of FTI (effective
January 1, 1997), a
28
<PAGE>
regional long-distance telecommunications carrier with nation-wide delivery of
telecommunications services over traditional switched telecommunications
networks, the Company launched its marketing efforts and began to obtain
customers for these long distance telecommunications services. The Company
expanded its existing customer base through these marketing activities and plans
further expansion through the strategic acquisition of existing customer bases.
The Company believes that the multi-level marketing channel is an excellent
vehicle through which to acquire new customers. There are numerous revenue
sources derived from the sales through a multi-level marketing channel. These
revenues include the sale of long distance service, sales marketing materials
and business opportunity. The multi-level marketing channel did not begin
selling services and materials until June of 1997. Therefore, significant
revenues from this channel were not realized during the second quarter of 1997.
In addition, it should be noted that significant long distance usage over the
Company's network is not expected until the third quarter of 1997.
On August 12, 1997 the Company signed an agreement to acquire
MiBridge, Inc., a leading provider of telephone and conferencing software and
hardware. The closing of this acquisition occurred on September 2, 1997. This
acquisition facilitates the Company's ability to further expand its product
offerings as well as receive royalty revenue from existing MiBridge customers.
Financial Condition
Working Capital. The working capital position of the Company was a
deficit of $2,573,251 at June 30, 1997 and $1,579,501 at December 31, 1996. Cash
on hand at June 30, 1997 was $1,176,386 as compared to $4,500,227 as of December
31, 1996. The decrease in cash on hand was primarily attributable to cash used
by operating activities during the six months ended June 30, 1997. Cash used by
operating activities was $5,040,728 in the first six months of 1997 as compared
to cash used by operating activities of $866,315 for the same period in 1996.
Investing Activities. Effective January 1, 1997, the Company entered
into an agreement to acquire all of the outstanding shares of FTI in exchange
for 400,000 shares of the Company's common stock. FTI is an FCC-licensed
long-distance carrier and provider of telecommunication services and as such
provides the Company with an existing customer base and related revenues.
On 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 will 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 Stockholders, 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
Company's shareholders of an increase in the number of shares of authorized
capital stock at the Company's next annul shareholders meeting.
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.
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Investing activities during the first six months of 1997 resulted in
a net cash outflow of $48,680, including cash acquired in the amount of $435,312
from the acquisition of FTI. The Company expended $483,992 for acquisition of
property and equipment during the first six months of 1997.
Financing Activities. In the first six months of 1997, the Company
reduced its notes payable, long-term debt and capital lease obligations by
$256,932. These reductions include payments in the amount of $60,378 on
indebtedness acquired in the acquisition of FTI. The inclusion of FTI in 1997
increased notes payable by $693,333, and notes payable to others of $104,575.
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 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.
Also on June 6, 1997 the Company executed a letter of intent ("LOI")
with Winter Harbor relating to an equity investment in the Company. The LOI
contemplates that Winter Harbor will invest $12,100,000 in a series of the
Company's convertible preferred stock to be created (the "Series M Preferred
Stock"). Winter Harbor will purchase such number of shares of Series M Preferred
Stock as are convertible into 4,400,000 shares of Common Stock for an aggregate
cash consideration of $12,100,000 (equivalent to $2.75 per share of Common
Stock, subject to adjustment). As additional consideration for its equity
financing commitments, Winter Harbor will be issued additional warrants by the
Company to acquire (a) 2,500,000 shares of Common Stock at an exercise price of
$2.75 per share (the "Series A Warrants"), (b) 2,500,000 shares of Common Stock
at an exercise price of $4.00 per share (the "Series B Warrants") and (c)
5,000,000 share of Common Stock at an exercise price of $9.31 (the "Series C
Warrants"). The respective exercise prices for the Series A Warrants, the Series
B Warrants and the Series C Warrants (collectively, the "Investment Warrants"),
shall be subject to adjustment. The Series A Warrants will be exercisable at any
time for thirty months from the date of issuance, and the Series B Warrants and
Series C Warrants will be exercisable at any time for sixty months from the date
of issuance. All of the Investment Warrants (i) will have demand registration
rights and anti-dilution rights and (ii) will contain cashless exercise
provisions.
The Series M Preferred Stock will be entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred or
common stock receives any dividends. Thereafter, the Series M Preferred Stock
will participate with the common stock in the issuance of any dividends on a per
share basis. The Series M Preferred Stock will be senior to all other series of
the Company's preferred stock or Common Stock as to liquidation rights, which
rights shall be deemed to include accrued or unpaid dividends relating to the
Series M Preferred Stock. The Series M Preferred Stock shall be convertible at
any time prior to the fifth anniversary of its issuance, at the sole option of
Winter Harbor, into shares of Common Stock on a one-to-one basis; provided,
however, that the Series M Preferred Stock shall be automatically converted to
Common Stock on the fifth anniversary of its issuance at no cost to Winter
Harbor. The conversion price ("Class M Conversion Price") shall be equal to the
lesser of $2.75 per share or 50% of the average closing bid price of the Common
Stock for the ten trading days immediately preceding the fifth anniversary of
issuance. The basis for discretionary conversion, or the conversion price for
automatic conversion, shall be adjusted upon the occurrence of certain events,
including without limitation, issuance of stock dividends, recapitalization of
the Company, or the issuance of stock by the Company at less than the fair
market value thereof.
On August 18, 1997 the Company amended the existing Note, allowing
for additional borrowing of up to $3,000,000. The incremental borrowings under
this amendment have a maturity date of February 15, 1998. For every $1,000,000
drawn down on this extension, the Company will issue 100,000 warrants at current
market price. All other provisions of this extension are the same as the Note
discussed above.
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The Company will require the additional equity financing
($12,100,000) proposed by Winter Harbor (see above), or financing from other
sources of equity, third-party debt or similar financing, in order to
successfully operate the business as planned. The completion of this equity
investment is subject to the approval of an authorization of additional common
shares by the shareholders of the Company. This authorization is to be voted
upon by the shareholders of the Company at the next shareholder meeting. The
ability of the Company to meet the demands for growth and expansion will be
dependent upon the success the Company achieves in meeting its forecasted sales
objectives and anticipated expenses. The availability of capital remains a
significant element to the Company's success. There can be no assurance that
such financing will be completed or that the Company will not be required to
issue significant debt or equity securities in order to obtain the necessary
funding.
See "Recent Transactions - Transactions With Winter Harbor, L.L.C."
for further information regarding the transactions with Winter Harbor, including
a discussion of debt issuance costs relating thereto.
Results of Operations
Comparison of Second Quarter 1997 to Second Quarter 1996
Telecommunications Service Revenue. Telecommunications service
revenue in the second quarter of 1997 was $2,266,492. There was no such revenue
in the second quarter of 1996 as this service began with the acquisition of FTI
in January 1997.
Health Care Service Revenue. Health care service revenue was
$582,298 in the second quarter of 1997 as compared to $582,490 in the same
quarter of 1996. Although the revenue was comparable, the number of procedures
decreased in 1997 while the revenue per procedure increased. The decrease in
procedures and increase in revenue per procedure was expected as one of the
Company's diagnostic imaging facilities now pursues the retail segment of the
MRI market rather than providing services to hospitals through contracts as in
1996.
Marketing Services Revenue. Marketing services revenue, which
includes revenues recognized from independent representatives for training,
promotional and presentation materials, and ongoing administrative support was
$720,490 in the second quarter of 1997 as compared to $0 in the same quarter of
1996. This channel of distribution of telecommunication services was begun late
in the second quarter of 1997 and thus had no comparable revenue in 1996.
Other Revenue. Other revenue decreased $55,338 in the second quarter
of 1997 to $0 as compared to $55,338 in the same quarter of 1996. The decrease
is primarily due to internet service provider revenues in 1996 that did not
recur in 1997.
Telecommunications Network Expenses. Telecommunications expenses
increased $3,950,406 in the second quarter of 1997 to $4,174,708 as compared to
$224,302 for the same quarter of 1996. These expenses include the costs related
to the continuing development and deployment of the Company's communication
network and expenses related to the telecommunication service revenue which
began in 1997 with the acquisition of FTI.
Marketing Services Expenses. Marketing services expense was $640,739
in the second quarter of 1997 as compared to $0 for the same quarter of 1996.
The expenses directly relate to the Company's marketing service revenue which
began late in the second quarter of 1997. Marketing service expenses include
commissions and the costs of providing training, promotional and presentation
materials and ongoing administrative support.
Selling, General and Administrative. Selling, general and
administrative expense increased $1,343,208 to $2,378,890 in the second quarter
of 1997 as compared to $1,035,682 in the second quarter of 1996. The increase
was primarily due to increased administrative expense associated with the launch
of the multi-level marketing channel and general increase in overhead and
personnel expenses associated with growing the Company's telecommunication
business.
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Provision for Doubtful Accounts. Provision for doubtful accounts
increased $318,654 to $368,273 in the second quarter of 1997 as compared to
$49,619 in the same quarter of 1996. This increase is primarily related to the
Company's growth in telecommunication service revenue.
Depreciation and Amortization. Depreciation and amortization
increased $422,625 to $618,443 in the second quarter of 1997 as compared to
$195,818 in the second quarter of 1996. The increase is primarily due to
increased amortization of intangible assets acquired in the acquisition of FTI
in 1997. Depreciation expense also increased due to the acquisition of
telecommunication equipment in late 1996 and 1997.
Research and Development. Research and development was $234,246 in
the second quarter of 1997 as compared to $0 in 1996. The increase is associated
with the Company's continuing telecommunication network research and development
efforts.
Interest Expense. Interest expense decreased $1,009 to $74,118 in
the second quarter of 1997 as compared to $75,127 in the same quarter of 1996.
The decrease is primarily due to a decrease in the average balance of loans
outstanding during the second quarter of 1997 as compared to the same quarter of
1996.
Interest and Other Income (Expense). Interest and other income
(expense) increased $59,964 to $57,199 in the second quarter of 1997 as compared
to $(2,765) in the second quarter of 1996. The increase was primarily due to an
increase in interest income in 1997 due to an increase in the average balance of
cash on hand as a result of proceeds from the Company's sale of Class C
Preferred Stock in the third quarter of 1996.
Minority Interest in Net Loss of Consolidated Subsidiaries. Minority
interest in net loss of consolidated subsidiaries increased $18,033 to $20,039
in the second quarter of 1997 as compared to $2,006 in the same quarter of 1996.
The increase is related to increased losses in the Company's subsidiary as it
transitioned from contracts with hospitals to the retail segment of the MRI
market.
Comparison of Six Months Ending June 1997 to Six Months Ending June
1996
Telecommunications Service Revenue. Telecommunications service
revenue for the six months ending June 30, 1997 was $4,414,825. There was no
such revenue for the same period ending June 30, 1996 as this service began with
the acquisition of FTI in January 1997.
Health Care Service Revenue. Health care service revenue increased
$4,885 in the six months ending June 30, 1997 to $1,179,555 as compared to
$1,174,670 in the same period ending June 30, 1996. Although the revenue was
comparable, the number of procedures decreased in 1997 while the revenue per
procedure increased. The decrease in procedures and increase in revenue per
procedure was expected as one of the Company's diagnostic imagining facilities
now pursues the retail segment of the MRI market rather than providing services
to hospitals through contracts as in 1996.
Marketing Services Revenue. Marketing services revenue was $720,490
in the six months ending June 30, 1997 as compared to $0 in the same period
ending June 30, 1996. This channel of distribution of telecommunication services
was begun late in the second quarter of 1997 and thus had no comparable revenue
in 1996.
Other Revenue. Other revenue decreased $72,364 in the six months
ending June 30, 1997 to $0 as compared to $72,364 in the same period ending June
30, 1996. The decrease is primarily due to internet service provider revenues in
1996 that did not recur in 1997.
Telecommunications Network Expenses. Telecommunications expenses
increased $6,743,255 in the six months ending June 30, 1997 to $7,065,790 as
compared to $322,535 for the same period ending June 30, 1996. These expenses
include the costs related to the continuing development and deployment of the
Company's communication network and expenses related to the telecommunication
service revenue which began in 1997 with the acquisition of FTI.
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Marketing Services Expenses. Marketing services expense was $640,739
in the first six months of 1997 as compared to $0 for the same period of 1996.
The expenses directly relate to the company's marketing service revenue which
began late in the second quarter of 1997. Marketing service expenses include
commissions and the costs of providing training, promotional and presentation
materials and ongoing administrative support.
Selling, General and Administrative. Selling, general and
administrative expense increased $2,995,749 to $5,026,034 in the six months
ending June 30, 1997 as compared to $2,030,285 in the same period ending June
30, 1996. The increase was primarily due to increased administrative expense
associated with the launch of the multi-level marketing channel and general
increase in overhead and personnel expenses associated with growing the
Company's telecommunication business.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased $412,635 to $503,498 in the six months ending June 30, 1997 as
compared to $90,863 in the same period ending June 30, 1996. This increase is
primarily related to the Company's growth in telecommunication service revenue.
Depreciation and Amortization. Depreciation and amortization
increased $494,747 to $1,019,938 in the six months ending June 30, 1997 as
compared to $525,191 in the same period ending June 30, 1996. The increase is
primarily due to increased amortization of intangible assets acquired in the
acquisition of FTI in 1997. Depreciation expense also increased due to the
acquisition of telecommunication equipment in late 1996 and 1997.
Provision for Asset Valuation. The provision for asset valuation
occurred in the first quarter of 1997 (none in 1996) and includes a valuation
allowance for inventory of $55,341 and a write off of tenant improvements
abandoned when I-Link moved corporate headquarters in January 1997 in the amount
of $158,603.
Acquired In-Process Research and Development. Acquired in-process
research and development in the six months ending June 30, 1996 was $4,777,943
which was related to the acquisition of I-Link in February 1996. There were no
similar costs in the six months ended June 30, 1997.
Research and Development. Research and development was $345,334 in
the six months ending June 30, 1997 as compared to $0 in the same period ending
June 30, 1996. The increase is associated with the Company's continuing
telecommunication network research and development efforts.
Interest Expense. Interest expense decreased $647,291 to $420,475 in
the six months ending June 30, 1997 as compared to $1,067,766 in the same period
ending June 30, 1996. The decrease is primarily due to a decrease in imputed
interest expense (non-cash) of $625,000 to $320,000 in the six months ending
June 30, 1997 as compared to $945,000 in the same period of 1996. The imputed
interest was related to certain convertible promissory notes issued in 1996.
Interest and Other Income. Interest and other income increased
$129,352 to $142,114 in the six months ending June 30, 1997 as compared to
$12,762 in the same period ending June 30, 1996. The increase was primarily due
to an increase in interest income in the first six months of 1997 as compared to
the same period in 1996 due to an increased average balance of cash on hand
primarily as a result of proceeds from the Company's sale of Class C Preferred
Stock in the third quarter of 1996.
Minority Interest in Net Loss of Consolidated Subsidiaries. Minority
interest in net loss of consolidated subsidiaries increased $29,065 to $29,128
in the six months ending June 30, 1997 as compared to $63 in the same period
ending June 30, 1996. The increase is related to increased losses in the
Company's subsidiary as it transitions from contracts with hospitals to the
retail segment of the market.
Other Items
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices in general.
However, the Company's revenues will continue to be affected by competitive
forces in the market place.
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In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing EPS and
makes them comparable to international EPS standards. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is currently evaluating the impact of the
recently issued statement and will adopt the requirements for the year ending
December 31, 1997.
The Company has reviewed all other recently issued, but not yet
adopted, accounting standards in order to determine their effects, if any, on
the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
As the Company is developing its own accounting systems for
reporting and operations and is addressing year 2000 issues as part of that
development, no significant incremental costs are anticipated in order to be
year 2000 compliant.
BUSINESS OF I-LINK
Overview
The primary business of Medcross, Inc. ("Medcross" or the "Company")
as carried on through its wholly-owned subsidiaries I-Link Systems, Inc.
(formerly named I-Link Worldwide, Inc.), I-Link Communications, Inc. (formerly
named Family Telecommunications Incorporated) and I-Link Worldwide, L.L.C.
(collectively referred to as "I-Link"), is the sale and delivery of
communications capabilities to residential, business and wholesale customers via
both a proprietary data communication network established by I-Link that
operates in the same manner as the Internet (the "I-Link Intranet") and existing
switched telecommunications networks. I-Link seeks to provide more effective
communications solutions and enhanced capabilities to users of traditional
telecommunications services through utilization of the I-Link Intranet and other
existing data communications networks, as well as through volume purchasing of
capacity on traditional switched telecommunications networks. I-Link has
developed patent-pending technology and has deployed a national network
infrastructure of communications equipment and dedicated lines that will enable
it to route traditional telecommunications services over the I-Link Intranet in
a manner that is transparent to the user, employing the user's existing
telecommunications equipment.
With its acquisition of Family Telecommunications Incorporated (now
renamed I-Link Communications, Inc.), a regional long-distance
telecommunications carrier with nation-wide delivery of telecommunications
services over traditional switched telecommunications networks, the Company in
January 1997 launched its marketing efforts and began to obtain customers for
its long-distance telecommunications services through I-Link. In June 1997
I-Link launched its multi-level marketing program, I-Link Worldwide, L.L.C., to
market its products and services to the residential and small business markets.
Through its marketing activities and through strategic acquisitions of existing
customer bases, I-Link will aggressively seek to enlarge its overall customer
base. The I-Link services will initially be delivered across existing switched
telecommunications networks; then, as I-Link's Intranet technology becomes fully
deployable and reaches targeted customer-base size in given geographic areas,
customer traffic in those areas will be moved from the traditional switched
telecommunications networks to the network of dedicated lines I-Link has
established and over which its proprietary technology is deployed (the "I-Link
Intranet"). The move from the traditional switched telecommunications network to
the I-Link Intranet is transparent to the customer and will result in a
significant reduction in the cost of delivering the services, both increasing
profitability and permitting I-Link to offer increased savings to its customers,
as well as differentiating I-Link and its services in a highly commoditized
market. I-Link believes this strategy of building customer bases in geographic
areas on traditional switched networks and transitioning the traffic to the
I-Link Intranet as the size of the customer base increases will result in the
most cost effective nation-wide deployment of the I-Link Intranet.
Currently, I-Link's communications products and services (the
"I-Link Services") are primarily delivered over the traditional switched
telephone network at discounted pricing levels based upon existing contracts
with national
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carriers. Within certain geographic areas in the Intermountain West where the
number of I-Link customers is greatest, the I-Link Services are now delivered
over the I-Link Intranet. As the customer bases in other geographic areas
increase, the I-Link Intranet will be expanded to include those areas, and the
delivery of the I-Link Services in those areas will be diverted from the
traditional switched telephone network to the I-Link Intranet. The following is
a description of how the I-Link Services are delivered using the I-Link
Intranet and technology.
The I-Link Intranet and technology enable the user to employ its
existing telephone and fax machine to call or send a fax long-distance to its
ultimate destination with a significant savings on long-distance telephone
charges. Transmission takes place primarily via flat rate-based data lines which
comprise the I-Link Intranet such as those found on the Internet. No special
telephone or fax equipment is required for the user. The person who receives the
call or fax does not need to be a subscriber to the I-Link Services and does not
need any equipment other than a conventional telephone or fax machine to receive
the call or fax. The call and fax arrive in the same amount of time, and the fax
in the same form, as with a conventional telephone/fax transmission.
I-Link pursues a multi-tiered infrastructure strategy. In some
cases, I-Link has and will continue to establish its own local sites. In others,
I-Link will partner with nationally recognized telephone service resellers and
Internet Service Providers ("ISPs"), incenting those organizations to provide
the needed local site consistent with I-Link's service requirements. I-Link will
continue to establish its own local sites incrementally as growing customer
base and business needs dictate. Installation of the local sites is a relatively
simple process involving pre-configured Communication Engines (consisting of
computer and networking hardware and proprietary software) and communications
lines.
I-Link will use I-Link Intranet Operations Centers ("NOCs") to
monitor and maintain the I-Link Intranet. Successful management of the I-Link
Intranet is critical to providing the highest level of support.
The Communication Engine(TM) represents I-Link's patent pending
technology. This technology provides the method which enables a conventional
telephone or fax machine to communicate with another conventional telephone or
fax machine via I-Link's proprietary Intranet (a data communication network
similar to the Internet), that uses the TCP/IP communications protocol.
TCP/IP is the communications protocol that allows a computer to access and
communicate over data communication networks such as the I-Link Intranet as well
as the Internet. Communication Engines are located at I-Link local sites which
cover strategic local dialing areas and provide the service infrastructure.
Thus, cost for the transmission is the user's cost of a local call plus access
to the I-Link Intranet, similar to current computer access to the Internet.
By way of illustration, a subscriber in Los Angeles wishing to call
or send a fax from Los Angeles to Dallas simply dials the desired number in
Dallas. The call or fax is immediately and transparently routed to a local
Communication Engine located at I-Link's Los Angeles site. The Los Angeles
Communication Engine receives the call or fax, then routes it for delivery by
area code and local exchange prefix to the appropriate Communication Engine in
Dallas via the I-Link Intranet. A local phone call to the recipient telephone or
fax machine is placed by the Dallas Communication Engine, and the call or fax is
delivered. A report of the transaction, including notification of receipt and/or
any error handling, is sent to the Los Angeles subscriber.
The Methodology. The I-Link Services are founded on patent pending
technology that allows conventional telephones and fax machines to communicate
via TCP/IP driven networks. This means that devices such as telephones or fax
machines can be used as they currently are used, but users will no longer need
to access communications lines that charge distance-based rates. A subscriber
can call or transmit faxes via the I-Link Intranet outside local dialing areas
for the cost of a local call. This technology is housed in an I-Link
Communication Engine at an I-Link local site. In addition to connecting devices,
the engine provides self-diagnostic software designed to prevent service
failure. And, it stores data and statistics on account information and system
usage, allowing I-Link to immediately monitor capacity and enhance
functionality.
The I-Link Network receives traffic from the public switched
telephone network ("PSTN") as a TDM stream (time division multiplexing) and
converts it to IP (internet/intranet protocol) data packets. The data is
converted from the PCM (pulse code modulation) format standard to traditional
telephony to an I-Link proprietary coding. The I-Link proprietary coding can
distinguish among and handles voice, fax and modem communications differently.
Voice is
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compressed using a voice coder or codec, fax and modem traffic are
demodulated/modulated. The data can then be stored (such as recording a
message), altered (as in changing a fax call from 14400 BPS to 9600 BPS) or
redistributed to multiple recipients (as in the case of conferencing).
Market Opportunities
Virtually every home and business in the United States today uses
long-distance telephone services. Even though competition between the various
providers of long-distance telephone services is intense, I-Link believes the
significant cost savings that can be achieved through the deployment and
implementation of the I-Link Network and technology, together with additional
enhanced services that can be offered to the customer by virtue of the I-Link
Intranet and technology, will make I-Link highly competitive in this
marketplace. I-Link targets residential and small-business customers for its
"I-Link" branded services through I-Link Worldwide, L.L.C., a nationwide,
multi-level marketing and sales program. Marketing and sales of the "I-Link"
branded products to larger business users will be carried out by traditional
sales agents. I-Link wholesales its services on a non-branded basis to various
distributors, aggregators, resellers and member organizations that then resell
the products to both residential and business end-users. I-Link will also lease
excess capacity on its network to long-distance carriers.
Opportunity to Provide Substantial Savings to Users. Utilization of
the I-Link Services will afford the opportunity to substantially reduce the
long-distance telephone and data transmission charges presently borne by the
current user of long-distance telephone and fax services. Charges for the use of
land-line networks traditionally used in long-distance telecommunications
are generally based on time and distance, often resulting in substantial
long-distance charges. In contrast, the charges associated with the new data
communications networks (such as I-Link's Intranet and the Internet) are
generally fixed.
Integration of Distinct Networks. There are currently a number of
distinct information-transmission networks. Telephone, cable, wireless, and
private and public networks are primary examples. Technologies supporting these
networks will continue to integrate and evolve, allowing for previously
unavailable opportunities for information distribution and access. The current
business infrastructure presents impediments to the easy use of those networks.
For example, in the fax industry there is a proliferation of fax or fax-like
communication technologies, including fax machines, fax servers, fax software
and e-mail. But these technologies are not well integrated; a party wishing to
send information to others may have to format and send the data several
different ways depending on the messaging equipment and systems available to the
recipients.
Opportunity to Deliver Enhanced Capabilities. The TCP/IP networking
protocol and new transmission media such as are often associated with a data
communications network such as I-Link's Intranet or the Internet ("Data
Communications Network") offer the possibility of substantially reduced cost and
improved data communication. However, as highlighted above, telephones and fax
machines are not TCP/IP-enabled. In the past, in order to take full advantage of
the TCP/IP protocol and the Data Communications Network, users first must own or
have access to a computer, and then obtain access to the Data Communications
Network. Therefore, telephones and fax machines have used traditional land-line
telecommunications networks to transmit their voice and data. Charges for the
use of those traditional networks are generally based on time and distance,
often resulting in high long-distance charges. In contrast, the charges
associated with the new Data Communications Networks are generally fixed.
Market Response. Many of the responses seen in the marketplace to
the opportunities discussed above are problematic in that they are often
computer-oriented. Solutions typically require that a user (i) own a personal
computer; (ii) have access to a Data Communications Network; and (iii) have
software compatible with software other users own. This significantly limits the
market for the solution. Moreover, the responses often follow a product approach
rather than a service approach. The product approach, usually modeled after the
same approach followed by computer software vendors, imposes further
requirements on the user. The approach requires version management, with users
required to ensure that their software is current; it requires training, and
re-training as procedures change; and gives a customer an interface-driven
product that often has more capacity than a user needs. I-Link's strategic
response to the market is to provide, above all, a true service-based approach,
providing customers access to a Data Communications Network via their existing
telephones and fax machines and offering an array of enhanced services.
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The Residential Market
I-Link, through I-Link Worldwide, L.L.C., has targeted all
residential users, initially throughout North America, through the establishment
and implementation of a multi-level marketing and sales program, providing
individuals the opportunity to earn commissions on the sale of the I-Link
Services to their neighbors and acquaintances. A large amount of interest in
I-Link has been generated throughout the multi-level, network marketing
industry, and I-Link believes a significant market opportunity exists through
the exploitation of this marketing and sales channel to reach a large number of
potential residential customers. I-Link formally launched its multi-level sales
operation and began marketing in this channel in June 1997.
The Business Market
Management of I-Link categorizes its domestic and international
target user markets as follows: (i) small and medium sized businesses (less than
500 employees); (ii) large businesses (500 or more employees); and (iii)
vertical markets. I-Link's primary target market consists of small and medium
sized businesses. Small and medium-sized businesses often have a difficult time
obtaining and using technology. Typically, they lack the resources and/or
expertise needed to obtain strategic advantage from state-of-the-art technology.
Although I-Link defines small and medium-sized businesses as businesses with
less than 500 employees, it is also important to note that departments or
offices within larger businesses may also be placed in this category. Larger
businesses can dedicate resources and/or funds to technology customization or
even technology development. Smaller businesses often must accept off-the-shelf
solutions designed for general use. I-Link believes that its services are of
significant strategic advantage to small businesses. Without having to adopt new
technology or procedures, small and medium-sized businesses can immediately save
money crucial to their bottom line. Large businesses and high-end national
accounts (Fortune 2000) have significant long-distance telephone and fax
traffic. Management believes those businesses could realize substantial savings
from I-Link's services.
Distribution Plan
I-Link will target the following distribution methods:
(i) multi-level marketing and sales program; (ii) direct sales using independent
sales agents; (iii) selling through independent telephone company, or "Telco",
resellers; (iv) acquisition of smaller carriers with established customer bases;
(v) selling through Internet service providers ("ISPs"); (vi) selling through
cable/broadcasting companies; (vii) selling through direct sales organizations;
(viii) direct sales to top national accounts and vertical market resellers
("VMRs"); (ix) established channels of distribution in the retail
computer/technology markets; (x) leveraging OEM channels; and
(xi) telemarketing/telesales.
Multi-Level Marketing and Sales Program. I-Link, through I-Link
Worldwide, L.L.C., has targeted all residential and small-business users,
initially throughout North America, through the establishment and implementation
of a multi-level marketing and sales program, providing individuals the
opportunity to earn commissions on the sale of the products to their neighbors
and acquaintances. A large amount of interest in I-Link has been generated
throughout the multi-level, network marketing industry, and I-Link believes a
significant market opportunity exists through the exploitation of this marketing
and sales channel to reach a large number of potential residential customers.
I-Link formally launched its multi-level sales operation and commenced marketing
in this channel in June 1997.
Direct Sales. I-Link intends to use independent sales agents for
direct sales of I-Link's products on a commission basis.
Reselling. It is I-Link's intention to offer telephone service
resellers, cable and broadcast companies, ISPs and direct sales organizations
significant partnering opportunities. In January 1997 I-Link entered into a
reseller agreement with WealthNet Corporation ("WealthNet") (a co-op member
organization) under the terms of which I-Link sells its products and services to
WealthNet, and WealthNet markets and resells these products and services to its
members and potential WealthNet members. Other reseller agreements are currently
in negotiation. By adding I-Link services to their current list of services,
these potential partners enhance their competitive position in highly
competitive and increasingly fragmented markets.
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Acquisition of Smaller Carriers. In January 1997, the Company
acquired Family Telecommunications Incorporated (now renamed I-Link
Communications, Inc.), a regional long-distance carrier with an established
customer base in excess of 17,000. This acquisition brought to I-Link an
existing customer base, useful facilities and established industry
relationships, and afforded FTI the means to differentiate and enhance the
products and services it could offer to existing and potential customers in a
highly competitive marketplace. I-Link believes that there exist numerous other
local and regional carriers with established customer bases and facilities that
could be acquired in the same manner. I-Link intends to continue to seek out
these opportunities provided it is able to negotiate terms that are in the
Company's best interest.
Retail Channels. Suppliers of telecommunications equipment, such as
office equipment stores, computer dealers, and office supply superstores
represent a direct interface to many targeted I-Link customers. For example,
over 20% of fax machines are purchased from office equipment dealers or supply
superstores. This represents a significant, well-established channel for I-Link.
I-Link can also create a fax driver that allows a customer to both subscribe to
I-Link's service and interface with existing fax software. This gives I-Link a
"fax service in a box" capability and a shelf presence.
OEM Channels. Market building with OEMs (original equipment
manufacturers) also represents significant opportunity to I-Link. Sales
incentives will motivate OEMs to provide a highly targeted marketing channel for
I-Link campaigns.
Telemarketing. I-Link will use the telemarketing and telesales
channel employed by many service providers. As in the example of current
business communications providers, I-Link will directly contact customers in
strategic markets, stressing the significant cost benefits associated with
I-Link services while fielding sales inquiries derived from advertising.
Technology Issues
I-Link has established Communication Engines at strategic locations
in the United States to allow subscribers to access I-Link's network locally,
and intends to continue to establish Communication Engines in other strategic
locations both in North America and worldwide as the customer base warrants. The
I-Link Intranet is a high-speed interconnected network of Communication Engines.
I-Link has created this network by leasing high-speed data lines and/or
partnering with existing communications and Internet service entities that
currently provide access to such lines.
Capacity. Capacity, or lack thereof, is a frequently discussed topic
with regard to data transmission via Data Communications Networks such as the
Internet. "Slow service" resulting from inadequate capacity is one of the common
complaints among Internet users. Capacity is a function of "bandwidth" on the
network or the ability of the infrastructure to carry potentially large amounts
of data to and from large numbers of users.
The I-Link Intranet is leased from large IXCs with rigorous
performance standards and managed by I-Link. In some cases, parts of the network
may be contractually provided by other entities in the future. Management
believes I-Link has the ability to monitor and manage all of its network
capacity. I-Link Communication Engines monitor and store statistical
capacity-related data. Transmission locations, transmission size, and
transmission times are easily stored and accessed by the I-Link Intranet. An NOC
monitors data and can immediately detect when utilization levels are high.
I-Link can then add capacity as needed. Because I-Link data is associated with
specific capabilities (e.g., faxes) and is transmitted between (and encoded and
decoded by) I-Link Communication Engines, the type and purpose of the data is
well understood and "overhead" bandwidth needs are better addressed. Data
segmentation gives the Communication Engines additional ability to maximize
capacity. As a result I-Link uses bandwidth up to four times as efficiently as
traditional telephony and fax systems do over the same medium.
Security. Security is a major concern associated with data
transmission across Data Communications Networks. I-Link controls the routing of
data from one Communication Engine to another. Management believes that I-Link's
system provides a measure of security that actually makes phone and fax
transmission more secure than using traditional facsimile methods.
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Competition
The market for business communications services is extremely
competitive. I-Link believes that its ability to compete in I-Link's business
successfully will depend upon a number of factors, including the pricing
policies of competitors and suppliers; the capacity, reliability, availability
and security of the I-Link Intranet infrastructure; market presence and channel
development; the timing of introductions of new products and services into the
industry; ease of access to and navigation of the Internet or other such Data
Communication Networks; I-Link's ability in the future to support existing and
emerging industry standards; I-Link's ability to balance network demand with the
fixed expenses associated with network capacity; and industry and general
economic trends.
While I-Link believes there is currently no competitor in the North
American market providing the same capabilities in the same manner as I-Link
will offer using the I-Link Intranet, there are many companies that offer
business communications services, and therefore compete with I-Link at some
level. These range from large telecommunications companies and carriers such as
AT&T, MCI, Sprint and LDDS/WorldCom, to smaller, regional resellers of telephone
line access. These companies, as well as others, including manufacturers of
hardware and software used in the business communications industry, could in
the future develop products and services that compete with those of I-Link on a
more direct basis. These entities are far better capitalized than I-Link and
control significant market share in their respective industry segments. In
addition, there may be other businesses that are attempting to introduce
products similar to I-Link's for the transmission of business information over
the Internet. There is no assurance that I-Link will be able to successfully
compete with these market participants.
Government Regulation
General. Traditionally, the Federal Communications Commission (the
"FCC") has sought to encourage the development of enhanced services as well as
Internet-based services by keeping such activities free of unnecessary
regulation and government influence. Specifically in the area of
telecommunications policy and the use of the Internet, the FCC has refused to
regulate most online information services under the rules that apply to
telephone companies. This approach is consistent with the passage of the
Telecommunications Act of 1996 ("1996 Act") which expresses a Congressional
intent "to preserve the vibrant and competitive free market that presently
exists for the Internet and other interactive computer services, unfettered by
Federal or State regulation."
Federal. The FCC does not regulate value-added networks ("VANs"),
software or computer equipment that offer customers the ability to transport
data or voice messages over telecommunications facilities. By definition, VAN
operators purchase transmission facilities from "facilities-based" carriers and
resell them packaged with packet transmission and protocol conversion services.
Under current rules, such operators are excluded from regulation that applies to
"telecommunications carriers" under Title II of the Communications Act.
In the wake of the 1996 Act, however, the FCC is revisiting many of
its past decisions and could impose common carrier regulation on the transport
and resold telecommunications facilities used to provide telecommunications
services as a part of an enhanced or information service package. The FCC also
may conclude that I-Link's protocol conversions, computer processing and
interaction with customer-supplied information are insufficient to afford the
Company the benefits of the "enhanced service" classification, and thereby may
seek to regulate the Company as a common carrier/telecommunications service
provider. While there are no present indications that the FCC plans to make
either of these determinations, such decisions are within the agency's statutory
discretion and could affect the manner in which the Company conducts its
business.
To the extent I-Link customers move their services off the
facilities of existing long distance carriers, and increase their reliance on
the Internet for transmission, I-Link will continue to enjoy minimal federal
regulation under current rules. Historically, the FCC has not regulated
companies that provide the software and hardware for Internet telephony, or
other Internet data functions, as common carriers or telecommunications service
providers. Moreover, the FCC recently concluded that information and enhanced
service providers are not required to contribute to federal universal service
funding mechanisms.
Notwithstanding the current state of the rules, the FCC's
theoretical jurisdiction over the Internet is broad because the Internet relies
on wire and radio communications facilities and services over which the FCC has
long-
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standing authority. The FCC's existing framework for "enhanced services"
confirms that the FCC has authority to regulate these services, but provides
that carrier-type regulation would not serve the public interest. Only recently
has this general approach been questioned within the industry.
In March 1996, for instance, America's Carriers Telecommunications
Association ("ACTA"), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking that
the FCC regulate Internet telephony. ACTA argued that providers of software that
enable real-time voice communications over the Internet should be treated as
common carriers and subject to the regulatory requirements of Title II of the
Communications Act. The FCC sought comment on the request and has not yet
issued its decision.
Any FCC determination that Internet-based service providers should
be subject to some level of Title II regulation could affect the manner in which
I-Link operates, to the extent it uses the Internet to provide facsimile or
voice capabilities, as well as the costs of complying with federal common
carrier requirements. With the passage of the 1996 Act, the precise dividing
line or overlap between "telecommunications" and "information" services as
applied to Internet-based service providers is uncertain. Consequently, I-Link's
activities may be subject to evolving rules as the FCC addresses novel
questions presented by the increased use of the Internet to offer services that
appear functionally similar to traditionally-regulated telecommunications
services. At this time, it is impossible to determine what effect, if any, such
regulations may have on the future operation of the Company.
State. While states generally have declined to regulate enhanced
services, their ability to regulate the provision of intrastate enhanced
services remains uncertain. The FCC originally intended to preempt state
regulation of enhanced service providers, but intervening case law has cast
doubt on the earlier decision. Moreover, some states have continued to regulate
particular aspects of enhanced services in limited circumstances, e.g., to the
extent they are provided by incumbent local exchange carriers.
Whether the states within which I-Link makes its Intranet services
capabilities available will seek to regulate I-Link's activities as a
telecommunications carrier will depend largely on whether the states determine
that there is a need for or other public benefits of such regulation. The staff
of the Nebraska Public Service Commission, for example, recently informally
concluded that an Internet telephony gateway service operated by a Nebraska
Internet Service Provider was required to obtain state authority to operate as a
telecommunications carrier. The FCC has authority to preempt state regulation
that impedes competition; it has not, however, had occasion to consider this or
similar decisions. Under certain circumstances, the FCC may have occasion to
preempt state regulation. This issue has not yet been squarely placed before the
FCC for resolution.
Delivery of Services Over Existing Switched Telecommunications Networks
Approximately half of I-Link's communications services are currently
delivered over existing switched telecommunications networks through I-Link
Communications, Inc. (formerly named Family Telecommunications Incorporated, and
for clarity and ease of reference referred to herein as "FTI"). FTI is a
long-distance telecommunications carrier that provides long-distance service to
most states of the United States. In January 1997 FTI was acquired by the
Company in a share exchange transaction. Through this acquisition FTI provided
the Company with an existing customer base in excess of 17,000 and, through
FTI's contractual agreements with MCI Telecommunications Corporation ("MCI") and
telephone facilities and equipment owned and operated by FTI, access to the
switched telephone network at favorable rates. Access to the switched telephone
network is a necessary component of the I-Link Intranet in order for phone and
fax transmissions to be routed to destinations in lesser populated geographic
areas that are not serviced by one of I-Link's Communication Engines, which the
Company estimates encompasses approximately 15% to 20% of users nationwide. In
addition, the access to the switched telephone network at favorable pricing that
FTI affords to I-Link permits I-Link to rapidly develop and expand its customer
bases in given geographic areas across the switched telephone network until such
time as management determines the size of the customer base and the capacity and
timing of the deployment of the I-Link Intranet in the area can support the
transfer of the customers from the switched telephone network to the I-Link
Intranet.
FTI was incorporated under the laws of the state of Utah in 1996,
and maintains its principal place of business in Phoenix, Arizona. FTI also
maintains facilities in Salt Lake City, Utah. Through its Carrier Agreement with
MCI,
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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. By accessing the MCI network,
services are available to telephone users in the 48 continental states. FTI is
now in the process of obtaining state approval to offer its services in Alaska
and Hawaii. Customers using Bell South, Bell Atlantic, Ameritech, GTE Corp.,
NYNEX Corp., Pacific Telesis Group, US West, Southwestern Bell, Sprint United
LTD, SNET, ALLTEL Corp., Rochester Telephone Corp., Cincinnati Bell Telephone,
and Citizens as their local telephone company are being offered the FTI long-
distance programs. This represents approximately 97% of all telephone lines in
the United States; however, there can be no assurance FTI will be successful in
attracting new customers or increasing its market share.
FTI currently maintains switch facilities in twelve states. This
equipment allows FTI to offer additional services in the geographic areas 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.
Approximately 89% of FTI's revenues for 1996 consisted of sales to
one marketing group. The agreement between FTI and the marketing group was
modified effective January 1, 1997 and terminates on December 31, 1997 with
additional one-year terms unless either party gives the other party written
notice of its intent not to renew. The terms of the agreement call for variable
pricing based on volume, while the marketing group retains risks associated with
collection from the consumer. Though the agreement with the marketing group is a
significant portion of FTI's 1996 revenues, this agreement is expected to be of
decreasing significance to the consolidated operations of the Company in the
future.
Telephony Industry Description & History
The telecommunications industry today is an interconnected network
consisting of four corporations (AT&T, MCI, Sprint and LDDS/WorldCom) that
together control a significant majority of the interexchange market, and
hundreds of smaller companies. In recent years, the industry has changed
dramatically due to divestiture, deregulation, and technological innovation.
For most of this century, the industry was divided between the Bell
System, companies owned by or affiliated with AT&T, and the 1,600 or so local
telephone independents, companies not affiliated with AT&T, but often components
of large non-Bell holding companies. Although the independents served more
geographic areas, the Bell System accounted for more than 80% of the telephones
and provided most of the intermediate long-distance toll lines. In the 1970's,
the picture began to change when several smaller companies began to offer
long-distance services to customers in direct competition with AT&T, usually at
lower prices. Due to this competition, the projected growth of the markets, and
rapid technological changes, among other factors, the Department of Justice in
1974 filed an antitrust suit against AT&T alleging monopolistic practices. The
settlement of the suit that occurred in January 1982 mandated that AT&T spin-off
the local telephone companies into seven regional independent operating
companies (the "Baby Bells") that would remain monopolies in their respective
territories, but would be prohibited from selling long-distance services that
crossed geographic boundaries, and permitted AT&T to keep its manufacturing,
research and development, and interexchange assets. Beginning in 1984, the Baby
Bells were required under the settlement to provide access to all long-distance
carriers "equal in type, quality and price" to that provided to AT&T.
The AT&T spin-off and the equal access regulation has enabled the
long-distance telephone industry to experience significant growth. The telephone
system that has been developed is referred to as a "switched network." In a
switched network the phone call first goes from the terminal (the telephone,
computer or printer) over local lines to a local switch (the local exchange).
The telephone number dialed tells the switch whether the destination is inside
or outside the exchange. If the call is directed to a phone within the exchange,
the switch will send an electronic signal to the number being called. Once the
phone is picked up, the connection is made. If the called number is outside the
exchange, the switch will send the call signal over a trunk line to the switch
in the correct exchange and that switch will signal the phone at the destination
in order to make the connection. The central office is owned by the local phone
company and contains switching equipment that is hardwired to every telephone in
its area. In addition, it has trunk cables that connect the central office to
other central offices. In a seven-digit telephone exchange number, the first
three digits of every phone number designates the local area served by the
central office. Several central offices, and, therefore, several exchange
numbers, are grouped together to form calling areas serviced by the local phone
company.
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Often the telephone call is a destination number that crosses a
boundary between groups of central offices, known as the Local Access and
Transport Area (LATA). There are well over a hundred LATAs in the U.S. The area
code dialed signals the local switch that an interexchange or inter-LATA or toll
or long-distance call is to be terminated. The local switch then sends the call
to a toll switch, which directs the call over toll, long-distance, or
interexchange network lines to the toll switch at the destination city. That
switch, in turn, directs the call to the proper local exchange switch which
signals the phone at the number dialed. At present, most transmission on the
local level is by means of copper wires, coaxial cable or fiber optics, but
long-distance communication also takes place by means of wire cable, terrestrial
or satellite radio, or by a combination of transmission media. The trend is to
replace these other media with fiber optics for more flexible services.
The most common method of making long-distance calls is to first
dial a "1" plus the number to be called. The number includes an area code
destination comprised of three digits, followed by the three digit telephone
exchange and then the four digit location. The call goes first to the local
phone company central office and then it is handed off to the long-distance
carrier chosen by the customer. At the terminating end of the call, it is passed
back to the local phone company in the terminating area code for completion.
Both local telephone companies collect access charges from the long-distance
carrier for these services. Whenever an interstate call is preceded by a "1" and
an area code, the local phone company hands the call off to a long-distance
carrier, who will complete the call. The local telephone company knows that a
long-distance call must be handed off when the number dialed has ten digits.
Although the telecommunications industry was originally developed to
send electronic analog signals representing the speech pattern of the person
talking, the industry is evolving from the analog pattern to a digital network.
Digital lines provide higher quality service and, because of the computer
technology, make it possible for switches and lines to handle many times more
calls at one time than they could previously. The only significant part of the
telephone system that is still analog today is from the phone to the central
telephone office.
While a monumental step, the AT&T breakup and the creation of the
independent Regional Bell Operating Companies ("RBOCs") originally did nothing
more than reshape the existing ownership. Initially, the breakup left AT&T with
a near monopoly on long-distance service. It was the requirement of "equal
access" that led to the birth of a competitive long-distance market in the U.S.
As part of the settlement, the Department of Justice required that the Bell
Operating Companies (BOCs) offer their customers access to all long-distance or
interexchange carriers ("IXCs"), not just AT&T. Under "equal access," the phone
subscribers were given the opportunity to preselect the "long line" carrier of
their choice and, thereafter, to obtain from their BOC automatic access to that
preselected IXC.
With deregulation and its concomitant "equal access" requirement,
the number of independent long-distance carriers in the United States has grown
from the handful existing ten years ago to over 600 IXCs today, which control
close to one-half the market share in terms of long-distance or interexchange
minutes. The bulk of the market capture was accomplished by MCI, Sprint and
LDDS/WorldCom through extensive and mass advertising campaigns and the ability
to offer service throughout the entire U.S. These three carriers have priced
their product at approximately the same price or just below that of AT&T. The
smaller carriers have captured only a small portion of this new market.
Management believes this is largely due to two factors. The first is the
inability to offer service throughout the U.S. Instead, most small carriers can
only offer service to a small geographic location and thus have a limited number
of customers from which to draw. The second reason is the lack of resources to
commit to large advertising campaigns. The smaller carriers have captured market
share basically by offering prices that are substantially below those of the
largest four carriers.
The FCC has extensive authority to regulate long-distance carriers
and has the power to review requests for interstate rate changes and other
aspects of a carrier's operations. It has generally not exercised this power to
review changes in the domestic charges of the smaller carriers that compete with
the big four. The FCC has generally allowed competition to be the determinant of
the prices these small competitors charge. Moreover, except in certain
circumstances, the FCC increasingly has sought to reduce the level of regulation
on all interstate service providers, including AT&T.
In recent years, the European Commission has opened Europe's
nationalized telecommunications industry to free market competition. Much like
the AT&T breakup, the operation of basic local telephone services has been left
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to each country's current national carrier, with "deregulation" focused on the
more lucrative long-distance and value-added (e.g. data transmission) markets.
Competition in the Switched Network Market
FTI's competition in the switched network market is all other
long-distance providers. Due to the number of regional and local carriers, the
number of competitors varies by geographic region. However, the principal
competition is the big four carriers, AT&T, MCI, Sprint, LDDS/WorldCom and local
regional Bell companies. With these carriers controlling the vast majority of
the market share throughout the U.S., the majority of the potential customers to
which FTI's products and services are marketed to are customers of one of these
carriers. The competitive advantages these four largest carriers have are
primarily pervasive nationwide networks, name recognition, operating histories,
and substantial advertising resources.
Federal Regulation
FTI competes in an industry that, to a large degree, continues to be
regulated by federal and state governmental agencies. At approximately the same
time as the required divestiture of the BOCs from AT&T in 1984, the FCC
announced rules that were created to foster a self-regulating interstate
telecommunications industry, relying upon competitive forces to keep rates and
services in check.
The FCC has regulatory jurisdiction over interstate and
international telecommunications common carriers, including FTI. Since 1981, the
FCC has sought to deregulate substantially the interstate activities of
non-dominant interexchange carriers such as FTI. For instance, in addition to
subjecting non-dominant carriers to streamlined regulation, on numerous
occasions the FCC has attempted to exempt non-dominant carriers from federal
tariffing requirements altogether. Most recently, the FCC sought to forebear
from imposing tariffing requirements on the domestic telecommunications
offerings of non-dominant carriers pursuant to Section 10 of the 1996 Act. The
FCC's order taking this action, however, was stayed by the United States Court
of Appeals for the District of Columbia Circuit on February 13, 1997. FCC rules,
therefore, continue to require interstate service providers to tariff their
service offerings at the FCC.
In addition to various annual filing requirements, interstate common
carriers also are required by federal law to ensure that their rates are
reasonable and do not discriminate unreasonably among and between
similarly-situated customers. Moreover, facilities-based interstate carriers are
subjected to additional reporting requirements not imposed on interstate service
resellers.
Interstate Access Transport Proceeding
In an effort to encourage competition in the provision of interstate
access services, the FCC granted increased pricing flexibility to its local
exchange carriers for "access transport" services. Access transport refers to
the connection provided by local exchange carriers between long distance
carriers' long distance facilities and the customer's telephone. These rate
structures previously were designed such that local telephone companies assessed
an equal charge per unit of access to all long distance carriers, regardless of
the volume of local access that these long distance carriers independently
generated. Under the new FCC pricing plan, adopted in the fall of 1993, local
telephone companies were allowed to offer more cost effective access to those
long distance carriers with very high access volumes in a particular local
market. Accordingly, long distance carriers with lesser access requirements,
such as FTI, could experience increases in their overall average access cost
relative to larger competitors.
The FCC pricing plan implemented in the fall of 1993 was set to
expire in November 1995. In principle, the plan has been extended pending
implementation of the 1996 Act. Consideration of these issues has been delayed
as the FCC has sought to meet tight statutory deadlines imposed by the 1996 Act
on other matters. The FCC, however, is in the process of reconsidering the
federal access charge regime in a pending rulemaking proceeding. The Company is
unable to predict the course and effect of the FCC's actions on this issue at
this time.
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Recent Legislation
In February 1996, the Telecommunications Act of 1996 (the "1996
Act") was signed into law. The purpose of the 1996 Act is to promote competition
in all aspects of telecommunications. The 1996 Act requires telecommunications
carriers to interconnect with other carriers and to provide for resale, number
portability, dialing parity, access to rights-of-way and compensation for
reciprocal traffic. Additionally, incumbent local exchange companies ("ILECs")
are required to provide nondiscriminatory unbundled access, resale at wholesale
rates and notice of changes that would affect interoperability of facilities and
networks.
In August 1996, the FCC adopted a national regulatory framework for
implementing the local competition provisions of the 1996 Act, including
adoption of rules delineating interconnection obligations of ILECs, unbundling
requirements for ILEC network elements, requirements for access to local rights
of way, dialing parity and telephone numbering and requirements for resale of
and nondiscriminatory access to ILEC services. In many instances, the FCC left
the task of implementing the FCC's regulatory standards to the individual
states. Numerous states and ILECs have appealed the FCC's decisions and a
judicial determination of the legality of the FCC's interconnections rules is
pending at the United States Court of Appeals of the Eighth Circuit and there is
currently a stay in place on many of the FCC's interconnection rules promulgated
under the 1996 Act. A reversal of the legality of the FCC's decisions could
affect the development of local competition in the markets in which FTI
operates, as well as the pricing of services of interest to FTI. It also could
affect FTI's future plans to expand into new markets to the extent efficient
interconnection to local facilities is required for competitive market entry.
Pursuant to Section 254 of the 1996 Act, the FCC also recently
initiated a rulemaking to establish a new federal universal service mechanism,
and state authorities are revisiting the method by which universal service is
funded. The proceeding will determine the extent to which interstate carriers
will be required to contribute to federal universal service funds, as well as
their ability to draw universal service support. Resolution of the issues raised
in this proceeding will affect the cost of providing interstate service and the
way FTI conducts its business.
The 1996 Act also provides that RBOCs may provide long distance
service upon enactment that is out-of-region or incidental to: (1) audio/video
programming; (2) Internet for schools; (3) mobile services; (4) information or
alarm services; and (5) telecommunications signaling. In order for a BOC to
provide in-region long distance service, the 1996 Act requires the BOC to comply
with a comprehensive competitive checklist and expands the role of the U.S.
Department of Justice in the FCC's determination of whether the entry of a BOC
into the competitive long distance market is in the public interest.
Additionally, there must be a real facilities-based competitor for residential
and business local telephone service (or the failure of the potential providers
to request access) prior to a BOC providing in-region long distance service.
BOCs must provide long distance services through a separate subsidiary of at
least three years. Until the BOCs are allowed into long distance or three years
have passed, long distance carriers with more than five (5) percent of the
nation's access lines may not jointly market BOC resold local telephone service,
and states may not require the BOCs to provide intraLATA dialing parity.
Telecommunications companies also may provide video programming and
cable operators may provide telephone service in the same service area. The 1996
Act prohibits telecommunications carriers and cable operators from acquiring
more than ten percent of each other, except in rural and other specified areas.
The impact of the 1996 Act on FTI is unknown because a number of
important implementation issues (such as the nature and extent of continued
subsidiaries for local rates) still need to be decided by state or federal
regulators. However, the 1996 Act offers opportunities as well as risks. The new
competitive environment should lead to a reduction in local access fees, the
largest single cost in providing long distance service today. For instance, as
discussed above, the FCC has initiated a rulemaking to reform its system of
interstate access charges to make the pricing of interstate access more
compatible with the pricing principles of the 1996 Act and with federal and
state actions to open local networks to competition. The FCC proceeding will
affect the current pricing relationships between interstate carriers, such as
FTI, and ILECs. Specifically, it will determine what is paid to the ILECs for
access to their facilities and how it will be paid. While it is generally
expected that access charges will decrease under the new rules, it is impossible
to predict how the proposals may affect existing pricing relationships.
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Moreover, the removal of the long distance restrictions on the BOCs
is not anticipated to have an immediate significant impact on FTI because of the
substantial preconditions that must be met before the BOCs can provide most
in-region long distance services. Nevertheless, the entry of these local
telephone companies into long distance telecommunications services could result
in new competition and there is a possibility that the local telephone companies
will be able to use local access to gain a competitive advantage over other long
distance providers such as FTI.
State Regulation
In those states prohibiting intrastate resale, FTI may not engage in
intrastate operations and in those states where intrastate resale is permitted
(at least on an interLATA basis), FTI may be required to obtain state regulatory
certification prior to commencing operations. As of December 31, 1996, FTI had
received authorization to provide telecommunications services to its customers
in approximately 34 states and is applying for authorization to provide
telecommunications services to customers in other states. In addition, FTI is
required to maintain on file at the state regulatory commissions in those states
a tariff or schedule of its intrastate rates and charges. As FTI expands the
geographic scope of its direct dial long distance business, it may be required
to obtain additional state regulatory approvals to provide intrastate long
distance services.
Various state legislatures and public utility commissions are
considering a variety of regulatory policy questions which could adversely
affect FTI. At this time, however, it is impossible to determine what effect, if
any, such regulations, including the cost of compliance with such regulations,
may have on the operations of the Company.
BUSINESS OF THE MEDICAL IMAGING DIVISION
Radiological Diagnostic Services
The majority of the Company's revenue in 1996 and 1995 was derived
from owning and operating outpatient diagnostic imaging facilities in Florida.
This revenue was primarily generated from two subsidiaries operating magnetic
resonance imaging ("MRI") facilities. The Company is considering the sale of
such business in light of the Company's focus on the business of I-Link;
however, no final decision has been made with respect to any such sale and there
can be no assurance that such business will be sold.
On November 30, 1990, the Company closed on its limited partnership
offering of Medcross Imaging, Ltd. ("Partnership"). The Partnership was formed
for the purpose of purchasing a Philips T-5 MRI mounted in a mobile van to
provide services to health care facilities on the southwest coast of Florida.
The Partnership commenced operations in February 1991. During May and June 1992,
in a series of individual transactions, the Company acquired an additional
26.75% ownership interest in the Partnership. Prior to the acquisitions, the
Company had a 41.5% ownership interest. The Company increased its ownership of
the Partnership to 80.75% on October 1, 1993 and 81.75% on October 1, 1994. The
Partnership significantly upgraded the MRI to state-of-the-art performance in
August 1993 at a cost of over $250,000. The upgraded machine can now produce
better images in less time, thereby increasing the profit potential of the
mobile unit.
In June 1993, the Company purchased Waters Edge Scanning Associates,
Ltd., renamed "Tampa MRI" after the acquisition. Serving the Tampa, Florida
market, the acquisition of this facility was consistent with Medcross's "cluster
approach" of operating multiple MRIs in a single market or adjacent markets.
After the acquisition was complete, this MRI was upgraded for higher efficiency
and better images and the facility was remodeled.
In October 1994, the Company closed on the acquisition of a 75%
ownership interest in Urological Ultrasound Services of Tampa Bay ("UUSTB") from
Urology Ultrasound, Inc. Prior to the acquisition, the Company owned the other
25% ownership interest in UUSTB. The total consideration given for the 75%
partnership interest was $168,162. The purchase price was determined by arms
length negotiation and was paid in cash at the closing. The acquisition was
accounted for under the purchase method of accounting. UUSTB was organized on
September 9, 1987 and is in the business of providing mobile ultrasound services
to urologic patients in west central Florida. When the Company acquired the 75%
partnership interest in UUSTB from Urology Ultrasound, Inc., the partnership
cased to exist, and the Company immediately transferred all assets and
liabilities of the partnership, except cash of $115,603, to Urological
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Ultrasound Services of Tampa Bay, Inc., a wholly owned subsidiary of the
Company, formed for the purpose of this acquisition. Prior to the acquisition,
the Company recorded its share of income and loss on its 25% ownership interest
in UUSTB using the equity method. On May 1, 1995, the Company transferred all of
the assets and certain liabilities of Urological Ultrasound Services of Tampa
Bay, Inc. to Tampa MRI.
Regulatory and Legislative Developments
The Company's medical diagnostic businesses are subject to federal
law and various federal and state regulations. While the Company believes that
its operations comply with applicable regulations, the Company has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretation of laws will not adversely affect the Company's operations.
During the past several years, there has been increasing pressure
from federal and state regulatory and legislative bodies to prevent physicians
from referring patients to diagnostic imaging facilities in which they have an
ownership interest. Many prominent physicians, legislators, medical ethicists,
and others feel that ownership of imaging facilities can impair a physician's
judgment about the need for a diagnostic test. Studies have shown that
physicians who have an ownership interest in imaging facilities tend to refer
more patients for diagnostic testing than physicians who have no ownership
interest.
On the federal level, a physician self-referral bill was signed by
President Clinton in 1993. The bill bans physicians from referring Medicare
patients to imaging and almost any other type of diagnostic or therapeutic
outpatient medical facility in which they have an ownership or financial
interest, effective January 1, 1995. Many states, including Florida, Illinois,
Minnesota, New York, and New Jersey, have passed laws regarding physician self-
referral. Some simply require disclosure of ownership, while others restrict
physicians from referring to facilities in which they have an ownership
interest.
The Florida legislature enacted the Patient Self-Referral Act of
1992, effective April 8, 1992. This Act prohibits physician self-referral to
health care entities in which such physicians have a financial interest,
effective October 1, 1994. Management believes these legislative and regulatory
actions should have no material adverse effect upon the Company's existing
operations. However, the Self-Referral Act also imposed a fee cap, effective
July 1, 1992, limiting the technical and professional fees of all providers of
"clinical laboratory services, physical therapy services, comprehensive
rehabilitative services, diagnostic imaging services, and radiation therapy
services" to no more than 115% of the Medicare limiting charge for
non-participating physicians. The statute specifically excludes hospitals and
physician group practices from the fee cap provision and does not apply to
patients eligible for Medicaid or Medicare reimbursement.
Several lawsuits have been filed by various providers against the
State of Florida in both federal and state court alleging, among other things,
that the fee cap provision violates the Equal Protection Clause of the U.S.
Constitution and seeking to enjoin the state from enforcing the fee cap
provision. In July 1992, the United States District Court for the Northern
District of Florida granted a permanent injunction in a case entitled Panama
City Medical Center, Ltd., et al. vs. Robert B. Williams, et al. The State of
Florida appealed the decision granting the injunction and, on February 15, 1994,
the U.S. Court of Appeals for the Eleventh Circuit reversed the decision of the
lower court, finding that the fee cap provision did not violate the Equal
Protection Clause and ruling that the entry of the injunction was in error. A
motion for rehearing filed in the action has been denied and a petition has been
filed seeking appeal to the U.S. Supreme Court. On June 30, 1992, the Florida
Circuit Court, Second Judicial Circuit, enjoined the State of Florida from
enforcing the fee cap provision. The Company intervened as a party plaintiff in
the state court action. An injunction has been obtained preventing the State of
Florida from enforcing the fee cap. The State of Florida appealed the issuance
of that injunction. However, the Florida Supreme Court has dismissed the appeal
and the Circuit Court action has been dismissed.
The ultrasound services provided by the Company are related
specifically to urology. Approximately 80% of the Company's patients are covered
by Medicare. Therefore, changes in Medicare reimbursement rules and regulations
may have a significant impact on the profitability of the Company's ultrasound
operations. Reimbursement rates for procedures are set annually. The 1996
reimbursement rates for the procedures primarily performed by the Company were
increased from between 1.7% to 2.1% over 1995's reimbursement rates.
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On March 20, 1995, the Florida Medicare Part B carrier issued a
Final Local Medical Review Policy regarding procedures that can be billed by
independent physiological laboratories ("IPL"), the classification of the
Company's ultrasound operations. These changes do not allow the IPLs to receive
reimbursement from Medicare for the procedures performed by the Company after
April 30, 1995. On May 1, 1995, the Company transferred its ultrasound
operations to Tampa MRI.
Health Care Industry Competition
It is common for hospitals, physicians, physician groups, and others
in the health care field to form ventures to own and operate medical equipment.
The Company is in competition with such groups. There are many companies
offering general business consulting services. The companies that may compete
with the Company in the future and that currently offer consulting services may
be larger and have far greater financial resources than the Company. Also, if
the cost of a particular medical device is reduced and the utilization by
physicians increases, more hospitals will be able to afford to acquire their own
equipment rather than receive service on a shared basis.
Magnetic Resonance Imaging
MRI is a multi-billion dollar industry that has rapidly gained
acceptance by physicians throughout the nation. MRI is the imaging modality of
choice for soft tissue in the head, neck and spine. Over 3,000 MRI units have
been installed in hospitals, outpatient diagnostic imaging centers, physicians'
offices, and in mobile vehicles. At an estimated average of $900 per procedure,
the MRI market in the United States generates over $6 billion annually. New uses
for MRI are continually being developed. MRI is being used to a greater degree
than ever before to scan shoulders, knees, ankles, elbows, breasts, and even the
cardiac system.
The revenue from MRI services accounted for 70% of total revenue of
the Company in 1996 and 1995. Contracts with two hospitals that accounted for
41% and 40% of the revenue from MRI services in 1996 and 1995, respectively,
were due to expire on February 28, 1996. On December 5, 1995, the Company
renewed the contracts with the two hospitals effective October 1, 1995. The
agreements are substantially similar to the prior arrangements except with
respect to a change in the minimum arrangement and a reduction in per patient
charges. These contracts expired on February 28, 1997 and the Company intends to
pursue the retail MRI segment of the market although there can be no assurance
the Company will be able to do so.
Many of the MRI systems placed into operation in the market area of
the Company's existing MRI centers were purchased and operated by physicians.
For some physicians, it was the only way to gain access to this expensive
technology. For others, it was an opportunity to invest in a technology that
they use to help diagnose their patients' medical problems. The Company competes
for patient referrals from physicians with the other MRI centers located in its
immediate market area. Because physicians can no longer refer to entities in
which they have an ownership interest, the physicians have no financial
predisposition to refer to a given center. The Company's ability to obtain
referrals will be based upon the quality of its service and its ability to
obtain contracts to treat managed care patients. Three new MRI centers have
recently begun operations in the market area of Medcross Imaging, Ltd., which
will have a significant effect on the Company's ability to pursue the retail MRI
segment of the market. Tampa MRI has obtained over 40 managed care contracts
during 1996. While this has reduced the average per-patient charges, it has
increased the number of patients treated.
Ultrasound
On May 1, 1995, the Company transferred all of its ultrasound
operations to Tampa MRI. The ultrasound services are provided at each
physician's office under the physician's direction. The Company is not looking
to expand its operations outside of the current market area. There are two main
competitors in the Company's market area. Management believes that it will
maintain its referrals with the physicians offices and may even gain additional
physician referrals through its marketing efforts.
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Therapeutic Services
In the late 1980s, the Company was one of the industry leaders,
providing mobile kidney lithotripsy service throughout the southeastern United
States. Kidney lithotripsy is a non-invasive technique using shock waves to
disintegrate kidney stones. Other forms of kidney stone treatment include
surgical removal, drug treatment, endoscopic treatment, laser lithotripsy and
percutaneous treatment. The advantage of lithotripsy over surgery is that it can
be performed on an outpatient basis in about one hour at less than the cost of
the typical surgical procedure. In addition, lithotripsy has fewer complications
or side effects, less pain, and a substantially shorter recovery period.
The Company put the world's first mobile kidney lithotripter into
operation in 1986. During the next two years, the Company developed four
additional mobile kidney lithotripsy networks. In 1986, the Company coordinated
the development of one of the leading outpatient lithotripsy centers in the
nation which the Company managed under a management agreement. In 1992, 65% of
the ownership in the facility was sold to CORAM, a publicly held corporation. In
1994, the Company's responsibilities under the management agreement were reduced
to providing financial services. The annual revenue from this management
contract was also reduced from an average of approximately $180,000 to $47,100
per year. In 1995, the remaining 35% of the ownership in the facility was sold
to CORAM. In August 1995, the management agreement was terminated. The Company
has management agreements with three other owners of mobile kidney lithotripters
that operate in seven different states. The Company provides turn-key
operations, management, and financial services under its agreements with the
owning entities. The Company also provides the trained technicians who operate
the lithotripters and, when requested, the drivers who transport the equipment
between the using facilities. The Company does not expect any expansion or new
development efforts in the lithotripsy area.
The Company had a 70% ownership interest in International Prostate
Partners, formed in 1992. International Prostate Center - Cayman, Ltd., a wholly
owned Cayman Island subsidiary of International Prostate Partners, provided
transurethral microwave therapy ("TUMT") services in Georgetown, Grand Cayman,
for patients with benign prostate hyperplasia ("BPH"). The Company contracted to
provide a full range of management services, beginning in 1993, to International
Prostate Partners and International Prostate Center - Cayman, Ltd. Operations
began in January 1994. The patient case load was insufficient to support
operating expenditures. Therefore, the operations were closed down and the
equipment put in storage pending FDA approval. In August 1, 1995, the Company
sold its interest in the partnership and its Management Agreement was
terminated. In May 1996, the manufacturer received FDA approval. The Company has
proposed this technology to its existing lithotripsy clients; however, any
decisions to be made are pending Medicare reimbursement approval. No assurance
can be given by the Company as to when, or if Medicare reimbursement approval
will be received.
Foreign Sales and Service of Diagnostic Imaging Equipment
In January 1993, the Company formed Medcross Asia, Ltd., a wholly
owned subsidiary headquartered in Hong Kong. This subsidiary was formed to
identify opportunities for the Company to enter the medical field in the Far
East.
On January 7, 1994, the Company entered into a joint venture
agreement with China National Medical Equipment and Supplies Import & Export
Shenyang Corporation ("CNMC"). The joint venture company, Shenyang Medcross
Huamei Medical Equipment Company, Ltd. ("SMHME") is located in the People's
Republic of China. SMHME is 51% owned by the Company and 49% owned by CNMC.
SMHME imports used and refurbished CT scanners for resale to hospitals in the
province of Shenyang. SMHME also provides warranty service, including parts and
labor, for the machines it sells and intends to provide warranty service for
other machines already existing in the province. The Company's responsibilities
include locating, purchasing, refurbishing, and shipping used medical equipment
to SMHME. CNMC was required to contribute $380,000 in cash to SMHME of which
$260,417 has been contributed. Medcross contributed CT scanner equipment and
parts with an agreed upon value of $390,000 and a cost basis of $251,972 to
SMHME. The Company opened an office in Beijing to sell and service used CT
scanning equipment in the People's Republic of China outside the province of
Shenyang. In May 1995, the Company closed its Beijing office and is actively
pursuing the sale of such operations.
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DESCRIPTION OF PROPERTY
In September 1996, I-Link entered into a lease for 14,000 square
feet of space for its offices and other facilities in Draper, Utah pursuant to a
commercial lease dated September 11, 1996. The term of the lease is seven years
commencing November 5, 1996, subject to the right to extend for an additional
five years. The initial base rent is approximately $11,650 per month. I-Link has
delivered $215,000 in certificates of deposit to the landlord as a security
deposit under the lease. I-Link also leases several other spaces to house its
Communication Engines throughout the United States. Such spaces vary in size and
are rented on a month-to-month basis.
The Company currently occupies approximately 3,400 square feet for
its offices located in St. Petersburg, Florida on a month-to-month basis. The
Company leases approximately 2,400 square feet for its outpatient MRI center
located in Tampa, Florida. The lease for the medical facility expires May 31,
1998. The Company has the option to extend the medical facility lease an
additional two years.
FTI currently leases and occupies approximately 3,600 square feet of
office space in Phoenix, Arizona, pursuant to a commercial lease dated March 18,
1996. The lease term is four years and two months commencing March 18, 1996
beginning with a base rent of $3,598 per month and escalating to $4,498 per
month at the end of the lease. FTI also currently leases and occupies
approximately 5,100 square feet of office space in Salt Lake City, Utah,
pursuant to a commercial lease dated July 1, 1996. The lease term is five years
commencing July 1, 1996 beginning with a base rent of $5,313 per month and
escalating to $5,843 per month at the end of the lease.
MiBridge rents 1,800 square feet of office space in Eatontown, New
Jersey under a one-year lease effective May 1, 1997 at a cost of $2,000 per
month. After the initial term of the lease, MiBridge may continue occupancy of
its space on a month-to-month basis. MiBridge may cancel such lease without
penalty upon 30 days notice to the lessor.
LEGAL PROCEEDINGS
A Complaint was filed on April 12, 1996, by JW Charles Financial
Services, Inc. ("JW Charles") against the Company in Palm Beach County Florida
Circuit Court, JW Charles Financial Services, Inc. v. Medcross, Inc., Case No:
CL96-3218. JW Charles previously was issued a Common Stock Purchase Warrant
("Settlement Warrant") on or about November 3, 1994 by the Company. The
Settlement Warrant granted JW Charles the right to purchase from the Company
250,000 shares (331,126 as adjusted) of the Company's Common Stock (the
"Settlement Shares") subject to adjustment. On or about February 12, 1996, JW
Charles made written demand to the Company to invoke its rights to have the
Settlement Shares registered pursuant to the terms of the Settlement Warrant.
The Complaint alleged that the Company breached the terms of the Settlement
Warrant by failing to prepare and file with the Securities and Exchange
Commission, a registration statement covering such shares. JW Charles alleged a
breach of contract and requested specific performance, i.e., registering the
shares with the Securities and Exchange Commission, against the Company. JW
Charles also demanded damages in the amount of $2,728,478 plus interest,
reasonable attorneys fees, and forum costs.
On April 29, 1997, the Company executed a settlement agreement
relating to the settlement of the JW Charles lawsuit. The lawsuit was dismissed
upon payment of $600,000 to JW Charles in consideration for the purchase of the
Settlement Warrant. The Settlement Warrant was purchased by an investor group
(the Hardy Group) led by the Company's general counsel and its treasurer and
chief financial officer. The Company's funds were not used in the JW Charles
Settlement. In connection with the purchase of the Settlement Warrant, the
Company granted certain additional consideration to the Hardy Group, including
new warrants to purchase 175,000 shares of common stock at an exercise price
equal to or in excess of the conversion price of the Class C Preferred Stock
(i.e., $2.50 per share). Such warrants have registration rights and
anti-dilution provisions and are included in the Registration Statement of which
this Prospectus forms a part.
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1996 OFFERINGS
10% Notes Offering
Simultaneous with the closing of the I-Link Acquisition in February
1996, the Company completed a private placement of $1,000,000 in aggregate
principal amount of convertible promissory notes (the "10% Notes"). The 10%
Notes were payable upon the earlier of August 31, 1996 (subject to extension) or
the Company's receipt of proceeds of at least $4,000,000 from subsequent debt or
equity offerings. The 10% Notes bore interest payable semi-annually at the rate
of 10%. Up to $1,250 of each $50,000 in principal amount of the 10% Note was
convertible at any time at the option of the holder, into an aggregate of
350,000 shares of Common Stock at the rate of approximately $.0714 per share,
subject to certain anti-dilution adjustments; and such principal amount was
converted in August 1996.
The proceeds of the 10% Notes Offering were used to pay outstanding
accounts payable and other debts of I-Link. Commonwealth served as placement
agent for the 10% Notes and received a placement agent fee equal to 10% of the
purchase price of the 10% Notes Offering sold ($100,000) and a $20,000 expense
reimbursement to cover legal fees.
Class C Offering
On September 6, 1996, the Company closed a private placement of
240,000 shares of Class C Preferred Stock, $10 par value per share, at $60 per
share. Each share of Class C Preferred Stock entitles the holder to receive a
quarterly dividend of $1.20 (8% per annum) payable in cash or, at the option of
the Company, in shares of Common Stock of the Company. Unless previously
redeemed, the Class C Preferred Stock is convertible into shares of the
Company's Common Stock (the "Conversion Shares"), at the option of the holder,
commencing November 21, 1996, 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 eighteen months thereafter (the "Conversion
Price"). Unless previously redeemed, the shares of the Class C Preferred Stock
are automatically converted into the Conversion Shares on September 6, 2002 at a
Conversion Price equal to the lower of the then current Conversion Price or 50%
of the average closing bid price of the Company's Common Stock for the 10
trading days immediately preceding September 6, 2002.
In addition, the Company issued $717,000 of principal amount of
Convertible Promissory Notes payable on April 1, 1997 (the "Maturity Date") and
bearing interest at 8% per annum (previously defined as the "Convertible
Notes"). The Convertible Notes provide for the accrual of interest at the simple
annual rate of 8%, payable quarterly (18% following the Event of Default which
remains uncured). The unpaid principal balance of the Convertible Notes may be
prepaid by the Company without penalty upon 30 days' notice to the holder;
provided, however, that certain conditions be met. The unpaid principal amount
of a Convertible Note will be automatically converted into shares of Class C
Preferred Stock at any time prior to the close of business on the Maturity Date
at the rate of $60 per share of Class C Preferred Stock upon certain conditions
being met. See "Description of Securities--Convertible Promissory Notes."
The Company received net proceeds of approximately $12.3 million
from the Class C Offering, after commissions and other expenses related to the
offering.
As a result of the closing of the private placement, 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 Associates (previously defined and hereinafter referred
to as "Commonwealth"), acted as the placement agent for the Class C Offering.
Commonwealth received a commission equal to seven percent (7%) of the
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aggregate purchase price of the shares of Class C Preferred Stock and
Convertible Notes sold, a non-accountable expense allowance equal to three
percent (3%) 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 Warrants to purchase up to
250,000 shares of the Company's Common Stock and Consultant's Warrants to
purchase up to 500,000 shares of Common Stock (together previously defined as
the "Commonwealth Warrants"). The Commonwealth Warrants will be exercisable for
five (5) years commencing March 1997 at an exercise price of $2.50 per share,
subject to adjustment. See "Description of Securities--Commonwealth Warrants."
The Company also entered into a Consulting Agreement with
Commonwealth, pursuant to which: (i) the Company shall employ Commonwealth as
its investment banker and financial consultant for a period of twelve (12)
months; (ii) the Company paid Commonwealth a fee of $200,000, plus 2% of the
gross proceeds of the Class C Offering in excess of $10,000,000, for such twelve
(12) month period; and (iii) the Company agreed to pay Commonwealth a fee of
five percent (5%) of the first $5,000,000 and two and one-half percent (2-1/2%)
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, have agreed with Commonwealth not to sell any shares of Common
Stock or options to purchase Common Stock for a period of 12 months from
September 6, 1996 without the prior written consent of Commonwealth. In
addition, holders of the 10% Notes who converted a portion of such Notes to
Common Stock and who acquired Class C Preferred Stock in the Class C Offering
have agreed with Commonwealth not to sell any shares of Common Stock or the
Conversion Shares for a period of twelve (12) months from September 6, 1996,
without the prior written consent of Commonwealth; provided, however,
Commonwealth has agreed that such persons will be permitted to sell a sufficient
amount of the shares of Common Stock or Conversion Shares as will equal the
principal amount of the 10% Note previously held by such shareholder. In
addition, certain officers, directors and affiliated persons of the Company have
agreed not to exercise any options owned by them (and to waive reservation of
the shares of Common Stock underlying such options) until shareholders authorize
such number of additional shares of Common Stock necessary to accommodate the
lowest Conversion Price of the Class C Preferred Stock and, finally, all such
persons have agreed to vote their shares of Common Stock for such increase in
authorized capital.
Commonwealth designated Joseph 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. See
"Management."
Commonwealth also arranged bridge financings for the Company in the
amount of $375,000 and was paid $37,500 in commissions from the proceeds of the
Class C Offering.
See "Certain Relationships and Related Transactions," "Description
of Securities" and "Selling Securityholders" for a description of the
acquisition of certain securities by Commonwealth and associates and affiliates
of Commonwealth.
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MANAGEMENT
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
William H. Flury................. 43 Vice President, Sales and Marketing of I-Link
David E. Hardy................... 44 Secretary of the Company
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................ 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 third succeeding annual meeting of
shareholders. The terms of office of Dr. R. Huston Babcock and John W. Edwards,
Class III Directors, expire at the next annual meeting of shareholders. The term
of office of Clay Wilkes, a Class I Director, expires at the next succeeding
annual meeting of shareholders. Commonwealth has also designated Michael Falk,
President of Commonwealth, to be a non-voting advisor to the Board. In addition,
Commonwealth has the right to approve the Company's selection of a second
outside director in accordance with the terms of the Sales Agency Agreement
between the Company and Commonwealth entered into in July 1996 in connection
with the Company's private placement of Class C Preferred Stock. A second
outside director has not been selected as of the date hereof. See "1996
Offerings."
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 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. He 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
52
<PAGE>
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 I-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.
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, 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.
David E. Hardy, Secretary of the Company. Mr. Hardy was appointed
Secretary of the Company in December 1996. He is a founding partner of the law
firm of Hardy & Allen, in Salt Lake City. From February 1993 to April 1995, Mr.
Hardy served as Senior Vice President and General Counsel of Megahertz
Corporation, a publicly-held manufacturer of data communication products. Prior
to his association with Megahertz Corporation, Mr. Hardy was a senior partner of
the law firm of Allen, Hardy, Rasmussen & Christensen which was founded in 1982.
Mr. Hardy holds a Bachelor of Arts degree from the University of Utah and a
Juris Doctor degree from the University of Utah School of Law.
Henry Y.L. Toh, Director of the Company. Mr. Toh was elected by the
Board of Directors as a Class II Director and as Vice Chairman of the Board of
Directors in March 1992. Mr. Toh was elected President of the Company in May
1993, Acting Chief Financial Officer in September 1995 and Chairman of the Board
in May 1996, and served as such through September 1996. 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. Mr. Wilkes served as Chairman
of the Board of the Company from 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
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<PAGE>
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 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.
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.
54
<PAGE>
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.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid
for services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's three most highly compensated executive officers serving as such at
the end of the year ended 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, Sales 1996 91,667/7/ 0 0 0 250,000/8/ 0 N/A
and Marketing of I-Link 1995 -- -- -- -- -- -- --
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 fiscal year. See "--Employment Agreements."
5 Excludes warrants to purchase 25,000 shares of Common Stock at an exercise
price of $4.875 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
6 Mr. Ryser began his employment with I-Link in September 1996; his annual
salary during the 1996 fiscal year was $125,000. See "--Employment
Agreements."
7 Mr. Flury began his employment with I-Link in May 1996; his annual salary
during 1996 was $137,500 per year. See "--Employment Agreements."
8 Excludes warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.50 per share issued in connection with a bridge loan. See
"Certain Relationships and Related Transactions."
55
<PAGE>
Option/SAR Grants in Last Fiscal Year (1996)
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1996, for the persons named
in the Summary Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Percent of Total Exercise
Number of Securities Underlying Options/SARs Granted to or Base
Name Options/SARs Granted (#) Employees in Fiscal Year Price ($/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
"Certain Relationships and Related Transactions."
2 Does not include warrants to purchase 5,000 shares of Common Stock at an
exercise price of $2.50 in connection with a bridge loan. See "Certain
Relationships and Related Transactions."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to options
exercised during 1996 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of 1996.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired On Value Underlying Unexercised Money Options/SARs at
Name Exercise (#) Realized ($) Options/SARs at FY-End (#) FY-End ($)/1/
- ---------------- --------------- -------------- ------------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Henry Y.L. Toh 0 0 173,501 0 581,919 0
John W. Edwards 0 0 416,666 833,334 N/A N/A
Karl S. Ryser, Jr. 0 0 25,000 225,000 N/A N/A
William H. Flury 0 0 0 250,000 N/A N/A
- ---------------------
</TABLE>
1 The calculations of the value of unexercised options are based on the
difference between the closing bid price on Nasdaq of the Common Stock on
December 31, 1996, and the exercise price of each option, multiplied by the
number of shares covered by the option.
Director Compensation
During 1996, Directors of the Company then serving received options to
purchase 10,000 shares of Common Stock on the first business day of January at
an exercise price equal to the fair market value of the Common Stock on the date
of grant. Mr. Cohen received options to purchase 64,000 shares of Common Stock
upon his appointment to the Board. Effective February 6, 1997 and the first
business day of January of each year thereafter, each Director then serving will
receive options, to purchase 10,000 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.
56
<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 then Secretary. The Employment Agreements are each for an initial
period ending on December 31, 1997 and are automatically renewable for
successive one-year periods unless written notice to the contrary is given by
the Company not less than 120 days prior to expiration of the term. Pursuant to
the terms of the employment agreements, each such officer is required to devote
such of his or her time to the business and affairs of the Company as is
required to fulfill the duties and responsibilities of his or her office. Mr.
Toh is entitled under his employment agreement to receive compensation at the
rate of $54,000 per year. Ms. Michon is entitled to compensation at the rate of
$63,000, and Ms. Giallourakis is entitled to compensation at the rate of $53,000
per year. Each such officer is entitled to an annual bonus at the discretion of
the Board of Directors and may participate in fringe benefits, deferred
compensation, stock benefits and option plans of the Company. In the event of
termination of his employment by the Company other than for "cause" (as defined
in the agreement) or by Mr. Toh upon "good reason" (as defined in the
agreement), the Company is required to pay Mr. Toh, as liquidated damages or
severance pay, monthly termination payments equal to the base salary in effect
for a period of six months after such termination and, with respect to Ms.
Michon and Ms. Giallourakis, each such officer is entitled to monthly
termination payments equal to the base salary for periods of three months after
any such termination. Each of the employment agreements contains confidentiality
and non-solicitation provisions.
I-Link entered into three-year employment agreements on February 21,
1996 with each of Clay Wilkes and Alex Radulovic, Senior Engineer of I-Link.
Under his employment agreement, Mr. Wilkes is employed at a salary of $95,000
per annum, subject to adjustment upon satisfaction of performance criteria.
Under his employment agreement, Mr. Radulovic is employed at a salary of $90,000
per annum, subject to adjustment upon satisfaction of performance criteria. In
the event of termination by the Company not involving Just Cause (as defined in
the agreement), or upon a material breach by the Company which is unremedied for
30 days after written notice, each of Mr. Wilkes and Mr. Radulovic is entitled
to receive, as liquidated damages or severance pay, an amount equal to the
Monthly Compensation (as defined in the agreement) for the remaining term of the
Agreement and, in addition, all options shall vest and all Common Stock of
Medcross held in escrow shall be released. Each of the agreements contain
non-competition and confidentiality provisions. On July 1, 1996, the Company
approved the grant of options to purchase 1,500,000 and 500,000 shares of Common
Stock at $7.00 per share for five years, to Messrs. Wilkes and Radulovic,
respectively. To the extent vested, the options may be exercised commencing June
30, 1997. The options vest on June 30, 2001; provided however, that vesting will
accelerate in 25% increments at such time as the average closing bid price of a
share of Common Stock equals or exceeds $10, $15, $20 and $25, respectively.
On April 8, 1996, subject to the approval of the I-Link Board of
Directors, I-Link entered into a three-year employment agreement with John W.
Edwards, President, Chief Executive Officer and Director of the Company.
Pursuant to the terms of the employment agreement, Mr. Edwards is employed as
the Chief Executive Officer and a Director of I-Link, and is required to devote
substantially all of his working time to the business and affairs of I-Link. Mr.
Edwards is entitled under his employment agreement to receive compensation at
the rate of $175,000 per year and is entitled to a profitability bonus in the
discretion of the I-Link Board of Directors and to participate in fringe
benefits of the Company as are generally provided to executive officers. In
addition, Mr. Edwards is entitled to receive an option to purchase one million
shares of Common Stock of Medcross, Inc. at an exercise price of $7.00 per
share. Of such options, 83,333 vested immediately and 83,333 vest and become
exercisable on the first calendar day of each quarter after April 8, 1996. In
the event of termination by I-Link or in the event of a violation of a material
provision of the agreement by I-Link which is unremedied for thirty (30) days
and after written notice or in the event of a "Change in Control" (as defined in
the agreement), Mr. Edwards is entitled to receive, as liquidated damages or
severance pay, an amount equal to the Monthly Compensation (as defined in the
agreement) for the remaining term of the agreement. The agreement contains non-
competition and confidentiality provisions. Mr. Edwards agreed to amend his
contract, effective August 21, 1996, to reduce his annual salary from $175,000
to $96,000; and in consideration of the salary reduction, the Company has agreed
to grant him options to purchase 250,000 shares of Common Stock at an exercise
price of $4.875 per share.
57
<PAGE>
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, subject to approval of the Board of Directors of the Company.
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 for the three-month
period ended October 23, 1995 with Bijan Taghavi, formerly an officer and
director of the Company. Pursuant to such agreement, Mr. Taghavi was engaged to
provide such consulting services as requested by the Company in exchange for
compensation at the rate of $5,208 per month. Mr. Taghavi's consulting agreement
contains certain mutual release, non-competition and confidentiality provisions.
The Company entered into a consulting agreement with Timothy R.
Barnes, formerly an officer of the Company (the "Barnes Agreement"), which
agreement expired February 6, 1996. The Barnes Agreement provided for the
issuance to Mr. Barnes of warrants to purchase 36,858 shares of Common Stock
exercisable at a purchase price equal to the fair market value of the Common
Stock at the date of grant. The shares of Common Stock were included in a
registration statement on Form S-8. The Barnes Agreement also contained standard
non-competition and confidentiality provisions.
The Company entered into a Consulting Agreement with David E. Hardy
effective February 6, 1997 and for a term of 36 months thereafter. Pursuant to
the Agreement, Mr. Hardy shall provide legal services to the Company in exchange
for compensation at the rate of $10,417 per month for the term of the Agreement.
In addition, in the event the Company increases the salary of its senior-level
vice presidents, the consulting fee shall be equally increased and in the event
the Company shall pay any company performance-based bonuses to its senior level
vice presidents, the Company shall pay an equal amount to Mr. Hardy. In
addition, Mr. Hardy was granted options to purchase 250,000 shares of the
Company's Common Stock at an exercise price equal to the closing price of the
Company's publicly traded shares as of the effective date of the Agreement
($5.375 per share). The options vest as to 47,500 shares upon the execution of
the Agreement and options relating to 20,250 shares shall vest at the
commencement of each calendar quarter for ten quarters, with the first quarterly
vesting to occur on April 1, 1997 and the final quarterly vesting to occur July
1, 1999. In the event of the termination of the Agreement prior to the
expiration of the full term for any reason other than as a result of a material,
unremedied breach by Mr. Hardy which remains uncured following 30 days written
notice, Mr. Hardy is entitled to a lump sum payment equal to the lesser of the
monthly consulting fee payable
58
<PAGE>
through the end of the term of the Agreement or the monthly consulting fee
payable over 12 months and all unvested options shall accelerate and immediately
become fully vested and exercisable.
Director Stock Option Plan
The Company's Director Stock Option Plan (the "DSOP") authorizes the
grant of stock options to directors of the Company. Options granted under the
DSOP are non-qualified stock options exercisable at a price equal to the fair
market value per share of Common Stock on the date of any such grant. Options
granted under the DSOP are exercisable not less than six (6) months nor more
than ten (10) years after the date of grant.
As of December 31, 1996, options for the purchase of 8,169 shares of
Common Stock at prices ranging from $.875 to $3.875 per share were outstanding.
As of December 31, 1996, options to purchase 15,228 shares of Common Stock have
been exercised. In connection with adoption of the 1995 Director Plans (as
hereinafter defined) the Board of Directors authorized the termination of future
grants of options under the DSOP; however, outstanding options granted under the
DSOP will continue to be governed by the terms thereof until exercise or
expiration of such options.
Stock Purchase Plan
In accordance with the Employee Qualified Stock Purchase Plan (the
"Purchase Plan"), employees may contribute up to ten percent of their base wages
toward the purchase of Common Stock. The exercise price of options granted under
the Purchase Plan is the lesser of 85% of the market value on the first business
day of the payment period (September 1) or the last business day of the payment
period (August 31). As of December 31, 1996, the Company had 35,146 shares of
Common Stock reserved for issuance on exercise of the purchase rights granted
under the Purchase Plan.
1995 Director Stock Option Plan
In October 1995, the stockholders of the Company approved adoption
of the Company's 1995 Director Stock Option and Appreciation Rights Plan, which
plan provides for the issuance of incentive options, non-qualified options and
stock appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary
grants of stock options which qualify as incentive stock options (the "Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), as well as options which do not so qualify (the "Non-Qualified
Options") to be issued to directors. In addition, stock appreciation rights (the
"SARs") may be granted in conjunction with the grant of Incentive Options and
Non-Qualified Options. No SARs have been granted to date.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 250,000 shares of Common Stock
(subject to adjustment in the event of stock dividends, stock splits and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of Common Stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employees.
The shares of Common Stock subject to the 1995 Director Plan may be made
available from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified
Options on a non-discretionary basis pursuant to the following formula: each
member of the Board of Directors then serving shall receive a Non-Qualified
Option to purchase 10,000 shares of Common Stock at an exercise price equal to
the fair market value per share of the Common Stock on that date. Pursuant to
such formula, directors received options to purchase 10,000 shares of Common
Stock as of October 17, 1995, 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
59
<PAGE>
of Common Stock reserved for issuance under the 1995 Director Plan. As of
December 31, 1996, options exercisable to purchase 190,000 shares of Common
Stock at prices ranging from $1.00 to $1.25 per share are outstanding under the
1995 Director Plan. As of December 31, 1996, options to purchase 40,000 shares
have been exercised under the 1995 Director Plan.
1995 Employee Stock Option Plan
In October 1995, the stockholders of the Company approved adoption of
the Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options, Non-
Qualified Options and SARs.
Directors of the Company are not eligible to participate in the 1995
Employee Plan. The 1995 Employee Plan provides for the grant of stock options
which qualify as Incentive Stock Options under Section 422 of the Code, to be
issued to officers who are employees and other employees, as well as
Non-Qualified Options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of Incentive Options
and Non-Qualified Options. No SARs have been granted to date.
The 1995 Employee Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs of up to 400,000 shares of Common Stock (subject
to adjustment in the event of stock dividends, stock splits and other similar
events). To the 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 Employee Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of Common Stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of Common Stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1996, options to purchase 400,000 shares of Common
Stock with exercise prices of $1.125 to $6.75 per share have been granted under
the 1995 Employee Plan. As of December 31, 1996, no options have been exercised
under the 1995 Employee Plan.
1997 Recruitment Stock Option Plan
In February 1997, the Board of Directors of the Company approved
adoption of the Company's 1997 Recruitment Stock Option and Appreciation Rights
Plan, subject to stockholder approval, which plan provides for the issuance of
incentive options, non-qualified options and stock appreciation rights (the
"1997 Plan").
The 1997 Plan provides for automatic and discretionary grants of
stock options which qualify as incentive stock options (the "Incentive Options")
under Section 422 of the Code, as well as options which do not so qualify (the
"Non-Qualified Options") to be issued to directors. In addition, stock
appreciation rights (the "SARs") may be granted in conjunction with the grant of
Incentive Options and Non-Qualified Options. No SARs have been granted to date.
The 1997 Plan provides for the grant of Incentive Options,
Non-Qualified Options and SARs to purchase up to 4,400,000 shares of Common
Stock (subject to adjustment in the event of stock dividends, stock splits and
other similar events). To the extent that an Incentive Option or Non-Qualified
Option is not exercised within the period of exercisability specified therein,
it will expire as to the then-unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1997 Plan, the shares of Common Stock as to which such option or
right was not exercised will become available under the 1997 Plan for the grant
of additional options or rights to any eligible employees. The shares of Common
Stock subject to the 1997 Plan may be made available from either authorized but
unissued shares, treasury shares, or both. As of December 31, 1996, there were
no options outstanding under the 1997 Plan.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first quarter of fiscal year 1995, the Company received
advances totaling $218,000 from Mortgage Network International ("MNI"). Henry
Y.L. Toh, a Director of the Company, has management control over MNI. Such
advances were previously payable upon demand. Subsequent to the extension of
such advances, the Board of Directors approved delivery of a promissory note
representing the aggregate amount of such advances, which promissory note
matured by its terms on October 1, 1995 and bears interest at one percent over
the prime rate of interest established by Southwest Bank of Texas, N.A.
Subsequently, the Company and MNI modified the note such that: (i) interest
thereon is payable monthly at the rate of 10.5%; and (ii) the remaining
principal amount of $218,000 (including a principal payment previously due on
December 31, 1996) with interest thereon at the rate of 10.5% will be paid in 21
equal monthly payments of approximately $4,600.
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. See "Selling Securityholders."
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. See "1996 Offerings" and "Selling Securityholders."
The Company also entered into two consulting agreements with Jason
H. Pollak, the initial term of one of which expired on January 31, 1996 and the
second of such agreements commenced thereafter. The term of the second agreement
was for a period of three years, subject to earlier termination by the Company.
Pursuant to the terms of the first of such agreements (collectively, the "Pollak
Agreements"), Mr. Pollak received 50,000 shares of Common Stock. The second of
the Pollak Agreements provided Mr. Pollak with an option to purchase up to
50,000 shares of Common Stock each year at prices of $1.50, $2.50 and $3.50,
respectively. The second of the Pollak Agreements was terminated by the Company
on March 5, 1996 (upon thirty days' advance notice which renders such
termination effective April 4, 1996). The shares of Common Stock subject to the
Pollak Agreement have been included in a registration statement on Form S-8.
In January 1996, certain associates and affiliates of Commonwealth
purchased an aggregate of 878,891 shares of Common Stock 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. See
"Description of Securities--Kanter Shares."
On February 21, 1996, Four M International, Ltd. ("Four M"), a
principal shareholder of the Company, granted certain options to purchase shares
of the Company owned by Four M exercisable commencing July 1, 1996 (subject to
the satisfaction of certain conditions) to purchase 3,915,570 shares of Common
Stock. Henry Y.L. Toh, a director of the Company, is one of the two directors of
Four M. The exercise price of $1.79 per share represents the lesser of 200% of
the average of the closing bid and ask price per share of Common Stock for the
ten (10) business days preceding July 1, 1996 or $1.79 per share. Commonwealth
and affiliates or associates thereof received the right to purchase 545,285
shares of Common Stock prior to December 31, 1996 and 537,500 shares of Common
Stock prior to December 31, 1997. Benchmark received the right to purchase
545,285 shares of Common Stock prior to December 31, 1996 and 537,500 shares
prior to December 1997. Certain members of management of I-Link (at that time),
namely, Clay Wilkes, Floyd Wilkes and Alex Radulovic, have the right to purchase
an aggregate of 825,000 shares of at that time Common Stock prior to December
31, 1996 and 825,000 shares prior to December 31, 1997. Scott Cook received the
right to purchase 100,000 shares prior to December 31, 1996. On February 21,
1996, I-Link
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<PAGE>
agreed to pay an aggregate of $1,275 to Four M by Mr. Cook on or before July 1,
1996. On April 24, 1996, the Four M Options issued to Mr. Cook were cancelled
and options were issued as of that date by Four M to Mr. Cook (50,000 shares),
S.C. Culbreth (25,000 shares) and John Beardmore (25,000 shares).
In August 1996, the Four M Options were amended to provide that in
the event that $200,000 in principal amount (i.e., exercise proceeds) of the
Four M Options have been exercised prior to December 31, 1996, the exercise
period of the remaining Four M Options exercisable during 1996 (the "1996 Four M
Options") will be extended to September 6, 1997 and the exercise price would be
increased by four percent (4%) of the then current exercise price for each 30
day period or portion thereof commencing January 1, 1997 in which the remainder
of the 1996 Four M Options are not exercised. In December 1996, Four M Options
to purchase the following shares were exercised by the following persons: 25,000
shares by Scott Cook, 12,500 shares by John Beardmore, 12,500 shares by S.C.
Culbreth, 30,726 shares by Benchmark, 46,509 shares by Commonwealth and 15,503
shares by William Baquet. Inasmuch as the aggregate amount exercised exceeded
$200,000 in principal amount, the exercise period of the remaining Four M
Options was extended. See "Description of Securities--Four M Options."
The shares of Common Stock owned by Four M are subject to a lock-up
agreement with Commonwealth from and after the termination of the option
agreements and until 12 months from September 6, 1996; provided, however, that
to the extent Commonwealth releases more than 300,000 shares in the aggregate on
behalf of any affiliate or associated person of Commonwealth, any officer or
director of the Company or its subsidiaries or Benchmark, Commonwealth shall
release a number of Four M Shares equal to the same percentage as the number of
shares owned by such person. In addition, the Company has been informed that the
holders of the Four M Options have executed lockup agreements with Commonwealth
for 12 months after September 6, 1996.
On February 21, 1996, R. Huston Babcock, M.D., a director of the
Company, granted certain options 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%
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. 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. See "Description of Securities--Babcock Shares."
Certain shares of Common Stock owned by Dr. Babcock are subject to a
lock-up agreement with Commonwealth for a period of twelve (12) months from
September 6, 1996.
In August 1996, William H. Flury, Vice President, Sales & Marketing
of I-Link, loaned I-Link the sum of $100,000, with $105,000 (including a loan
origination fee of $5,000) due and payable the earlier of September 6, 1996 or
upon the closing of a debt or equity offering by the Company. In connection with
such loan, the Company agreed to issue Mr. Flury a warrant to purchase 5,000
shares of Common Stock for two years at $2.50 per share. The Company recorded
additional interest expense of $11,875 in connection with the transaction. The
funds from the loan were used for general working capital purposes of I-Link.
The loan was repaid in September 1996 and the sums directed by Mr. Flury to
purchase 1,666 shares of Class C Preferred Stock.
In August 1996, John W. Edwards, President and Chief Executive
Officer of I-Link, loaned I-Link the sum of $131,250 (including a $6,250
original issue discount) due and payable the earlier of September 6, 1996, or
upon the receipt of proceeds from a debt or equity financing of the Company. In
connection with such loan, the Company agreed to issue Mr. Edwards a warrant to
purchase 25,000 shares of Common Stock for two years at $4.87 per share. Funds
from the loan were used to pay a $100,000 payment due to AT&T and for general
working capital purposes. The loan was repaid in September 1996.
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 will pay FTI for the switches as a vendor, and lease them to
I-Link. As of December 31, 1996, the remaining portion of the advance was
$120,000. The majority owner of FTI
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<PAGE>
is Robert W. Edwards, Jr., brother of John W. Edwards, the Company's President
and Chief Executive Officer. Effective January 1, 1997, the Company acquired all
of the outstanding stock of FTI. See "The Company."
On April 29, 1997 the Company entered into a Settlement Agreement
("Settlement Agreement") with JW Charles, pursuant to which the Company and JW
Charles settled certain litigation between them. Pursuant to the Settlement
Agreement, the Company agreed (a) to pay or cause JW Charles 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 JW Charles agreed (c) to transfer to the Company or its designees
and/or assignees all of its right, title and interest to a warrant (the
"Settlement 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 Settlement Warrant with an executed assignment of the
Settlement 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 Settlement 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 per share until November 3, 1999. In connection with the execution of the
Settlement Agreement the Settlement Warrant was purchased by a group of
investors which includes David E. Hardy and Karl S. Ryser, Jr., both of whom are
officers of the Company (the "Hardy Group"), in consideration for payment by the
Hardy Group of six hundred thousand dollars ($600,000) to JW Charles in
satisfaction of the amounts owed to JW Charles under the Settlement Agreement.
As additional compensation for the Hardy Group's commitment to purchase the
Settlement Warrant, the Company also (i) will amend the Settlement 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 "Legal Proceedings."
Clay Wilkes, the sole shareholder of GNET Enterprises, Inc.
("GNET"), the general partner of I-Link, Ltd., pledged all of the issued and
outstanding shares of GNET to secure the Company's guarantee of $100,000 of the
principal amount of a loan on October 19, 1995 from Scott Cook to I-Link. The
loan was repaid in September 1996 from the proceeds of the Class C Offering.
Certain officers and directors of the Company and/or I-Link have
agreed to vote shares over which they exercise voting power in an aggregate
amount of 6,956,000 shares of Common Stock in favor of a proposal to increase
the authorized shares of Common Stock and Preferred Stock of the Company. In
addition, pending the solicitation of the necessary stockholder approval and as
a condition to the first closing of the Class C Offering, securityholders,
including officers and directors of the Company and/or I-Link, have agreed not
to exercise any options owned by them unless and until the shareholders of the
Company approve an increase in authorized capital stock.
See "Executive Compensation--Employment Agreements" and "Executive
Compensation--Consulting Agreements" for descriptions of the terms of employment
and consulting agreements between the Company or I-Link and certain officers,
directors and other related parties.
See "1996 Offerings" for a description of offerings of securities of
the Company conducted in 1996 and of certain payments to and agreements with
Commonwealth.
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
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<PAGE>
by the lower of (i) $2.50 or (ii) the closing bid price for any five consecutive
trading days during the period commencing on September 6, 1996 and ending on
March 5, 1998. The table below sets forth information, to the best of the
Company's knowledge, with respect to the total number of shares of the Company's
Common Stock, Class B Preferred Stock and Class C Preferred Stock beneficially
owned by each director, the Named Executive Officers, each beneficial owner of
more than five percent of the Common Stock, and all directors and executive
officers as a group, as of August 29, 1997. On that date, there were 11,652,597
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 3,112,723/(4)/ 26.7%
1980 Post Oak Boulevard
Houston, TX 77056
I-Link, Ltd./(5)/ Common Stock 284,854 2.4%
c/o Clay Wilkes
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Clay Wilkes/(6)/ Common Stock 3,005,008/(7)/ 24.9%
2100 E. Bengal Blvd. #M104
Salt Lake City, UT 84121
Benchmark Equity Group Inc. Common Stock 819,570/(10)/ 7.0%
700 Gemini Class C Preferred 752
Houston, TX 77058 Stock
R. Huston Babcock, M.D. Common Stock 682,173/(11)/ 5.8%
741 12th Street North Class B Preferred 7,500
St. Petersburg, FL 33705 Stock
Henry Y.L. Toh/(3)/ Common Stock 188,501/(12)/ 1.6%
3227 Bennet Street North
St. Petersburg, FL 33713
John W. Edwards Common Stock 840,831/(13)/ 6.7%
13751 S. Wadsworth Park Drive
Draper, UT 84020
T6-G Limited Partnership Common Stock 771,192/(9)/ 6.5%
185 South State Street Class C Preferred 7,133
Salt Lake City, UT 84111 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 Preferred 3,750
Suite 700 Stock
New York, NY 10017
Alex Radulovic Common Stock 894,824/(17)/ 7.6%
13751 S. Wadsworth Park Drive
Draper, UT 84020
</TABLE>
64
<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>
Joseph A. Cohen Common Stock 141,000/(18)/ 1.2%
1370 Avenue of the Americas Class C Preferred Stock 3,000
New York, NY 10019
Karl S. Ryser, Jr. Common Stock 239,527/(19)/ 2.0%
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 Preferred 2,666
Draper, UT 84020 Stock
David E. Hardy Common Stock 413,616/(21)/ 3.4%
60 East South Temple
Salt Lake City, UT 84111
All Executive Officers and Common Stock 5,637.138/(22)/ 39.7%
Directors as a Group (9 Persons) Class C Preferred 5,666
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 date hereof have been
exercised or converted, as the case may be. Does not give effect to the
agreement of certain holders of outstanding options not to exercise such
options pending shareholder approval of an increase in the authorized
capital stock of the Company. See Footnote 4.
(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 3,112,723 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 I-Link and/or the Company
have the right to purchase 435,000 shares of Common Stock prior to
September 6, 1997 and 824,391 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 284,854 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 284,854
shares owned by I-Link, Ltd.
(7) Includes 284,854 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. Also includes 389,891 shares of Common Stock
purchasable upon exercise of an option exercisable commencing on July 1,
1996 granted by Four M, 289,000 shares of Common Stock previously purchased
by exercise of Four M Options and options to purchase 20,000 shares of
Common Stock issuable by the Company. Also includes 375,000 shares of
Common Stock which represents the exercisable portion of 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 vests in its entirety on June 30, 2001 and lapses
on June 30, 2002. Of the shares owned, 60,000 have been pledged to secure
the repayment of loans in the principal amount of $150,000 made in March
and April 1997 and other contractual commitments. 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
acquisition of I-Link, Ltd. Also includes 171,192 shares of Common Stock
which are issuable upon conversion of 7,133 shares of Class C Preferred
Stock.
(10) Includes 92,692 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 an additional 617,059 shares of
Common Stock which may be purchased, upon exercise of an option exercisable
commencing July 1, 1996 granted by Four M to the noted shareholder. Also
includes 18,048 shares of Common Stock issuable
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<PAGE>
upon conversion of 752 shares of Class C Preferred Stock, which 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) 18,501 shares of Common Stock issuable pursuant to options exercisable
within 60 days of the date hereof. 91,771 of the shares of Common Stock
issuable upon conversion of such shares of the Class B Preferred Stock are
subject to an option granted by the noted stockholder to Benchmark.
(12) Represents shares issuable pursuant to options exercisable within 60 days
of the date hereof.
(13) Includes 499,998 shares of Common Stock subject to the vested portion of
Mr. Edwards' option to purchase 1,000,000 shares of Common Stock and 20,833
shares subject to the vested portion of an option to purchase 250,000
shares of Common Stock. Also includes 295,000 shares of Common Stock
subject to options held by Mr. Edwards, and 25,000 shares of Common Stock
subject to a warrant held by Mr. Edwards. See "Executive Compensation--
Employment Agreements" and "Certain Relationships and Related
Transactions."
(14) Includes 15,503 shares of Common Stock issued and 380,890 shares issuable
pursuant to options exercisable commencing July 1, 1996 granted by Four M
and 243,891 Kanter Shares.
(15) Includes 46,509 shares issued and an additional 494,883 shares of Common
Stock issuable pursuant to options exercisable commencing July 1, 1996
granted by Four M to Commonwealth and 530,000 shares of Common Stock owned
by certain affiliates and control persons of the named shareholder. Also
includes 750,000 shares of Common Stock subject to warrants held by the
named stockholder and 90,000 shares of Common Stock issuable upon
conversion of 3,750 shares of Class C Preferred Stock which are held by
certain affiliates of the named stockholder. Does not include shares of
Common Stock which may be held by Commonwealth from time to time in its
trading account in connection with ordinary market-making activities.
(16) [reserved]
(17) Includes 134,912 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. 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 which represent the exercisable
portion of 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 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.
(19) Includes 27,594 shares issuable under the Settlement Warrant, 14,583 shares
issuable pursuant to the Hardy Group Warrant, 186,933 shares issuable
pursuant to the exercisable portion of options granted per Mr. Ryser's
employment agreement, and 10,417 shares issuable pursuant to other options
granted by the Company.
(20) Includes 62,499 shares of Common Stock issuable pursuant to options
exercisable within 60 days of the date hereof 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 Settlement
Warrant, 42,177 shares issuable pursuant to the Hardy Group Warrant,
219,053 shares issuable pursuant to the exercisable portion of options
granted per Mr. Hardy's consulting agreement, and 10,417 shares issuable
pursuant to other options granted by the Company.
(22) Includes 2,223,474 shares of Common Stock which may be obtained pursuant to
options exercisable within 60 days of the date hereof, 183,542 shares of
Common Stock into which the 7,500 shares of Class B Preferred Stock are
convertible and 135,984 shares of Common Stock into which 5,666 shares of
Class C Preferred Stock are convertible. Also includes 389,891 shares of
Common Stock subject of an option exercisable commencing on July 1, 1996
granted by Four M and 284,854 shares owned of record by I-Link, Ltd. (see
footnote 6), and excludes certain unvested options granted by the Company.
<PAGE>
SELLING SECURITYHOLDERS
The following table assumes that each Selling Stockholder is
offering for sale securities previously issued or issuable by the Company and/or
shares of Common Stock issuable in the event of conversion or exercise of
outstanding securities. The Company has agreed to pay all expenses in connection
therewith (other than brokerage commissions and fees and expenses of their
respective counsel). None of the Selling Securityholders has ever held any
position with the Company or had any other material relationship with the
Company except that Clay Wilkes, the owner of GNET, the general partner of
I-Link, Ltd., is a director of the Company. Mr. Babcock is also a director of
the Corporation and Messrs. Ryser, Flury and Hardy are officers of the Company
and/or I-Link. See "The Company," "1996 Offerings," and "Certain Relationships
and Related Transactions."
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<PAGE>
The following table sets forth the beneficial ownership of the Securities
by each person who is a Selling Stockholder. The Company will not receive any
proceeds from the sale of such securities by the Selling Stockholders.
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Richard Adams
c/o Commonwealth Associates -- 45,000(36) * 0%
733 Third Avenue
New York, NY 10017
ADF Inc. -- 10,992 (9) * 0%
P.O. Box 908
Helen, GA 30545
Paul R. Alter -- 18,000 (9) * 0%
1111 Park Avenue
New York, NY 10128
Anasazi Partners Limited Partners -- 36,000 (9) * 0%
108 Charles Street
Boston, MA 02114
Basil Asciutto -- 42,000 (7)(34) * 0%
82 Haywood Street
Staten Island, NY 10307
R. Huston Babcock, M.D. -- 183,542 (44) 5.8% 2.8%
741 12th Street North
St. Petersburg, FL 33705
Edward Dallin Bagley -- 36,000 (9) * 0%
8 Shadow Wood Lane
Sandy, UT 84092
William Baquet -- 640,284 (32) 5.5% 0%
33 Libby Avenue
Hicksville, NY 11801
Steve M. Barnett -- 36,000 (9) * 0%
666 Dundee Road, Suite 1704
Northbrook, IL 60062
Bartlesville Wesleyan College -- 13,584 (9) * 0%
2201 Silver Lake Road
Bartlesville, OK 74006
Richard L. Bazelon and Eileen A. Bazelon, JT TEN -- 36,000 (9) * 0%
3009 Foxx Lane
Philadelphia, PA 19144
John Beardmore -- 50,000 (14) * 0%
P.O. Box 457
Alexandria, VA 22313
John Becker -- 18,000 (9) * 0%
2709 Monte Creston Drive
Belmont, CA 94002
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Benchmark Equity Group, Inc. -- 819,570 (19) 7.0% 0%
700 Gemini
Houston, TX 77058
Oded Berkowitz -- 15,000 (33) * 0%
200 East 58th Street, #5H
New York, NY 10021
Sandra Bernstein -- 24,000 (9) * 0%
10 Carriage Drive
Old Westbury, NY 11568
Harold S. Blue -- 36,000 (9) * 0%
2501 David Road, #230
Ft. Lauderdale, FL 33317
Bondstreet Partners Limited -- 72,000 (9) * 0%
64 West 12th Street
New York, NY 10011
Ronald B. Booth -- 18,000 (9) * 0%
Marew L. Booth
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
The British Life Office Limited -- 180,000 (9) 1.5% 0%
Reliance House
Tunbridge Wells
Kent TN4 8B1 England
Robert A. Bryson -- 18,000 (9) * 0%
2982 Castro Lane
Holladay, UT 84117
Robert L. Burr and Catherine W. Burr -- 18,000 (9) * 0%
5168 Renaissance Avenue
San Diego, CA 92122
Richard Campanella -- 10,000 (33) * 0%
5 Lower Overlook Road
Gillette, NJ 07933
J.A. Cardwell -- 18,000 (9) * 0%
5467 Upper Valley Road
El Paso, TX 79932
James A. Cardwell Jr. -- 18,000 (9) * 0%
1105 Los Jardines
El Paso, TX 79912
Drew Carmi -- 28,000 (37) * 0%
8216 Skyline Drive
Los Angeles, CA 90046
Zachary Carmi -- 31,500 (38) * 0%
1365 York Avenue
New York, NY 10021
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
John A. Catsimatidis -- 36,000 (9) * 0%
817 Fifth Avenue, 14th Floor
New York, NY 10021
Joe Cayre -- 100,000 (36) * 0%
16 East 40th Street
New York, NY 10016
Michael Cayre -- 15,000 (36) * 0%
16 East 40th Street
New York, NY 10016
Christiana Bank Luxembourg S.A. -- 36,000 (9) * 0%
16 Avenue Pasteur
1-2015 Luxembourg
David L. Cohen -- 36,000 (9) * 0%
923 Harvard Ct.
Woodmere, NY 11598
Jonathan R. Cohen -- 9,000 (9) * 0%
50 East 42nd Street, Suite 200
New York, NY 10017
Robert H. Cole -- 9,000 (9) * 0%
5102 Los Alamitos Ct.
Midland, TX 79705
Commonwealth Associates 750,000 (29) 1,911,392 (30) 15.3% 0%
733 Third Avenue
New York, NY 10017
Conzett Europa Invest Ltd. -- 396,000 (9) 3.3% 0%
c/o Bank Julius Baer
330 Madison Avenue
New York, NY 10017
Scott Cook -- 230,078 (21) 2.0% 0%
1700 Pacific Avenue, Suite 500
Dallas, TX 75201
Richard Corbin -- 9,000 (9) * 0%
2000 Broadway, #21A
New York, NY 10023
Gerald B. Cramer -- 36,000 (9) * 0%
707 Westchester Avenue
White Plains, NY 10604
Cramer Taos Partners -- 36,000 (9) * 0%
707 Westchester Avenue
White Plains, NY 10604
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ------------------------------------------------- --------------- --------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
James Crandall and Claudia Crandell JTTEN -- 18,000 (9) * 0%
6045 Serene Drive
Las Vegas, NV 89130
S.C. Culbreth -- 50,000 (14) * 0%
10 Tidewater Drive
Ormond Beach, FL 32174
Michael P. Curtis -- 18,000 (9) * 0%
14 Stonehedge Drive
Wilmington, MA 01887
Richard G. Dahlen -- 54,000 (9) * 0%
and Pricilla A. Dahlen
16467 Horseshoe Ridge Rd.
Chesterfield, MO 63005
Richard G. David -- 39,000 (9) * 0%
David & Hagner
1120 19th Street, N.W.
Washington, DC 20036
David J. Dercher -- 9,000 (9) * 0%
6801 Ludlow Street
Upper Darby, PA 19082
Sidney Deutsch -- 36,000 (9) * 0%
17214 Ryton Lane
Boca Raton, FL 33496
DLJSC IRA -- 12,000 (9) * 0%
F/B/O William H. Flury
Pershing Division of DLJSC
Post Office Box 2060
Jersey City, NJ 07303-9917
DLJSC IRA -- 12,000 (9) * 0%
F/B/O Sandy Flury
Pershing Division of DLJSC
Post Office Box 2060
Jersey City, NJ 07303-9917
Robert C. Donaldson and -- 18,000 (9) * 0%
Kathleen T. Donaldson
7780 Boot Hill Drive
Park City, UT 84098
Zane R. and Debbie J. Doyle -- 18,000 (9) * 0%
2966 Acorn Lane
Sandy, UT 84093
Jens Duborg -- 18,000 (9) * 0%
19 Sterling Road
N. Billenco, MA 01862
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
E&M RP Trust 80,000 (26) 152,000 (27) 1.3% 0%
655 Brea Canyon Road
Walnut, CA 91789
Jack Ehrenhaus - IRA Rollover -- 14,400 (9) * 0%
c/o Smith Barney Shearson, Inc.
2 World Trade Center
New York, NY 10048
Maxwell Lang Elliott -- 36,000 (9) * 0%
27271 Ridge Lake Court
Bonita Springs, FL 34134
Entermedia Growth Partners LP -- 120,000 (9) 1.0% 0%
1900 Wazee Street, Suite 106
Denver, CO 80202
Faisal Finance (Switzerland) S.A. -- 100,800 (9) * 0%
84 Au Louis-Casai
Post Office Box 42
CH-1216 Cointrin, Geneva, Switzerland
Kenneth R. Falchuk -- 36,000 (9) * 0%
126 Cottage Street
Brookline, MA 02146
Michael S. Falk -- 187,525 (24) 1.6% 0%
One Beekman Place, Apt. 15A
New York, NY 10022
Falk Family Foundation -- 130,000 (33) 1.1% 0%
c/o Michael S. Falk
One Beekman Place, Apt. 15A
New York, NY 10022
Fiducie Desjardins, A/C 900595-0-59 -- 36,000 (9) * 0%
c/o Commonwealth Assoc.
733 Third Avenue
New York, NY 10017
Fiducie Desjardins, A/C 744766-7-59 -- 36,000 (9) * 0%
c/o Commonwealth Assoc.
733 Third Avenue
New York, NY 10017
Manny Fink IRA -- 36,000 (9) * 0%
c/o Oppenheimer
1 World Financial Center
New York, NY 10281
S. Marcus Finkle -- 54,000 (9) * 0%
117 AABC
Aspen, CO 81061
William H. Flury -- 63,984 (35) 1.1% *
2824 Lucky John Road
Park City, UT 84060
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Flynn Investment Corporation -- 90,000 (9) * 0%
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Founders Equity Group -- 250,000 (43) 2.1% 0%
2602 McKinney, Suite 220
Dallas, TX 75204
Four M International, Ltd. -- 3,112,723 (11) 26.7% 0%
1980 Post Oak Boulevard
Houston, TX 77056
Dr. Philip Freedman -- 18,000 (9) * 0%
1365 York Avenue, Apt. 28A
New York, NY 10021
David Funk -- 10,000 (36) * 0%
4606 Othesda Court
Rockland, CA 95677
Maurice J. Gallagher -- 58,488 (9) * 0%
c/o Gallagher Investment Corp.
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Gallagher Investment Corp. -- 84,000 (9) * 0%
6900 Westcliff Drive, Suite 505
Las Vegas, NV 89128
Rich Galtierri -- 15,000 (33) * 0%
400 Carriage Lane
Wyckoff, NJ 07481
Edith G. Gampel TTEE -- 36,000 (9) * 0%
Edith G. Gampel Irrevocable Tr. Dtd. 9/1/92
19495 Biscayne Blvd., Suite 906
Aventura, FL 33180
Evan Gartenberg -- 11,500 (8) * 0%
143-03 Cronston Avenue
Neponsh, NY 11694
Lawrence Genin -- 18,000 (9) * 0%
61 English Turn
New Orleans, LA 70131
Michael J. George -- 18,000 (9) * 0%
19 Hale Street
Haverhill, MA 01830
Ned Gilleland Sr. -- 36,000 (9) * 0%
232 S. Sea Pines Dr.
Hilton Head, SC 29928
Charles Giordano -- 10,000 (36) * 0%
335 Lightner Avenue
Staten Island, NY 10314
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
John J. Giuffrida IRA -- 18,000 (9) * 0%
Bear Stearns Securities Co., Custodian
245 Park Avenue
New York, NY 10167
Paul D. Goldenheim -- 9,000 (9) * 0%
4 Bald Hill Pl.
Wilton, CT 06897
Zachary Gomes -- 36,000 (9) * 0%
155 Perry Street
New York, NY 10014
H. Eugene Graves -- 72,000 (9) * 0%
313 West Moreno Street
Pensacola, FL 32502
Fredrik Grunewald -- 36,000 (9) * 0%
Herrviksvagen 21
13940 Varindo, Sweden
David Hardy -- 210,886 (39) 2.6% *
13751 S. Wadsworth Park Drive #200
Draper, UT 84020
Hare & Co. -- 36,000 (9) * 0%
1 Wall Street
New York, NY 10286
Mel Harris -- 36,000 (9) * 0%
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Andrew B. Hart -- 9,000 (9) * 0%
12570 Skyline Boulevard
Oakland, CA 94619
Phyllis Henderson -- 20,000 (36) * 0%
17 Salem Road
Hicksville, NY 11801
Hercules Systems Inc. -- 18,000 (9) * 0%
2900 Hearne
Shreveport, LA 71103
George Hodor -- 36,000 (9) * 0%
15 Pleasantville Road
Ossining, NY 10562
I-Link Ltd. -- 284,854 (15) 2.4% 0%
c/o GNet Enterprises, Inc.
c/o Clay Wilkes
2100 E. Bengal Boulevard, #M104
Salt Lake City, UT 84121
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Joseph P. Ingarra -- 36,988 (6) * 0%
120 Kensington Road
Garden City, NY 11530
Intergalactic Growth Fund Inc. -- 36,000 (9) * 0%
Post Office Box N-341
Nassau, Bahamas
J-Mark Computer Corp. -- 36,000 (9) * 0%
13111 Brooks Drive, #A
Baldwin Park, CA 91706
William J. Jackson and Ann S. Jackson -- 54,000 (9) * 0%
2919 West Autumn Run Circle
Sugar Land, TX 77479
A.T. Jagman Trustee -- 36,000 (9) * 0%
Anthony T. Jagman
1415 Renson Street
Lansing, MI 48910
Jeffries International -- 22,800 (28) * 0%
46 New Broad Street
London EC2M 1JD England
Chatri Jhynjhnuwala -- 36,000 (9) * 0%
Lourdes Jhynjhnuwala
25 Harbor Drive
Corona Del Mar, CA 92635
Peggy Jordan -- 36,000 (9) * 0%
610 Wingspread
Peachtree City, GA 30369
Mansour Khayyam -- 36,000 (9) * 0%
27 Harbour Road
Kings Point, NY 11024
Robert B. Kimball III -- 36,000 (9) * 0%
107 Wood Street
Groveland, MA 01834
Spencer Kirk -- 253,063 (40) 2.1% 0%
c/o Hardy & Allen
60 East South Temple, Suite 2200
Salt Lake City, UT 84111
Bernard Kirsner TTEE -- 24,000 (9) * 0%
Bernard Kirsner Trust-DTD
6196 Vista Linda Lane
Boca Raton, FL 33433
Sheldon Kraft -- 20,000 (33) * 0%
H2 Downing Street #1
New York, NY 10014
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- ---------------------------------------- -------------- ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Vincent Labarbara -- 49,750 (34)(45) * 0%
1266 Ocean Boulevard
Sea Bright, NJ 07760
Daniel R. Lee -- 36,000 (9) * 0%
500 Skokie Blvd., Suite 200
Northbrook, IL 60062
Leslie Group Inc. -- 72,000 (9) * 0%
1370 Avenue of the Americas, 26th Floor
New York, NY 10019
Douglas Levine -- 36,000 (9) * 0%
88 University Place
New York, NY 10003
Daniel M. Libby -- 9,000 (9) * 0%
333 East 68th Street
New York, NY 10021
Phillip C. Lockwood -- 18,000 (9) * 0%
11 Kendall Drive
Northborough, MA 01532
John Luck -- 18,000 (9) * 0%
1 Marsh Bird Lane
Savannah, GA 31411
Maerki Baumann & Co. A.G. -- 336,000 (25) 2.8% 0%
8002 Zurich, Switzerland
Joseph Mandarino 40,000(4) 209,988 (5) 1.8% 0%
280 Watchogue Road
Staten Island, NY 10314
Fred and Ann Margolin -- 36,000 (9) * 0%
10515 Lennox Lane
Dallas, TX 75229
Mario Marsillo Jr. -- 21,000 (46) * 0%
23 Ebey Lane
Staten Island, NY 10312
Scott A. Mednick -- 150,000 (22) 1.3% 0%
7972 Mulholland Drive
Los Angeles, CA 90046
Herbert Meislich -- 36,000 (9) * 0%
338 Lacey Drive
New Milford, NJ 07646
Arnold R. Meyer Trustee -- 36,000 (9) * 0%
Arnold R. Meyer Estate Trust
19707 Turnberry Way
Aventura, FL 33180
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Patrick H. Miller Jr. and -- 54,000 (9) * 0%
Lee Miller JTWROS
1266 W. Paces Ferry Road, N.W.
Atlanta, GA 30327
Alvin Mirman -- 26,733 (34)(47) * 0%
4183 Shell Road
Sarasota, FL 34242
David Morley -- 9,000 (9) * 0%
2 Longbeach
Grey Grouville
Jersey CI, UK
Ronald Moschetta -- 12,500 (33)(48) * 0%
122 Genessee Boulevard
Atlantic Beach, NY 11509
Keyvan Novinkakht -- 36,000 (9) * 0%
433 N. Palm Dr., #403
Beverly Hills, CA 90210
Orbis Pension Trustees Limited -- 540,000 (9) 4.4% 0%
1 Connaught Place
London W2 2DY England
Frederick J. Oswald -- 9,000 (9) * 0%
3312 Big Horn Trail
Plano, TX 75075
Steve Parker -- 10,000 (36) * 0%
6307 Winston Drive
Bethesda, MD 20817
Gary R. Perrine and -- 18,000 (9) * 0%
Rebecca C. Perrine JTWROS
2470 Tarpon Road
Naples, FL 34112
Ronald Piasecki -- 180,000 (9) 1.5% 0%
17854 W. Spring Lake Rd.
Spring Lake, MI 49456
Robert L. Priddy -- 130,488 (9) 1.1% 0%
1800 Phoenix Boulevard, Suite 126
Atlanta, GA 30349
Alex Radulovic -- 769,824 (17) 7.6% *
13751 S. Wadsworth Park Drive
Draper, UT 84020
Eric Rand -- 45,500 (10)(34) * 0%
345 Rumson Road
Little Silver, NJ 07391
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Republic New York Securities -- 36,000 (9) * 0%
American Equities Overseas
1 Hanson Place
Brooklyn, NY 11243
Lawrence J. Rodler -- 18,000 (9) * 0%
1 Victoria Street
Cumberland House, Fifth Floor
Hamilton Bermuda HM11
Richard Rosenbloom -- 40,250 (34)(49) * 0%
42 Chicopee Drive
Wayne, NJ 07470
William A. Rosser and Karen S. Westrell -- 36,000 (9) * 0%
Tenants in Common
2946 Robinson Hill Road
Golden, CO 80403
Gerald S. Royal -- 18,000 (9) * 0%
Mary E. Royal
8111 84th Street, NE
Marysville, WA 98270
Rush Family Revocable Trust -- 9,000 (9) * 0%
TR DTD 4-13-93
335 N. Maple Drive
Beverly Hills, CA 90210
Karl S. Ryser, Jr. -- 42,177 (41) 1.2% *
13751 South Wadsworth Park Drive #200
Draper, UT 84020
Monroe H. Schenker and -- 18,000 (9) * 0%
Barbara P. Schenker
22604 Caravelle Circle
Boca Raton, FL 33433-6309
Leonard M. Schiller -- 19,488 (9) * 0%
17323 Bridleway Trail
Boca Raton, FL 33496
Phillip J. Schiller -- 19,488 (9) * 0%
17323 Bridleway Trail
Boca Raton, FL 33496
Schneider Fuel Oil Inc. Pension Plan -- 36,000 (9) * 0%
Edward T. Schneider, Trustee
275 E. 7th Street
Mt. Vernon, NY 10550
William R. Schoen -- 9,000 (9) * 0%
5 Kenilworth Court
Novato, CA 94945
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Vikki K. Schorlenner -- 9,000 (9) * 0%
Post Office Box 57
Beeville, TX 78104
Peter M. Scotto -- 18,000 (9) * 0%
33 Tharp Lane
Marlboro, NJ 07746
Lawrence Seftel and Sandra Bernstein -- 12,000 (9) * 0%
7620 Dorchester Rd.
Boynton Beach, FL 33437
Murray Segal -- 21,500 (6)(34) * 0%
300 East 56th Street
New York, NY 10022
Carl Shaifer -- 38,000 (42) * 0%
8515 Seminole Street
Philadelphia, PA 19118
Edward Shea -- 99,984 (9) * 0%
c/o E&M RP Trust
655 Brea Canyon Road
Walnut, CA 91789
Alvin Siegel -- 18,000 (9) * 0%
1530 Palisade Avenue
Fort Lee, NJ 07024
Marc Siegel -- 102,500 (34)(50) * 0%
2 Bridle Way
Fort Lee, NJ 07024
SJG Management Inc. -- 9,000 (9) * 0%
4934 Sable Pine Circle, #920C
West Palm Beach, FL 33417
George L. Smith -- 18,000 (9) * 0%
403 Dater Hill Road
Troy, NY 12186
George W. Smith -- 18,000 (9) * 0%
4049 Darby Lane
Seaford, NY 11783
Thomas C. Smith -- 36,000 (9) * 0%
1817 Sacramento Terrace
Plano, TX 75075
David L. Stellway -- 9,000 (9) * 0%
10400 SW Riverside Drive
Portland, OR 97219
Theodore Stern and Elizabeth Stern -- 72,000 (9) * 0%
1943 Wightman Street
Pittsburgh, PA 15217
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Joel A. Stone -- 54,000 (9) * 0%
2839 Woodmere Dr.
Northbrook, IL 60062
Michael Stranahan -- 90,000 (33) * 0%
21 Hedgerow W.
Swedesboro, NJ 08085
T6-G Limited Partnership -- 771,192 (31) 6.5% 0%
185 South State Street
Salt Lake City, UT 84111
T.G.A., Inc. -- 130,001 (20) 1.1% 0%
c/o David Royal
8421 Wilshire Boulevard
Beverly Hills, CA 90211
Milton A. Teplin -- 18,000 (9) * 0%
31 Rogers Drive
New Rochelle, NY 10804
Trident I, LLC -- 18,048 (9) * 0%
c/o Benchmark Equity Group, Inc.
700 Gemini
Houston, TX 77058
Angelo Vivolo -- 18,000 (9) * 0%
140 East 74th Street
New York, NY 10021
Watts Texas Limited Partnership -- 50,000 (13) * 0%
525 17th Street
Rock Island, IL 61201
Joyce N. Westmoreland -- 36,000 (9) * 0%
6946 Moniteau Ct.
Baton Rouge, LA 70809
Clay Wilkes -- 2,610,008 (16) 24.9% 2.2%
2100 E. Bengal Boulevard, #M104
Salt Lake City, UT 84121
Floyd C. Wilkes -- 403,511 (18) 3.5% 0%
13751 S. Wadsworth Park Drive #200
Draper, UT 84020
Edward L. Wilson Jr. -- 18,000 (9) * 0%
1900 McFarland
Baytown, TX 77520
Charles L. Wisseman -- 9,000 (9) * 0%
805 La Salle Drive
Champaign, IL 61820
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Percent of
Securities Being Offered Common Stock Owned
Name and Common Prior to After
Address of Beneficial Owner Other Stock Offering(1) Offering(2)
- -------------------------------------- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
J. Michael Wolfe -- 36,000 (9) * 0%
403 Greenwood Avenue
Clarksville, TN 37040
Joseph Wong -- 53,096 (23) * 0%
c/o Grand Fur Trading Company, Ltd.
10 A Humphreys Avenue
1/F Kowloon, Hong Kong
Joseph Wynne -- 10,000 (33)(34) * 0%
10 Crest Road East
North Merrick, NY 11566
Alfred Yau -- 18,000 (9) * 0%
13111 Brooks Drive #A
Baldwin Park, CA 91706
David L. Yeager -- 72,000 (9) * 0%
2881 S. 98th Street
West Allis, WI 53227
The Yorkin Trust -- 36,000 (9) * 0%
345 N. Maples Drive, #206
Beverly Hills, CA 90210
David H. Zises -- 36,000 (9) * 0%
20 Patten Circle
Newton Centre, MA 02159
Kenneth J. Zises -- 36,000 (9) * 0%
c/o Zises Associates
20 William Street
Wellesley, MA 02181
</TABLE>
- --------------------------------
* Less than one percent.
(1) As to each person or entity named as beneficial owners, such person or
entity's percentage of ownership is determined by assuming that any options
or convertible securities held by such person or entity which are
exercisable or convertible within 60 days from the date hereof have been
exercised or converted, as the case may be.
(2) Assumes the conversion and/or sale of the entirety of the securities being
offered by the noted shareholder. 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.
(3) Represents the shares of Common Stock issuable upon exercise of the
Settlement Warrant, as adjusted.
(4) Represents the Mandarino Warrant to purchase Common Stock.
(5) Includes 52,500 shares of Common Stock issued pursuant to the conversion of
a portion of the principal of a 10% Note, 73,488 shares of Common Stock
(previously defined as the "Conversion Shares") issuable upon conversion of
Class C Preferred Stock, 40,000 shares of Common Stock issuable upon
exercise of the Mandarino Warrant, and 44,000 shares of Common Stock
previously purchased by exercise of Four M Options. The conversion price of
the Class C Preferred Stock assumes that the closing bid price of the
Common Stock is not lower than $2.50 during any five consecutive trading
days during the period commencing August 21, 1996 and ending 18 months
thereafter. To the extent that the closing bid price of the Common Stock is
lower than $2.50 for such period, the holder of the Class C Preferred Stock
would be entitled to a lower conversion rate and the number of Conversion
Shares issuable would be proportionately higher.
(6) Includes 20,000 Kanter Shares and 1,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(7) Includes 40,000 Kanter Shares and 2,000 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
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(8) Includes 10,000 Kanter Shares and 1,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(9) Represents Conversion Shares issuable upon conversion of Class C Preferred
Stock (see also FN5).
(10) Includes 30,000 Kanter Shares and 15,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(11) Represents shares subject of the Four M Options.
(12) Represents shares of Common Stock issued pursuant to the conversion of a
portion of the principal of a 10% Note.
(13) Includes 25,000 shares of Common Stock issued in connection with the I-Link
Acquisition and 25,000 shares of Common Stock issuable upon exercise of the
Cook Option.
(14) Includes 12,500 shares of Common Stock issued and an additional 12,500
shares of Common Stock which may be purchased upon exercise of Four M
Options and 25,000 shares of Common Stock issuable upon exercise of the
Cook Option.
(15) Represents shares of Common Stock issued in connection with the I-Link
Acquisition. The registration statement of which this prospectus is a part
includes the distribution of the I-Link, Ltd. shares to the following
persons and their respective offers and sales of such securities: Rod Dial
(212,046 shares), Kim Watkins (6,935 shares), John Peterson (6,935 shares),
Brian Kerns (4,624 shares), Mike Radulovic (13,289 shares), Mark Wellander
(13,289 shares), Floyd A. Wilkes (6,934 shares), Steve Mitchell (6,934
shares), Toni Rae Peterson (6,934 shares) and Brandon Mayfield (6,934
shares). The address of each of such parties is c/o I-Link, Ltd. See "The
Company."
(16) Includes 1,646,263 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd. and 284,854 shares held of record by I-Link,
Ltd. Also includes 389,891 shares of Common Stock which may be purchased
upon exercise of Four M Options and 289,000 shares of Common Stock
previously purchased by exercise of Four M Options. Of the shares owned,
60,000 have been pledged to secure the repayment of loans in the principal
amount of $150,000 made in March and April 1997 and other contractual
commitments. 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.
(17) Includes 269,824 shares of Common Stock issued in connection with the
acquisition of I-Link, Ltd., and 500,000 shares of Common Stock which may
be purchased upon exercise of Four M Options.
(18) Includes 370,000 shares of Common Stock which may be purchased upon
exercise of Four M Options and 33,511 shares of Common Stock issued in
connection with the acquisition of I-Link, Ltd.
(19) Includes 92,692 shares of Common Stock issued in connection with the I-Link
Acquisition and 91,771 shares of Common Stock issuable upon conversion of
Class B Preferred Stock subject of an option exercisable commencing July 1,
1996 granted by R. Huston Babcock to the noted shareholder and an
additional 617,059 shares of Common Stock which may be purchased upon
exercise of Four M Options. Also includes 18,048 shares of Common Stock
issuable upon conversion of 752 shares of Class C Preferred Stock
beneficially owned by Trident I, LLC, of which the noted shareholder is the
manager with the power to exercise investment, dispositive and voting
control.
(20) Represents shares of Common Stock issued in connection with the I-Link
Acquisition.
(21) Includes 75,086 shares of Common Stock issued in connection with the I-Link
Acquisition, 79,992 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5), 25,000 shares of Common Stock issuable upon
exercise of the Cook Option and 25,000 shares of Common Stock issued and an
additional 25,000 shares of Common Stock which may be purchased upon
exercise of Four M Options.
(22) Includes 100,000 shares of Common Stock issued in connection with the
I-Link Acquisition and 50,000 shares previously purchased by exercise of
Four M Options.
(23) Includes 18,096 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 35,000 shares of Common Stock issued
upon conversion of a promissory note in February 1996.
(24) Includes 18,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5), 64,525 shares of Common Stock issuable upon
exercise of the named shareholder's interest in the Commonwealth Warrant
and 105,000 Kanter Shares held by the named shareholder. The Company has
been advised that the named shareholder is an affiliate or associated
person of Commonwealth. Does not include shares of Common Stock held by
Commonwealth or other affiliates or associates of Commonwealth or 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.
(25) Includes 72,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 264,000 shares of Common Stock issuable
upon conversion of Class C Preferred Stock issuable in accordance with and
upon conversion of the Convertible Notes in the event of the amendment of
the Company's Articles of Incorporation to increase its authorized capital
stock and designation of Class C Preferred Stock. See "Description of
Securities-Convertible Promissory Notes."
(26) Represents the E&M Warrant to purchase Common Stock.
(27) Includes 72,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 80,000 shares of Common Stock issuable
upon exercise of the E&M Warrant.
(28) Represents shares of Common Stock issuable upon conversion of Class C
Preferred Stock issuable in accordance with and upon conversion of the
Convertible Notes in the event of the amendment of the Company's Articles
of Incorporation to increase its authorized capital stock and designation
of Class C Preferred Stock. See "Description of Securities-Convertible
Promissory Notes."
(29) Represents the Commonwealth Warrant to purchase Common Stock.
(30) Includes 46,509 shares issued and an additional 494,883 shares of Common
Stock which may be purchased upon exercise of 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
issuable upon exercise of the Commonwealth Warrant 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. The
registration statement of which this prospectus is a part includes the
contemplated distribution of certain of the
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Commonwealth Warrants, and/or the shares of Common Stock issuable upon
exercise of such Commonwealth Warrants, to the following persons and their
respective offers, and sales of such securities: Michael Falk (64,525
shares), Al Mirman (26,733 shares), Keith Rosenbloom (25,250 shares) Robert
O'Sullivan (19,020 shares), Eric Rand (15,500 shares), Robert Beuret
(15,300 shares), Cornelia Eldridge (15,000 shares), Michael Lyall (12,500
shares), Vincent Labarbara (9,750 shares), Inder Tallur (7,500 shares),
Andres Bello (6,000 shares), Cathy Ross (4,000 shares), Eric Rubenstein
(3,633 shares), Mario Marsillo (3,000 shares), Juan Lopera (2,877 shares),
Robert Sheets (2,667 shares), Beth Lipman (2,538 shares), Ronald Moschetta
(2,500 shares), Edward Vanacore (2,500 shares), Vincent Calicchia (2,500
shares), Marc Siegel (2,500 shares), Basil Ascuitto (2,000 shares),
Jennifer Solow (2,000 shares), Murray Segal (1,500 shares), Evan Gartenberg
(1,500 shares), Zack Carmi (1,500 shares), Moustafa Zayed (1,500 shares),
Lisa Jagerman (1,000 shares), Brad Van Siclen (1,000 shares), Richard
Perreira (1,000 shares), Said Aboumar (500 shares), Wilford Adkins (500
shares), Jerome Messana (500 shares), John Tyus (500 shares), Tarek Ahamd
(500 shares), Michael Volpe (500 shares), Stephen Labarbara (500 shares),
and Russell Bailenson (500 shares). The address of each of such parties is
c/o Commonwealth Associates.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.
(31) Includes 171,192 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5), 548,891 shares of Common Stock issued in
connection with the acquisition of I-Link, Ltd., and 51,109 shares
previously purchased by exercise of Four M Options.
(32) Includes 243,891 Kanter Shares and 15,503 Four M Shares held by the named
shareholder, and an additional 380,890 shares of Common Stock which may be
purchased upon exercise of Four M Options.
(33) Represents Kanter Shares held by the named shareholder.
(34) The Company has been advised that the named shareholder is an affiliate or
associated person of Commonwealth. Does not include shares of Common Stock
held by Commonwealth or other affiliates or associates of Commonwealth or
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.
(35) Includes 39,984 shares of Common Stock issuable upon conversion of Class C
Preferred Stock (see also FN5). Also includes 12,000 Conversion Shares
issued in the name of the IRA accounts for the benefit of each of the named
shareholder and his wife.
(36) Represents shares of Common Stock which may be purchased upon exercise of
Four M Options.
(37) Includes 10,000 shares of Common Stock which may be purchased upon exercise
of Four M Options and 18,000 Conversion Shares issuable upon conversion of
Class C Preferred Stock (see also FN5).
(38) Includes 20,000 shares of Common Stock which may be purchased upon exercise
of Four M Options, 1,500 shares of Common Stock issuable upon exercise of
the named shareholder's interest in the Commonwealth Warrant and 10,000
Kanter Shares.
(39) Includes 137,969 shares of Common Stock which may be purchased upon
exercise of Settlement Warrants and 72,917 shares of Common Stock which may
be purchased upon exercise of Hardy Group Warrants.
(40) Includes 165,562 shares of Common Stock which may be purchased upon
exercise of Settlement Warrants and 87,500 shares of Common Stock which may
be purchased upon exercise of Hardy Group Warrants.
(41) Includes 27,594 shares of Common Stock which may be purchased upon exercise
of Settlement Warrants and 14,583 shares of Common Stock which may be
purchased upon exercise of Hardy Group Warrants.
(42) Includes 20,000 shares of Common Stock which may be purchased upon exercise
of Four M Options and 18,000 Conversion Shares issuable upon conversion of
Class C Preferred Stock (see also FN5).
(43) Represents Four M shares held by the named shareholder.
(44) Includes 183,542 shares of Common Stock into which the 7,500 shares of
Class B Preferred Stock owned by the noted stockholder are convertible;
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.
(45) Includes 40,000 Kanter Shares and 9,750 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(46) Includes 18,000 Conversion Shares issuable upon conversion of Class C
Preferred Stock (see also FN5) and 3,000 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(47) Represents shares of Common Stock issuable upon exercise of the named
shareholder's interest in the Commonwealth Warrant.
(48) Includes 10,000 Kanter Shares and 2,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(49) Includes 15,000 Kanter Shares and 25,250 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(50) Includes 100,000 Kanter Shares and 2,500 shares of Common Stock issuable
upon exercise of the named shareholder's interest in the Commonwealth
Warrant.
(51) Represents shares transferred to the named shareholder pursuant to his
beneficial interest in shares of Common Stock originally issued by the
Company to I-Link, Ltd. in connection with the I-Link Acquisition.
MARKET FOR THE COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap MarketSM
("Nasdaq") tier of the Nasdaq Stock MarketSM under the symbol "ILNK." Prior to
March 8, 1996, the Common Stock was traded on Nasdaq under the symbol "MDCR.".
Although the Common Stock is currently listed for quotation on Nasdaq, there can
be no assurance given that the Company will be able to continue to satisfy the
requirements for maintaining quotation of such
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securities on Nasdaq or that such quotation will otherwise continue. The Company
has no current plans to apply for listing of any of the shares of Class B
Preferred Stock, Class C Preferred Stock, the Commonwealth Warrants or any of
its other securities for quotation on Nasdaq. See "Risk Factors--Continued
Nasdaq Listing."
The range of high and low bid information for the Common Stock for
each full quarterly period during 1997 and within the two prior fiscal years is
as follows:
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
----------------------- -------- -------
<S> <C> <C>
March 31, 1995 $2.13 $1.13
June 30, 1995 1.13 0.63
September 30, 1995 1.13 0.88
December 31, 1995 1.25 1.00
March 31, 1996 $7.63 $1.00
June 30, 1996 9.75 6.13
September 30, 1996 7.50 4.06
December 31, 1996 6.00 4.00
March 31, 1997 $7.50 $3.63
June 30, 1997 15.50 4.00
</TABLE>
These quotations reflect interdealer prices, without retail markup,
markdown, or commission and may not represent actual transactions.
As of August 29, 1997, there were approximately 261 stockholders of
Common Stock of record and approximately 3,500 beneficial owners. In addition,
as of August 22, 1997, there were approximately 113 individual participants in
security position listings furnished by Cede & Co., New York, New York,
registered clearing agency and depository. On August 29, 1997, the closing bid
price for a share of Common Stock was $5.19.
RECENT TRANSACTIONS
Transactions with Winter Harbor, L.L.C.; Series M Preferred Stock
On June 5, 1997, Medcross, Inc. (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 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; 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-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.
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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 a private company engaged in the business of making
private investments in individual projects and companies. Richard E. Marriott,
his family and other minority equity holders own Winter Harbor. Medcross's
general counsel, David E. Hardy, is a brother to 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.
Also on June 5, 1997 the Company executed a letter of intent ("LOI")
with Winter Harbor relating to the Investment. The LOI contemplates that Winter
Harbor will invest $12,100,000 in a series of the Company's convertible
preferred stock to be created (the "Series M Preferred Stock"). Winter Harbor
will purchase such number of shares of Series M Preferred Stock as are
convertible into 4,400,000 shares of Common Stock for an aggregate cash
consideration of $12,100,000 (equivalent to $2.75 per share of Common Stock,
subject to adjustment). As additional consideration for its equity financing
commitments, Winter Harbor will be issued additional warrants by the Company to
acquire (a) 2,500,000 shares of Common Stock at an exercise price of $2.75 per
share (the "Series A Warrants"), (b) 2,500,000 shares of Common Stock at an
exercise price of $4.00 per share (the "Series B Warrants") and (c) 5,000,000
shares of Common Stock at an exercise price of $9.31 (the "Series C Warrants").
The respective exercise prices for the Series A Warrants, the Series B Warrants
and the Series C Warrants (collectively, the "Investment Warrants") shall be
subject to adjustment. The Series A Warrants will be exercisable at any time for
thirty months from the date of issuance, and the Series B Warrants and Series C
Warrants will be exercisable at any time for sixty months from the date of
issuance. All of the Investment Warrants (i) will have demand registration
rights and anti-dilution rights and (ii) will contain cashless exercise
provisions.
The Series M Preferred Stock will be entitled to receive cumulative
dividends in the amount of 10% per annum before any other class of preferred or
common stock receives any dividends. Thereafter, the Series M Preferred Stock
will participate with the common stock in the issuance of any dividends on a per
share basis. The Series M Preferred Stock will be senior to all other series of
the Company's preferred stock or Common Stock as to liquidation rights, which
rights shall be deemed to include accrued or unpaid dividends relating to the
Series M Preferred Stock. The Series M Preferred Stock shall be convertible at
any time prior to the fifth anniversary of its issuance, at the sole option of
Winter Harbor, into shares of Common Stock on a one-to-one basis; provided,
however, that the Series M Preferred Stock shall be automatically converted to
Common Stock on the fifth anniversary of its issuance at no cost to Winter
Harbor. The conversion price ("Class M Conversion Price") shall be equal to the
lower of $2.75 per share or 50% of the average closing bid price of the Common
Stock for the ten trading days immediately preceding the fifth anniversary of
issuance. The basis for discretionary conversion, or the conversion price for
automatic conversion, shall be adjusted upon the occurrence of certain events,
including without limitation, issuance of stock dividends, recapitalization of
the Company, or the issuance of stock by the Company at less than the fair
market value thereof. 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 at the Company's next annual shareholders meeting.
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.
In the event that Winter Harbor completes the Investment, the
Company anticipates that it 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
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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 will 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 Stockholders, 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
Company's shareholders of an increase in the number of shares of authorized
capital stock at the Company's next annul shareholders meeting.
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.
DESCRIPTION OF SECURITIES
Common Stock
The Company is currently authorized to issue 20,000,000 shares of
Common Stock, having a par value of $.007 per share. The Company proposes to
increase the number of authorized shares of Common Stock to at least 50,000,000;
and the Company expects to solicit shareholder approval for the same in the near
future. As of August 29, 1997, there are 11,652,597 shares of Common Stock
issued and outstanding and 261 holders of record of the Common Stock, and
approximately 3,500 beneficial owners. Each share of Common Stock entitles the
holder thereof to one vote on each matter submitted to the stockholders of the
Company for a vote thereon. The holders of Common Stock: (i) have equal ratable
rights to dividends from funds legally available therefor when, as and if
declared by the Board of Directors; (ii) are entitled to share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) as noted above, are
entitled to one non-cumulative vote per share on all matters submitted to
stockholders for a vote at any meeting of stockholders. Prior to any payment of
dividends to the holders of Common Stock, all accrued and unpaid dividends on
any outstanding shares of Preferred Stock must be paid. Other than as set forth
herein, the Company anticipates that, for the foreseeable future, it will retain
earnings, if any, to finance the operations of its businesses. The payment of
dividends in the future will depend upon, among other things, the capital
requirements and the operating and financial conditions of the Company.
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Preferred Stock
The Articles of Incorporation authorize the issuance of up to
500,000 shares of preferred stock, $10.00 par value per share (previously
defined as the "Preferred Stock"). The Company proposes to increase the number
of authorized shares of Preferred Stock to at least 10,000,000 and to solicit
shareholder approval for the same in the near future. The Board of Directors is
authorized to issue shares of Preferred Stock from time to time in one or more
series and, subject to the limitations contained in the Articles of
Incorporation and any limitations prescribed by law, to establish and designate
any such series and to fix the number of shares and the relative conversion
rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. New issuances of shares of Preferred
Stock with voting rights can affect the voting rights of the holders of
outstanding shares of Preferred Stock and Common Stock by increasing the number
of outstanding shares having voting rights, and by the creation of class or
series voting rights. Furthermore, additional issuances of shares of Preferred
Stock with conversion rights can have the effect of increasing the number of
shares of Common Stock outstanding up to the amount of Common Stock authorized
by the Articles of Incorporation and can also, under certain circumstances, have
the effect of delaying or preventing a change in control of the Company and/or
otherwise adversely affect the rights of holders of outstanding shares of
Preferred Stock and Common Stock. To the extent permitted by the Articles of
Incorporation, such shares of Preferred Stock may have preferences over the
Common Stock (and other series of Preferred Stock) with respect to dividends and
liquidation rights. As of the date hereof, 22,500 shares of Preferred Stock had
been designated Class B Preferred Stock (of which 7,500 shares are issued and
outstanding), 240,000 shares of Preferred Stock had been designated Class C
Preferred Stock (of which 240,000 are issued and outstanding), and 7,500 shares
of Preferred Stock had been designated 12% Cumulative Convertible Preferred
Stock (no shares of which are issued and outstanding).
Class B Preferred Stock
There are 22,500 shares of Class B Preferred Stock authorized to be
issued, 7,500 of which are issued and outstanding. Each share of Class B
Preferred Stock entitles the holder thereof to receive cumulative dividends. The
initial dividend rate for the Class B Preferred Stock was 5.5%. Effective April
1, 1992, the rate has been adjusted monthly, to be equal to the published rate
paid by Texas Commerce Bank, N.A., Houston, Texas, on 30-day certificates of
deposit in effect on the first day of each such month, plus 2%. As of December
1, 1995, the Class B Preferred Stock dividend rate was 5.0%. Dividends are
payable in cash quarterly on the first day of July, October, January and April
of each year that any shares of Class B Preferred Stock are outstanding.
Dividends accrue on each share of Class B Preferred Stock whether or not earned
or declared and whether or not there are funds of the Company legally available
for payment thereof. Each share of Class B Preferred Stock is convertible at the
option of the holder thereof into shares of Common Stock. The number of shares
of Common Stock into which shares of Class B Preferred Stock are convertible is
derived by multiplying the number of shares of Class B Preferred Stock to be
converted by a fraction, the numerator of which is $10.00 and the denominator of
which is the conversion price ("Conversion Price"), which is adjustable. The
initial Conversion Price was $0.058375. As of June 30, 1997, the Conversion
Price was $0.408625; therefore the number of shares of Common Stock issuable if
all 7,500 outstanding shares of Class B Preferred Stock were converted as of
such date would be 183,542. Except as otherwise provided by law, shares of Class
B Preferred Stock have no voting rights.
The Class B Preferred Stock is subject to redemption by the Company
at any time. If called for redemption, the right to convert Class B Preferred
Stock to Common Stock shall terminate on the close of business on the day before
the date fixed for actual payment of the redemption price. No shares of Class B
Preferred Stock designated for redemption pursuant to any notice of redemption
shall be entitled to any dividends after the applicable redemption date. On the
redemption date, all rights of the holders of such shares as stockholders of the
Company by reason of the ownership of such shares shall cease, except the right
to receive the redemption price of such shares upon presentation and surrender
of the certificate representing such shares. No Class B Preferred Stock
designated for redemption shall be deemed to be outstanding after the redemption
date. The redemption price is $10.00 per share of Class B Preferred Stock, plus
the amount of any accrued and unpaid dividends on such share on the date payment
of such redemption price is paid.
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In the event of the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company, the holders of the
Class B Preferred Stock shall be entitled to liquidation rights identical to the
holders of the Class A Preferred Stock; however, such liquidation rights are
subordinate to the Class A Preferred Stock, but superior to any other series of
Preferred Stock and to the Common Stock.
Class C Preferred Stock
There are 240,000 shares of Class C Preferred Stock designated and
issued and outstanding. The holders of the Class C Preferred Stock are entitled
to cumulative preferential dividends, when, as and if declared by the Board of
Directors, on a quarterly basis on November 15, February 15, May 15 and August
15 each year in an amount equal to 8% per annum of the liquidation preference
per share of $60.00. Dividends will be paid, to the extent permissible under the
Florida Business Corporation Act, to the holders of the Class C Preferred Stock
in cash or, at the option of the Company, as determined by the Board of
Directors, in shares of Common Stock (the "Dividend Shares") (based upon the
last sale price of a share of Common Stock for the five trading days preceding
the record date for a particular dividend), provided that such Dividend Shares
are covered by an effective registration statement. Except as otherwise provided
by law, shares of Class C Preferred Stock have no voting rights.
Conversion Rights. Unless previously redeemed, the Class C Preferred
Stock is convertible into shares of the Company's Common Stock, at any time
commencing November 21, 1996, at the option of the holder, into such number of
shares of the Company's Common Stock as shall equal $60 divided by the lower of
(i) $2.50, or (ii) the closing bid price for any five consecutive trading days
during the period commencing on September 6, 1996 and ending on March 5, 1998
(previously defined as the "Conversion Price"), subject to certain adjustments
for (a) the sale or issuance of Common Stock by the Company at a price less than
the Conversion Price (except for shares issuable upon exercise or conversion of
securities outstanding or issuable by the Company as of the date hereof), (b) in
the event the Company's registration statement relating to the Conversion Shares
is not declared effective within twelve months after September 6, 1996 the
Conversion Price shall be subject to a reduction of ten percent for each 90 day
delay in the effective date of such registration statement, or (c) in the event
the closing bid price is less than $2.50 for five consecutive trading days
during the period from September 6, 1996 to the date eighteen months thereafter
("the Adjustment Period,") the Conversion Price shall be reduced to the lower of
the then current Conversion Price or the lowest of the average closing bid price
for five consecutive trading days during the Adjustment Period. In no event
shall the Conversion Price be adjusted below $1.25 on account of the adjustments
described in (a), (b) or (c); however, the Conversion Price is subject to
adjustment under certain other circumstances. As of the date hereof, none of the
shares of Class C Preferred Stock has been converted. Although the Company
contemplates obtaining shareholder approval for the amendment of the Company's
Articles of Incorporation to accommodate such adjustment provision, in the event
that all 240,000 Shares are converted, the Company is without sufficient shares
of Common Stock to accommodate an adjustment of the Conversion Price below
$2.06. Therefore, no adjustment will be effected unless and until the number of
the Company's authorized shares is increased. See "Risk Factors-Authorization of
Preferred Stock."
Automatic Conversion. Unless previously redeemed, the Class C
Preferred Stock shall be automatically converted into the Conversion Shares on
September 6, 2001 at a Conversion Price equal to the lower of the then current
Conversion Price or 50% of the average closing bid price of the Company's Common
Stock for the ten trading days immediately preceding the fifth anniversary
of the Final Closing.
Redemption. The Class C Preferred Stock is redeemable at any time
prior to September 6, 2000, at the option of the Company, as determined by the
Board of Directors, on not less than thirty nor more than sixty days written
notice to registered holders at a redemption price equal to $60 per share plus
accrued and unpaid dividends, provided (i) the Conversion Shares are covered by
an effective registration statement; and (ii) during the immediately preceding
thirty consecutive trading days ending within fifteen days of the date of the
notice of redemption, the closing bid price of the Company's Common Stock is not
less than $8.00 per share.
The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the Company, on not less than thirty nor
more than sixty days written notice to registered holders at a redemption price
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equal to $90 plus accrued and unpaid dividends, provided the Conversion Shares
are covered by an effective registration statement or the Conversion Shares are
otherwise exempt from registration.
Registration Rights. Within 12 months of September 6, 1996, the
Company shall file a registration statement under the Securities Act covering
the Common Stock underlying the Class C Preferred Stock (previously defined as
the "Conversion Shares"). If the registration statement is not declared
effective within such 12 month period, the Conversion Price shall be subject to
an additional reduction of 10% for each 90 day delay in the effective date of
the Registration Statement and the dividend rate shall be increased to 12%;
provided, however, that in the event the Company files any registration
statement prior to the expiration of 12 months from September 6, 1996, the
Conversion Shares shall be likewise registered at such time; and further
provided that the Conversion Price shall not be reduced below $1.25 per share.
Lockup. The holders of the Conversion Shares and Dividend Shares may
not publicly sell their Conversion Shares or Dividend Shares, if any, for a
period of 12 months from September 6, 1996, without the prior written consent of
Commonwealth.
The 10% Notes
The Company issued $1,000,000 in principal amount of 10% Notes on
February 23, 1996. Commonwealth acted as the placement agent of the 10% Notes.
Each 10% Note has a minimum face amount of $50,000 and provides for the accrual
of interest at the simple annual rate of 10%, payable at maturity. The 10% Notes
were due upon the earlier of August 31, 1996 (the "Maturity Date") or the
Company's receipt of proceeds of at least $4 million from an equity or debt
financing (the "Accelerated Maturity Date"). The Company had the right to extend
the Maturity Date of some or all of the 10% Notes until February 28, 1997 upon
payment to the holder(s) of the 10% Note(s) of a cash payment equal to two and
one-half percent (2.5%) of the then outstanding principal amount of such 10%
Note(s). In the event of extension by the Company, the interest rate with
respect to the unpaid principal balance would have increased to the simple
annual rate of thirteen percent (13%). The unpaid principal balance of the 10%
Notes was prepayable by the Company without penalty upon 30 days notice to the
holder.
Up to $1,250 of each $50,000 (i.e., 2.5%) of unpaid principal amount
of a 10% Note was convertible at the option of the holder into 17,500 shares of
Common Stock (or $.0714 per share) (subject to adjustment) at any time after
March 31, 1996 but prior to the Maturity Date or Accelerated Maturity Date. Upon
the occurrence of an Event of Default (as defined in the 10% Note), the
conversion right in the 10% Note shall be amended such that the remaining unpaid
principal balance shall be convertible into shares of Common Stock at 40% of the
fair market value (the average of the closing bid and ask prices on the last ten
trading days of the prior calendar month) per share of Common Stock. Effective
as of August 21, 1996, holders of an aggregate of $1,000,000 in principal of the
10% Notes elected to convert $25,000 in principal to 350,000 shares of Common
Stock.
The non-convertible portion of the principal of the 10% Notes was
repaid from the proceeds of the Class C Offering. Simultaneous with the
Company's repayment, holders of the 10% Notes instructed the Company to allocate
an aggregate of $709,800 in principal amount of the 10% Notes to purchase an
aggregate of 11,018 shares of Class C Preferred Stock.
The holders of the 10% Notes who converted a portion of such notes
to purchase Common Stock and/or purchased Class C Preferred Stock have agreed
with Commonwealth not to publicly sell their shares of Common Stock or
Conversion Shares for a period of 12 months from September 6, 1996; however,
Commonwealth has agreed with such stockholders who used a portion of the
repayment of the 10% Notes to purchase Class C Preferred Stock in the Class C
Offering to permit such persons to sell a sufficient amount of Conversion Shares
following registration thereof as will equal in value the principal amount of
the note repayment used to purchase Class C Preferred Stock.
The 10% Notes provide for demand registration rights for the shares
of Common Stock issued or issuable upon conversion of the 10% Note on one
occasion at any time after March 1, 1996 but prior to February 28, 1999, upon
the written request from the holders of at least fifty percent (50%) of the
shares of Common Stock issued or issuable upon conversion of the 10% Notes. In
addition the shares of Common Stock issued or issuable upon conversion of
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the 10% Notes shall have piggy-back registration rights in the event that the
Company proposes to register any of its securities under the Act in connection
with the public offering thereof solely for cash (other than any registration
statement on the Forms S-4, S-8 or a similar form); provided, however, that the
Company shall have no such obligation after three years from the date of
issuance of the 10% Notes or if the managing underwriter of the subject proposed
offering expresses its objection thereto. Holders of an aggregate of $1,000,000
in principal amount of the 10% Notes demanded registration of the shares of
Common Stock on September 9, 1996.
Convertible Promissory Notes
The Company issued an aggregate of $717,000 in principal amount of
Convertible Promissory Notes (previously defined as the "Convertible Notes") on
September 6, 1996 in connection with the Class C Offering. Commonwealth acted as
the placement agent for such notes. Each Convertible Note is due on September
30, 1997 with interest at the rate of eight percent (8%) per annum. The
Convertible Notes are prepayable by the Company without penalty upon 30 days
notice provided that the Company has effected an amendment to its Articles of
Incorporation to increase its authorized capital stock and designated sufficient
Class C Preferred Stock to accommodate conversion of the Convertible Notes.
The entirety of the unpaid principal amount of the Convertible Notes
will be automatically converted into shares of Class C Preferred Stock at the
rate of $60 per share of Class C Preferred Stock 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 (the "Articles Amendment") and the
designation of sufficient shares to accommodate conversion. The Convertible
Notes are convertible into an aggregate of 11,950 shares of Class C Preferred
Stock.
Each of the following shall constitute an event of default (an
"Event of Default") under the Convertible Notes: (i) the failure to pay when due
any principal or interest thereunder; (ii) the failure of the Company to effect
the Articles Amendment within seven months of issuance of the Convertible
Note; (iii) the violation by the Company of any covenant or agreement contained
in the Convertible Note and the continuance of such violation for a period of
thirty days after written notice to the Company of such failure; (iv) any change
in control of the Company which the Board of Directors of the Company deems to
be hostile or unfriendly; (v) the assignment for the benefit of creditors by the
Company; (vi) the application for the appointment of a receiver or liquidator
for the Company or for property of the Company; (vii) the filing of a petition
in bankruptcy by or against the Company; (viii) the issuance of an attachment or
the entry of a judgment against the Company in excess of $500,000; (ix) a
default by the Company with respect to any other material indebtedness or
obligation; (x) the making or sending of a notice of an intended bulk sale by
the Company; or (xi) the termination of existence, dissolution or insolvency of
the Company. There is no sinking fund or other security for the payment of the
Convertible Notes.
Settlement Warrant
As of November 3, 1994, the Company issued a Common Stock Purchase
Warrant (previously defined as the "Settlement Warrant") to JW Charles Financial
Services, Inc. (previously defined as "JW Charles") pursuant to the terms of a
Financial Consulting Agreement dated as of November 1, 1994 between the Company
and Corporate Management Group, Inc. The Settlement Warrant entitled the holder
to purchase an aggregate of 250,000 shares of Common Stock at an initial
exercise price of $2.00 per share, subject to adjustment, at any time through
November 3, 1999. Pursuant to the adjustment provisions, the Settlement Warrant
was subsequently adjusted to entitle the holder to purchase an aggregate of
331,126 shares of Common Stock at an exercise price of $1.51 per share. The
Settlement Warrant contains demand registration rights during the exercise
period and piggyback registration rights for a period of five years. On April
29, 1997, all right, title and interest in the Settlement Warrant was
transferred to the Hardy Group pursuant to the Settlement Agreement between JW
Charles and the Company. See "Legal Proceedings" and "Certain Relationships and
Related Transactions."
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Commonwealth Warrants
On August 21, 1996, in connection with the Company's Class C
Offering, the Company entered into the Placement Agent's Common Stock Warrant
Agreement and the Consultant's Common Stock Warrant Agreement with Commonwealth
Associates (previously defined as "Commonwealth"). Together, the Placement
Agent's Common Stock Warrant Agreement and the Consultant's Common Stock Warrant
Agreement are collectively referred to as the "Commonwealth Warrant
Agreements." The Commonwealth Warrant Agreements are substantially identical
except that the Placement Agent's Common Stock Warrant Agreement
and related Warrant Certificate entitle Commonwealth to purchase 250,000 shares
of Common Stock and the Consultant's Warrant Agreement and related Warrant
Certificate entitle Commonwealth to purchase 500,000 shares of Common Stock
(previously defined as the "Commonwealth Warrants"). The Commonwealth Warrants
entitle Commonwealth to purchase up to an aggregate of 750,000 shares of Common
Stock at any time from March 1, 1997 until August 20, 2001 at an exercise price
per share of $2.50, subject to adjustment. At its option, Commonwealth may
effect a "cashless exercise" during the warrant exercise period by exchanging
the Commonwealth Warrants for a specified number of shares of Common Stock (the
"Total Share Number") less a number of shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Total Share Number and the
then-applicable exercise price by (ii) the market price (as defined) of a share
of Common Stock. The holders of the Commonwealth Warrants and/or shares issuable
upon exercise of the Commonwealth Warrants (the "Commonwealth Shares") have
piggyback registration rights through August 20, 2003 and demand registration
rights from August 20, 1997 through August 1, 2003; provided, however, that in
the event the Company does not file a registration statement covering the shares
of Common Stock issued upon conversion of the 10% Notes within ninety-five
days of a request of a majority of the 10% Noteholders, the demand registration
rights accelerate from August 20, 1997 to the 96th day following such demand. In
the event the Company has not used its best efforts to file a registration
statement within ninety-five days of receipt of demand therefor by the 10%
Noteholders or within thirty days after demand by Commonwealth upon
acceleration of its demand registration rights, the Company will be required to
repurchase any Commonwealth Shares at the higher of the market price (as
defined) on the date of notice of demand for registration or the expiration of
the period by which the Company must have filed the registration statement and
must repurchase any outstanding Commonwealth Warrants at the market price of the
Common Stock less the exercise price of the Commonwealth Warrants.
Four M Options
On February 21, 1996, Four M International, Ltd. ("Four M"), a
principal shareholder of the Company granted certain options exercisable
commencing July 1, 1996 (subject to the satisfaction of certain conditions) to
purchase 3,915,570 shares of Common Stock. Subsequent to their initial issuance,
802,847 of such options have been exercised and 3,112,723 Four M Options remain
outstanding. 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 business days preceding July 1, 1996 or $1.79 per
share. 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 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 members of management of I-Link (at
that time), namely, Clay Wilkes, Floyd Wilkes and Alex Radulovic, have the right
to purchase an aggregate of 435,000 shares of Common Stock prior to September 6,
1997 and 824,891 shares prior to December 31, 1997. Other individuals have the
right to purchase 235,199 shares prior to September 6, 1997 and 505,696 shares
prior to December 31, 1997.
In August 1996, the Four M Options were amended to provide that in
the event that $200,000 in principal amount (i.e., exercise proceeds) of the
Four M Options have been exercised prior to December 31, 1996, the exercise
period of the remaining Four M Options exercisable during 1996 (the "1996 Four M
Options") will be extended to September 6, 1997 and the exercise price would be
increased by 4% of the then current exercise price for each 30 day period or
portion thereof commencing January 1, 1997 in which the remainder of the 1996
Four M Options are not exercised. From December 1996 through August 1997, an
aggregate of 802,847 Four M Options were exercised by certain of the holders
thereof and proceeds aggregating $1,837,977 were received by Four M. The
exercise price per share of the Four M Options is $2.45 through September 6,
1997 and thereafter is $1.79.
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The shares of Common Stock owned by Four M are subject of a lockup
agreement with Commonwealth from and after the termination of the option
agreements and until 12 months from September 6, 1996; provided, however, that
to the extent Commonwealth releases more than 300,000 shares in the aggregate on
behalf of any affiliate or associated person of Commonwealth, any officer or
director of the Company or its subsidiaries or Benchmark, Commonwealth shall
release a number of Four M Shares equal to the same percentage as the number of
shares owned by such person. In addition, each of the Four M Option holders has
executed a lock-up agreement with Commonwealth for a period of twelve
months from September 6, 1996.
Babcock Shares
The Babcock Shares are issuable upon conversion of outstanding Class B
Preferred Stock. On February 21, 1996 R. Huston Babcock, M.D., a director of
the Company, granted certain options 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 Preferred Stock.
The exercise price is equal to the lesser of 200% of the average of the closing
bid and ask price per share of Common Stock for the ten 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 option has expired) and
91,771 shares prior to December 31, 1997.
Dr. Babcock and Benchmark have executed lock-up agreements with
Commonwealth for a period of twelve months from September 6, 1996.
Kanter Option
On January 31, 1996, Walnut Capital Corp. ("WCC"), Windy City, Inc. ("WCI")
and Canadian Imperial Bank of Commerce and Trust Company (Bahamas) Limited
("CIB") (the "Kanter Group") entered into an agreement for the grant of an
option to various purchasers, including certain affiliates and associated
persons of Commonwealth, for the sale of 40,000 shares of Class A Preferred
Stock and/or the 978,891 shares of Common Stock of the Company issuable upon
conversion of such Class A Preferred Stock owned by the Kanter Group to the
purchasers. The option became effective February 7, 1996 and continued through
February 11, 1996, unless extended. The consideration for the purchase was
$485,000. The Shareholders' Agreement between Four M, WCC, WCI and CIB was
terminated concurrent with the sale by the Kanter Group by agreement among the
parties to the Shareholders' Agreement.
Holders of the Kanter Option Shares have entered into lock-up agreements
with Commonwealth for a period of twelve months from September 6, 1996.
Cook Option
On October 19, 1995, Scott Cook loaned the principal amount of $200,000 to
I-Link, Ltd., one-half of which was guaranteed by the Company. The amount
guaranteed by the Company was secured under a Security Agreement pursuant to
which GNET Enterprises, Inc., the general partner of I-Link, Ltd. granted a
security interest in certain assets of I-Link, Ltd. In addition, the Company
issued to Mr. Cook a Common Stock Purchase Option to Purchase Common Stock for
the purchase of 100,000 shares of Common Stock at an exercise price of $1.00 per
share commencing January 1, 1996 through December 31, 1996. The Cook Option
provides for piggyback registration rights for three years beginning January 1,
1996. On April 24, 1996, Mr. Cook transferred 25,000 of the Cook Options to
S.C. Culbreth, 25,000 to John Beardmore and 25,000 to Watts Texas Limited
Partners. Mr. Cook has agreed to refrain from exercising the options and waived
the right to have the shares issuable on exercise of the Cook Option reserved
until approved by stockholders of the Company of an increase in the number of
authorized shares in an amount sufficient to accommodate an adjustment of the
Conversion Price of the Class C Preferred Stock.
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E&M Warrants
In connection with a loan to the Company in June 1996 of $250,000 by E&M RP
Trust, the Company issued the E&M Warrants to purchase 80,000 shares of Common
Stock to E&M. The E&M Warrants entitle the holder to purchase the Common Stock
at an exercise price of $4.00 per share at any time during the period ending
June 9, 1999. The E&M Warrants contain demand and piggyback registration rights
commencing July 31, 1997 through June 9, 1999 as to the E&M Warrants and shares
of Common Stock.
Mandarino Warrants
In connection with a loan to the Company in June 1996 of $125,000 by Joseph
Mandarino, the Company issued the Mandarino Warrants to purchase 40,000 shares
of Common Stock to Mandarino. The Mandarino Warrants entitle the holder to
purchase the Common Stock at an exercise price of $4.00 per share at any time
during the period ending June 9, 1999. The Mandarino Warrants contain demand and
piggyback registration rights commencing July 31, 1997 through June 9, 1999 as
to the Mandarino Warrants and shares of Common Stock. Mr. Mandarino has entered
into a lock-up agreement with Commonwealth for a period of twelve months from
September 6, 1996.
Hardy Group Warrants
In connection with the JW Charles Settlement Agreement, in April 1997 the
Company issued the Hardy Group Warrants to purchase an aggregate of 175,000
shares of Common Stock to the members of the Hardy Group. The Hardy Group
Warrants entitle the holders to purchase the Common Stock at an exercise price
of $2.50 per share at any time during the period ending April 29, 2002. The
Hardy Group Warrants contain demand and piggyback registration rights as to the
Hardy Group Warrants and underlying shares of Common Stock.
Anti-Takeover Measures
The Articles of Incorporation and Bylaws contain provisions that could
discourage potential takeover attempts and prevent shareholders from changing
the Company's management. The Articles of Incorporation provide for a
classified Board of Directors and that vacancies on the Board of Directors shall
be filled only by a majority of the remaining directors then in office.
In addition, the Bylaws provide, among other things, that no proposal by a
stockholder shall be presented for vote at a special or annual meeting of
stockholders unless such stockholder shall, not later than the close of business
on the fifth day following the date on which notice of the meeting is first
given to stockholders, provide the Board of Directors or the Secretary of the
Company with written notice of intention to present a proposal for action at the
forthcoming meeting of stockholders, which notice shall include the name and
address of such stockholder, the number of voting securities he or she holds of
record and which he or she holds beneficially, the text of the proposal to be
presented at the meeting and a statement in support of the proposal. Any
stockholder may make any other proposal at an annual meeting or special meeting
of stockholders and the same may be discussed and considered, but unless stated
in writing and filed with the Board of Directors or the Secretary prior to the
date set forth above, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the stockholders taking place sixty
days or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business proposed by
a stockholder (acting in such capacity) shall be acted upon at such annual
meeting unless stated and filed as described above.
Transfer and Warrant Agent
American Stock Transfer & Trust Company, New York, New York is the
Registrar and Transfer Agent for the Company's Preferred Stock and Common Stock.
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PLAN OF DISTRIBUTION
The Securities subject hereto are being offered for sale by the Selling
Securityholders. Consequently, the Selling Securityholders will receive the
proceeds from the sale of such securities by the Selling Securityholders
pursuant to this Prospectus. The Company will receive the proceeds, if any,
from the exercise of the Settlement Warrants, the Commonwealth Warrants, the
Cook Option, the E&M Warrants, the Mandarino Warrants and the Hardy Group
Warrants. The Securities may be sold from time to time by the Selling
Securityholders or by pledgees, transferees, or other successors in interest, on
Nasdaq (or such other exchange on which the securities are listed at the time of
sale) at prices and terms then prevailing or related to the then current market
price, delivered in satisfaction of previously incurred indebtedness or other
contractual obligations, or sold directly to purchasers in privately negotiated
transactions by and subject to the discretion of the Selling Securityholders.
The Selling Securityholders may from time to time offer their respective
securities for sale through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Stockholders and/or the purchasers of such securities for whom
they may act as agents. The Selling Securityholders and any underwriter, dealer
or agent who participates in the distribution of such Selling Securityholders'
securities may be deemed to be "underwriters" under the Securities Act and any
profit on the sale of such securities by any of them and any discounts,
commissions or concessions received by any such underwriters, dealers or agents
may be deemed to be underwriting compensation under the Securities Act.
At the time a particular offer of the Securities is made by or on the
behalf of a Selling Securityholder, a Prospectus and a Prospectus Supplement, to
the extent required, will be distributed which will set forth the number of
securities being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for such securities purchased from the Selling Securityholders, any
discounts, commissions and other items constituting compensation from the
Selling Securityholders, any discounts, commissions or concessions allowed,
reallowed or paid to dealers, and the proposed selling price to the public.
The Securities may be sold from time to time in one or more transactions:
(i) at an offering price which is fixed or which may vary from transaction to
transaction depending upon the time of sale, or (ii) at prices otherwise
negotiated at the time of sale. Such prices will be determined by the Selling
Securityholders or by agreement between the Selling Securityholders and their
underwriter.
In order to comply with the applicable securities laws, if any, of certain
states, the Securities will be offered or sold in such states through registered
or licensed brokers or dealers in those states. In addition, in certain states,
such securities may not be offered or sold unless they have been registered or
qualified for sale in such states or an exemption from such registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations promulgated under the Exchange Act,
any person engaged in a distribution of securities may not simultaneously bid
for or purchase securities of the same class for a period of two business days
prior to the commencement of such distribution. In addition and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-5, 10b-6 and 10b-7, in
connection with transactions in the Shares during the effectiveness of the
registration statement of which this Prospectus is a part. All of the foregoing
may affect the marketability of such securities.
The Company has paid all of the expenses incident to the registration of
the foregoing securities (including registration pursuant to the securities laws
of certain states) other than: (i) any fees or expenses of any counsel retained
by any Selling Securityholder and any out-of-pocket expenses incurred by any
Selling Securityholder or any person retained by any Selling Securityholder in
connection with registration of the Securities and (ii) commissions, expenses,
reimbursements and discounts of underwriters, dealers or agents, if any.
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LEGAL MATTERS
Certain legal matters in connection with the registration of the securities
offered hereby will be passed upon for the Company by De Martino Finkelstein
Rosen & Virga, Washington, D.C.
EXPERTS
The consolidated balance sheet of Medcross, Inc. as of December 31, 1996,
and the consolidated statements of operations and cash flows for each of the two
years in the period ended December 31, 1996; the balance sheet of Family
Telecommunications Incorporated as of December 31, 1996 and the statements of
operations and cash flows for the period from the date of inception (March 20,
1996) to December 31, 1996; and the balance sheet of MiBridge, Inc. as of
December 31, 1996 and the statements of operations and cash flows for the period
from the date of inception (March 18, 1996) to December 31, 1996 included in
this prospectus have been included herein in reliance on the reports of Coopers
& Lybrand L.L.P., independent accountants, given the authority of that firm as
experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Medcross, Inc.
Report of Independent Accountants...................................................................... F-2
Consolidated Balance Sheet as of December 31, 1996..................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995.......................................................................... F-7
Notes to Consolidated Financial Statements............................................................. F-8
Consolidated Balance Sheet (unaudited) as of June 30, 1997............................................. F-26
Consolidated Statements of Operations (unaudited) for the three months ended June 30, 1997
and 1996 and for the six months ended June 30, 1997 and 1996........................................ F-27
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1997 and 1996...... F-28
Notes to Consolidated Financial Statements............................................................. F-29
Family Telecommunications Incorporated
Report of Independent Accountants...................................................................... F-36
Balance Sheet as of December 31, 1996.................................................................. F-37
Statement of Operations for the period from March 20, 1996 (inception) to December 31, 1996............ F-38
Statement of Cash Flows for the period from March 20, 1996 (inception) to December 31, 1996............ F-39
Notes to Financial Statements.......................................................................... F-40
Pro Forma Combined Financial Statements (unaudited)
Medcross, Inc. and Family Telecommunications Incorporated
Pro Forma Combined Balance Sheet as of December 31, 1996 (unaudited)................................ F-46
Medcross, Inc., Family Telecommunications Incorporated
Pro Forma Statement of Operations for the year ended December 31, 1996 (unaudited).................. F-47
Notes to the Pro Forma Combined Financial Statements (unaudited)....................................... F-48
MiBridge, Inc.
Report of Independent Accountants...................................................................... F-50
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................... F-51
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)............................ F-52
Statements of Changes in Stockholders' Equity for the period from inception (March 18, 1996)
to December 31, 1996 and for the six months ended June 30, 1997 (unaudited)......................... F-53
Statements of Cash Flows for the period from inception (March 18, 1996) to
December 31, 1996 and for the six months ended June 30, 1997 (unaudited)............................ F-54
Notes to Financial Statements.......................................................................... F-55
Pro Forma Combined Financial Statements (unaudited)
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc.
Pro Forma Combined Balance Sheet as of June 30, 1997 (unaudited).................................... F-62
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc. Pro
Forma Statement of Operations for the six month period ended June 30, 1997 (unaudited).............. F-63
Medcross, Inc., Family Telecommunications Incorporated (FTI) and MiBridge, Inc.
Pro Forma Statement of Operations for the six month period ended
December 31, 1996 (unaudited)....................................................................... F-64
Notes to the Pro Forma Combined Financial Statements (unaudited)....................................... F-65
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Medcross, Inc.:
We have audited the accompanying consolidated balance sheet of Medcross, Inc.
and Subsidiaries ("the Company") as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medcross, Inc. and
Subsidiaries as of December 31, 1996, and the consolidated results of their
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand, L.L.P.
Salt Lake City, Utah
April 11, 1997
F-2
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1996
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 4,500,227
Accounts receivable less allowances of $652,019 780,907
Inventory less allowances of $260,033 557,036
Certificate of deposit - restricted 208,500
Prepaid expenses 47,472
Other current assets 11,411
--------------
Total current assets 6,105,553
--------------
Property and equipment
Office furniture, equipment and leasehold improvements 388,191
Network services furniture and equipment 2,110,996
Medical equipment and vehicles 2,975,701
--------------
5,474,888
Less accumulated depreciation (2,618,252)
--------------
Net property and equipment 2,856,636
--------------
Other assets:
Intangible assets less accumulated amortization of $254,506 486,028
Certificate of deposit - restricted 1,761,312
Other assets 224,301
--------------
Total other assets 2,471,641
--------------
Total assets $ 11,433,830
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,379,451
Accrued litigation settlement 821,000
Note payable - related party 88,000
Notes payable 1,007,000
Current portion of long-term debt - related party 43,554
Current obligations under capital lease 187,047
--------------
Total current liabilities 4,526,052
--------------
Long-term debt - related party 44,128
Capital lease obligation 236,705
Minority interest in consolidated subsidiaries 328,328
--------------
Total liabilities 5,135,213
--------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $10 par value, 247,500 shares outstanding 2,475,000
Common stock, $.007 par value, authorized 20,000,000 shares, issued and
outstanding 10,607,597 shares 74,253
Additional paid-in capital 30,874,910
Accumulated deficit (27,125,546)
--------------
Total stockholders' equity 6,298,617
--------------
Total liabilities and stockholders' equity $ 11,433,830
==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Health care service revenue, net $ 2,212,544 $ 2,785,064
Network service revenue 170,532 -
Equipment sales and service - 337,889
-------------- ----------
Net operating revenue 2,383,076 3,122,953
-------------- ----------
Operating costs and expenses:
Salaries and benefits 1,825,138 1,123,340
Selling, general and administrative 2,863,963 1,199,519
Cost of goods sold - equipment sales and service - 154,481
Communications network expenses 1,120,779 -
Depreciation and amortization 1,094,004 465,020
Provision for inventory valuation 260,033 -
Repairs and maintenance 288,662 309,255
Provision for doubtful accounts 197,565 365,093
Research and development 347,504 -
Acquired in-process research and development 14,577,942 -
-------------- ----------
Total operating costs and expenses 22,575,590 3,616,708
-------------- ----------
Operating loss (20,192,514) (493,755)
-------------- ----------
Other income (expense):
Interest expense (2,191,629) (160,423)
Interest income 147,322 10,717
Equity in net income (loss) of unconsolidated subsidiaries (3,211) 20,500
Litigation settlement expense (821,000) -
Other income (8,108) 58,612
-------------- ----------
Total other expense (2,876,626) (70,594)
-------------- ----------
Loss before minority interest in income of consolidated
subsidiaries (23,069,140) (564,349)
Minority interest in income of consolidated subsidiaries 4,900 12,440
-------------- ----------
Net loss $ (23,064,240) $ (551,909)
============== ==========
Net loss per common share after preferred dividends $ (6.53) $ (.39)
============== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $(23,064,240) $ (551,909)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities
Depreciation and amortization 1,094,004 465,020
Accrued litigation settlement 821,000 -
Warranty liability - (94,091)
Expense for warrants issued below market 11,875 16,667
Imputed interest on convertible notes 1,945,000 -
Acquired in-process research and development 14,577,942 -
Common stock issued for services 12,500 50,000
Provision for inventory valuation 260,033 -
Provision for doubtful accounts 197,565 365,093
Gain (loss) on sale of property and equipment (3,080) 765
Equity in net loss (income) of unconsolidated subsidiaries 3,211 (20,500)
Minority interest in net income of consolidated subsidiaries (4,900) (12,440)
Forgiveness of debt (10,220) -
Increase (decrease) from changes in:
Accounts receivable (29,377) (161,353)
Inventory 12,919 91,926
Organization costs refunded - 14,055
Additions to other assets (204,406) -
Other current assets 15,591 46,465
Accounts payable and accrued expenses (475,702) 109,664
------------ -----------
Net cash provided (used) by operating activities (4,840,285) 319,362
------------ -----------
Cash flows from investing activities
Purchases of property and equipment (677,004) (23,222)
Proceeds from sale of property and equipment 3,080 5,755
Investment in unconsolidated subsidiary - (6,250)
Purchase of certificates of deposit - restricted (1,962,601) -
Proceeds from maturity of certificate of deposit - restricted 60,000 -
Distributions from unconsolidated subsidiary 3,039 -
Sale of interest in unconsolidated subsidiary - 28,000
------------ -----------
Net cash provided (used) by investing activities (2,573,486) 4,283
------------ -----------
</TABLE>
- continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities
Proceeds from notes payable $ 2,502,333 $ 218,000
Repayment of notes payable (2,499,833) (151,000)
Repayment of long-term debt (491,523) (370,871)
Payment of capital lease obligations (285,444) (246,451)
Proceeds from issuance of preferred stock, net of offering costs 12,290,000 -
Proceeds from exercise of warrants and options 356,013 1,820
Minority interest distributions
(36,865) (54,750)
------------- -----------
Net cash provided (used) by financing activities 11,834,681 (603,252)
---------- ---------
1 (2,234)
Effect of foreign currency translation on cash flows ---------- -----
Increase (decrease) in cash and cash equivalents 4,420,911 (281,841)
Cash and cash equivalents at beginning of year 79,316 361,157
------------- -----------
Cash and cash equivalents at end of year $ 4,500,227 $ 79,316
============= ===========
Supplemental cash flow information
- ----------------------------------
Interest paid $ 189,107 $ 129,859
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
CONSOLIDATED STATMENT OF STOCKHOLDER'S EQUITY
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional
----------
Preferred Stock Common Stock Paid-in Accumulated
--------- ----- ------ ----- ------- -----------
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 216,805 $2,168,050 1,521,449 $10,650 $3,268,255 $(3,511,165)
Conversion of preferred stock into
common stock (9,305) (93,050) 227,714 1,594 91,456
Common stock issued for services 50,000 350 62,150
Common stock issued for cancellation of
note payable 1,849 13 5,188
Common stock issued for employee stock
purchase plan 2,080 15 1,805
Foreign currency translation adjustment 1,764
Net loss - - - - - (551,909)
-------- --------- --------- ------ --------- ---------
Balance at December 31, 1995 207,500 2,075,000 1,803,092 12,622 3,428,854 (4,061,310)
Conversion of preferred stock into common
stock (200,000) (2,000,000) 4,894,461 34,261 1,965,739
Exercise of stock options 189,637 1,327 354,686
Common stock issued for the
acquisition of I-Link Worldwide 3,000,000 21,000 12,579,000
Sale of Class C preferred stock for cash,
net of offering costs of $2,110,000 240,000 2,400,000 9,890,000
Common stock issued for cancellation of
notes payable 720,407 5,043 699,756
Issuance of stock warrants below market
value of common stock 11,875
Interest expense associated with issuance
of convertible notes at a discount 1,945,000
Foreign currency translation adjustment 4
Net loss (23,064,240)
------- --------- ---------- ------ ---------- ----------
Balance at December 31, 1996 247,500 $2,475,000 10,607,597 $74,253 $30,874,910 $(27,125,546)
======= ========= ========== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Nature of business
Medcross, Inc. and subsidiaries ("the Company") operate in three businesses.
Domestically the Company is a provider of diagnostic and clinical services to
healthcare facilities and directly to patients both with its own equipment and
equipment of other entities under management contracts. Through its acquisition
in February 1996 of I-Link Worldwide, Inc. ("I-Link"), the Company is a provider
of business communication services. In China, the Company sells and services
used medical equipment.
Principles of consolidation
The consolidated financial statements include the accounts of Medcross, Inc. and
the following subsidiaries:
- Medcross Imaging, Ltd., a limited partnership, provides mobile magnetic
resonance imaging services to healthcare facilities. The Company is the
sole general partner of the partnership and had an 81.75% ownership
interest as of December 31, 1996 and 1995.
- Waters Edge Scanning Associates, Inc., a Florida corporation, provides
magnetic resonance imaging services. This wholly owned subsidiary
acquired the assets of Waters Edge Scanning Associates, Ltd. and its
general partner, Florida Medical Enterprises, Inc. on June 1, 1993.
- Urological Ultrasound Services of Tampa Bay, Inc., a Florida corporation,
provides mobile ultrasound services. This wholly owned subsidiary began
operations in October 1994 after completion of an acquisition of the 75%
ownership interest not previously owned by the Company. Prior to that
time, the Company recorded its share of income or loss from the 25%
ownership interest on the equity method. On May 1, 1995, this subsidiary
distributed all of its assets net of liabilities to the Company. All of
the assets of this subsidiary, except cash, were contributed to Waters
Edge Scanning Associates, Inc. and this subsidiary was dissolved in 1996.
- Medcross Asia, Ltd., a Hong Kong corporation, was formed by the Company as
a wholly owned subsidiary in 1993. This corporation is seeking investment
and equipment trading opportunities in the Far East.
- Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), a
People's Republic of China (PRC) corporation formed in January 1994, sells
and services used computerized tomography (CT) equipment in the Shenyang
Province of the PRC. The Company has a 51% ownership interest in SMHME.
- I-Link Worldwide Inc., a Utah corporation, was acquired by the Company
in February 1996 and is a wholly owned subsidiary. I-Link Worldwide Inc.
provides business communication services.
All significant intercompany transactions are eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less.
F-8
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
Non-Cash Transactions
Non-cash transactions not otherwise reflected in the consolidated statement of
cash flows include the following:
In February 1995, a holder of Class B Preferred Stock converted 9,305
shares into 227,714 shares of common stock.
In September 1995, one of the note holders of the $600,000 promissory note
demanded payment, due in common stock. A reduction of $5,201 of the debt
resulted in an issuance of 1,849 shares of common stock.
In February 1996, the Company acquired all of the outstanding shares of
I-Link Worldwide Inc. in exchange for 4,000,000 shares of Common Stock of
the Company, of which 2,600,000 shares were held in escrow, until August
1996 when 1,600,000 shares were released.
In August 1996, in accordance with the terms of the Stock Purchase
Agreement entered into during the I-Link acquisition, 1,600,000 shares of
Common Stock held in escrow for the benefit of the seller were released
resulting in acquired in-progress research and development expense in the
amount of $9,800,000 and a corresponding increase in additional paid-in
capital.
In 1996 holders of Class A Preferred Stock converted 200,000 shares into
4,894,461 shares of common stock.
During 1996, certain convertible promissory notes totaling $704,799
(principal amount) were converted into 720,407 shares of common stock.
During 1996, I-Link financed $605,609 of equipment through capital leases.
Inventory
Inventories consist of used and refurbished computerized tomography scanners
held for sale in China. Inventories are valued at the lower of cost or market
using the specific identification method.
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated using the
declining balance method for medical equipment and straight-line method for
other assets over the estimated useful lives of the assets, two to nine years.
Expenditures for maintenance and repairs are charged to expense as incurred, and
renewals and betterments are capitalized. Gains or losses on disposals are
credited or charged to operations.
Intangible assets
Organization costs are amortized on the straight-line basis over a period of
sixty months. Loan costs are amortized as an adjustment to interest expense over
the period of the loans (36 months to 60 months). Syndication and other issuance
costs incurred with respect to equity offerings of the Company and sale of
limited partnership interests are deferred and offset against the proceeds of
the offerings at closing. Goodwill resulting from purchase of Waters Edge
Scanning Associates, Inc., is amortized on the straight-line basis over a period
of twenty-five years. The Company regularly evaluates whether events or
circumstances have occurred that indicate the carrying value of the intangible
assets may not be recoverable. When factors indicate the asset may not be
recoverable, the Company uses an estimate of the related undiscounted future
cash flows compared to the carrying value of intangibles to determine if an
impairment exists. Adjustments are made if the sum of expected future net cash
flows is less than carrying value.
F-9
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
Revenue recognition
The Company recognizes revenue from health care services at the time services
are performed net of contractual allowances based on agreements with third party
payers. The Company records revenue from equipment sales when installation is
completed. Advance deposits received prior to installation are recorded as a
current liability. The Company recognizes revenue from business communication
services as services are rendered or as products are delivered to customers.
Warranty liability
Equipment sales are generally accompanied by a service warranty. Expected future
product warranty costs are recorded as an expense and liability when the product
is sold.
Foreign currency translation
The functional currency for the Company's foreign operations is the applicable
local currency. The translation from the applicable foreign currencies to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for income statement items using a weighted
average exchange rate for the period. The gains or losses, net of applicable
deferred income taxes, resulting from such translations are included in
stockholders' equity. Some transactions of the Company and its subsidiaries are
made in currencies different from their own. Gains and losses from these
transactions are generally included in income as they occur. Net foreign
currency transaction gains or losses are not material for any of the periods
presented.
Income taxes
The Company records deferred taxes in accordance with the Financial Accounting
Standards Board (FASB) Statement 109, "Accounting for Income Taxes." The
Statement requires recognition of deferred tax assets and liabilities for the
temporary differences between the tax bases of assets and liabilities and the
amounts at which they are carried in the financial statements based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Net loss per share
Net loss per share of common stock is computed based on the weighted average
number of common and common equivalent shares outstanding during the period.
Options, warrants and convertible preferred stock are excluded from the
calculation, when their effect would be anti-dilutive.
Net loss per common share for 1996 and 1995 were calculated as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss per consolidated statement of operations $(23,064,240) $ (551,969)
Cumulative preferred stock dividends not paid in current year (343,629) (128,669)
Preferred stock dividend on class C convertible cumulative
redeemable preferred stock (20,880,000) -
----------- ---------
Net loss applicable to common stock $(44,287,869) $ (680,578)
=========== =========
Weighted average shares outstanding 6,780,352 1,756,540
=========== =========
Net loss per common share $ (6.53) $ ( .39)
=========== =========
</TABLE>
F-10
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, continued
The preferred stock dividend (non cash) on Class C convertible redeemable
preferred stock is calculated as the difference between the conversion price per
common share per the private offering memorandum as compared to the market price
for the common stock on the date the preferred shares were sold. The dividend
was recognized over the period between the sale of the preferred stock and the
date the preferred shares could first be converted.
Financial Instruments
As of December 31, 1996 and 1995, the carrying amounts for cash, cash
equivalents, certificates of deposit and other current assets or liabilities
that are considered to be financial instruments approximate their fair value
because of the short maturity of these instruments. The carrying amounts for the
Company's line of credit and other non convertible debt also approximates fair
value based on current rates available to the Company for debt of a similar
nature and maturity. The Company's convertible promissory notes, with a carrying
value of $717,000 at December 31, 1996 have a fair value of $1,452,000 based on
the quoted market price of the stock at December 31, 1996.
Reclassifications
Certain balances in the December 31, 1995 financial statements have been
reclassified to conform with the current year presentation. These changes had
no effect on previously reported net loss, total assets, liabilities or
stockholders' equity.
Note 2 - Major customers and concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash and cash equivalents with financial
institutions in Utah and Florida and attempts to limit its exposure in any one
particular instrument. At December 31, 1996 the Company's cash deposits exceeded
the federally insured limits by $4,300,000.
The Company provided magnetic resonance imaging services to two major customers
in 1996 and 1995. The revenue and accounts receivable balances, net of
contractual allowances, at year-end for each of these customers were as follows:
<TABLE>
<CAPTION>
Revenue Accounts Receivable
------- -------------------
1996 1995 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A $433,338 $566,945 $55,204 $87,223
Customer B 248,000 304,791 22,750 18,200
</TABLE>
Note 3 - Certificates of Deposit-Restricted
During 1996, I-Link entered into a 24 month; $3.5 million operating lease. As a
condition of that lease, I-Link obtained a letter of credit totaling $1.575
million. To secure the letter of credit the Company has restricted Certificates
of deposit (CDs) in the same amount. These funds will be released when the lease
expires. I-Link also has restricted CDs totaling $150,812 used to secure lines
of credit in connection with capital leases totaling approximately $610,000. As
of December 31, 1996, I-Link also has restricted CDs totaling $244,000 of which
$215,000 is used for a security deposit on the facilities which I-Link occupied
in early 1997. The remaining $30,000 is collateral for I-Link's corporate credit
cards. These monies are held in escrow accounts and bear interest which is to be
paid to I-Link. Of the above monies held in escrow, $208,500 will be released
during 1997.
Note 4 - Notes payable
<TABLE>
<S> <C>
Uncollateralized promissory note, payable to Mortgage Network International, interest
payable at 10.5% payable monthly. $ 88,000
==========
Line of credit, $700,000, payable to First Union National Bank, interest payable
at 3/4% above prime rate, (prime rate was 8.25% at December 31, 1996), principal
balance due June 30, 1996, collateralized by accounts receivable
and general assets of the Company. $ 290,000
Convertible promissory notes, interest payable quarterly at 8% per
annum, uncollateralized. 717,000
---------
Total notes payable $ 1,007,000
=========
</TABLE>
F-11
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes payable - continued
The Company has reached an agreement with First Union National Bank pursuant to
which the Company has agreed to secure alternative financing to repay amounts
outstanding under the line of credit while continuing to repay the outstanding
balance in increments of $10,000 per month commencing on July 1, 1996. The line
of credit contains restrictive covenants relating to equity requirements,
minimum cash balances, acquisitions, debt to equity ratios, borrowing base
requirements, and net cash flow coverage requirements.
The convertible promissory notes were issued in September 1996 in conjunction
with a private placement offering Class C Preferred Stock of the Company. The
promissory notes will automatically be converted into 11,950 shares of Class C
Preferred Stock at $60 per share upon the amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Preferred Stock to
at least 2,000,000. Each convertible note is due on July 31, 1997 with interest
at the rate of 8% per annum. The notes are prepayable by the Company without
penalty upon 30 days notice provided that the Company has effected an amendment
to its Articles of Incorporation to increase its authorized capital stock and
designated sufficient Class C Preferred Stock to accommodate conversion of the
notes, though the holders of the promissory notes may elect to convert the
notes in lieu of accepting repayment.
Interest expense (non-cash) of $1 million has been recognized by the Company
representing the difference between the conversion price per common share
relating to the convertible promissory notes and the exercise price of
warrants issued with other notes as compared to the market price of the Common
Stock on the date the promissory notes and warrants were issued.
Note 5 - Long-term debt - related party
Long-term debt at December 31, 1996 was as follows:
<TABLE>
<S> <C>
Uncollateralized promissory note, payable to Mortgage Network International due in 36 equal
monthly installments of principal and interest totaling $4,225.32. The interest rate is 10.5% $ 87,682
Less current portion 43,554
-------
$ 44,128
=======
</TABLE>
Note 6 - Commitments under long-term leases
As of December 31, 1996, I-Link financed approximately $610,000 of leased
capital assets. Capital lease payments made in 1996 and 1995 were $160,000 and
$45,000, respectively.
In 1996, I-Link entered into a two-year equipment lease relating to the
financing of an aggregate of $3.5 million worth of equipment purchases necessary
to build the I-Link network. As a condition of that equipment lease, I-Link
obtained a standby letter of credit totaling $1.575 million to the benefit of
the lessor. In order to obtain this letter of credit, I-Link deposited $1.575
million into a certificate of deposit to be held until the obligation is
satisfied. The certificate of deposit bears interest which is payable to I-Link,
and will be released to I-Link when the lease expires. At the end of the lease,
at I-Link's option, the equipment secured by the lease can be purchased at fair
market value. I-Link also leases fiber optic data lines. The terms vary from 1-6
years.
The Company leases office and network equipment facilities throughout the United
States. The terms vary from 1-7 years. I-Link delivered $214,000 in certificates
of deposit to the landlord as a security deposit for rented facilities which are
refundable in periodic amounts as the lease expires.
F-12
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Commitments under long-term leases, continued
Future minimum payments, by year and in the aggregate, under noncancellable
capital leases and operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1996.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1997 $ 228,000 $3,414,000
1998 187,000 3,053,000
1999 69,000 1,248,000
2000 - 1,243,000
2001 - 415,000
Thereafter - 252,000
-------- ---------
Total minimum payments 484,000 $9,625,000
=========
Less amount representing interest 60,248
--------
Present value of net minimum less payments 423,752
Less current portion 187,047
--------
Long-term capital lease obligations $ 236,705
========
</TABLE>
The Company's rental expense for operating leases was $1,316,000 and $41,172 for
fiscal years ending December 31, 1996 and 1995, respectively.
Note 7 - Acquisition of subsidiary
In February 1996, the Company closed its acquisition of all of the issued and
outstanding common stock of I-Link Worldwide Inc., a Utah corporation ("I-Link")
from ILINK, Ltd., a Utah limited partnership in exchange for the issuance of an
aggregate of 4,000,000 shares of common stock of the Company. The acquisition
was accounted for using the purchase method of accounting. The results of
operations of the acquired enterprise are included in the consolidated financial
statements beginning February 13, 1996. Pursuant to the terms of the stock
purchase agreement, 1,400,000 shares of the common stock were issued at the time
of acquisition. In August 1996, 1,600,000 shares of Common Stock were released
from escrow upon the receipt of proceeds from the completion of the Company's
offering of Class C Preferred Stock. The remaining 1,000,000 shares of common
stock are to be released from escrow upon the first to occur of the following:
(i) the monthly revenue derived from subscribers serviced by I-Link and
revenue derived from the sale of related products and/or services
equals or exceeds $1,000,000; or
(ii) the number of subscribers serviced by I-Link exceeds 100,000 one
year from the date of receipt by the Company of gross proceeds equal
to $4,000,000 from the sale of its securities pursuant to one or
more private or public offerings.
The acquisition cost of $12,600,000 (representing the 3 million shares issued to
date) was allocated to the net liabilities of $2,003,000 (based on their fair
market values) with the balance of $14,603,000 allocated to in-process research
and development and software costs acquired. These were expensed as
technological feasibility of the in-process technology had not yet been
established and the technology had no alternative future use.
In the event the remaining 1,000,000 shares of common stock are released from
escrow upon the occurrence of one of the above criteria, the shares will be
valued at the then market value of the Company's common stock. As the issuance
of the contingent shares relates to the recognition of revenue relating to the
acquired technology, the value of the shares would be recorded as an increase to
the intangible assets of the Company, subject to applicable valuation criteria.
The following pro forma summary presents the consolidated results of operations
for the Company for 1996 and 1995, as if the acquisition of I-Link had occurred
at the beginning of 1995. This pro forma information is presented for
informational purposes only and may not be indicative of the results of
operations that would have occurred had the acquisition taken place at the
beginning of 1995.
F-13
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Acquisition of subsidiary, continued
<TABLE>
<CAPTION>
Years ended December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $2,383,000 $352,000
Net loss (17,386,000) (8,016,000)
Loss per common share $(5.52) $(2.60)
</TABLE>
At the time of the acquisition of I-Link, the Company issued certain convertible
promissory notes. The Company also issued convertible promissory notes in
September, 1996. Interest expense (non-cash) $1,945,000 has been recorded in
1996 relating to these promissory notes and warrants issued with other notes.
The interest expense is calculated as the difference between the conversion
price per common share per the promissory notes as compared to the market price
for the common stock on the date the promissory notes were issued. The interest
expense was recognized over the period between the date the promissory notes
were issued and the date the promissory notes could first be converted.
Note 8 - Income taxes
The income tax benefit for the years ended December 31, 1996 and 1995 consists
of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current tax expense $ - $ -
Deferred tax expense (benefit) - -
----------- -----------
Income tax benefit $ - $ -
=========== ===========
</TABLE>
The reported benefit from income taxes varies from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to income before
taxes for the following reasons:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected federal statutory tax benefit $(7,841,842) $(187,649)
Increase (reduction) in taxes resulting from:
State income taxes (net of federal benefit) (673,059) (30,355)
Non-deductible meals and entertainment 7,283 33
Non-deductible litigation settlement expense 279,140 -
Non-deductible interest on convertible notes 661,300 -
Allowance for doubtful accounts - 115,644
Change in valuation allowance 7,559,551 108,484
Other 7,627 (6,157)
------------ ----------
$ - $ -
============ ==========
</TABLE>
At December 31, 1996, the Company had net operating loss and capital loss
carryforwards for both federal and state income tax purposes of approximately
$7,400,000 and $60,000, respectively. The net operating loss carryforwards will
expire between 2006 and 2011 if not used to reduce future taxable income. The
capital loss carryforwards will expire in 1997.
F-14
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Income taxes, continued
The components of the net deferred tax asset and liability as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Tax net operating loss carryforwards $ 2,759,930
Acquired in process research and development 5,257,333
Capital loss carryforwards 22,267
Excess book depreciation and amortization 61,706
Other 95,686
Valuation allowance (7,944,647)
-----------
Total deferred tax asset 252,275
Deferred tax liability: -------------
Allowance for doubtful accounts ( 252,275)
-------------
Total deferred tax liability ( 252,275)
-------------
Net deferred tax asset $ -
=============
</TABLE>
The valuation allowance at December 31, 1996 has been provided to reduce the
total deferred tax assets to the amount which is considered more likely than not
to be realized. The net increase in the valuation allowance for the year ended
December 31, 1996 was $7,559,551. The change in the valuation allowance is due
primarily to the increase in net operating loss carryforwards and acquired in-
process research and development costs which were expensed for books and
capitalized for tax purposes, and because the Company has not generated net
income from its business communication services. It is at least reasonably
possible that a change in the valuation allowance may occur in the near term.
Note 9 - Litigation settlement
A complaint was filed on April 12, 1996 by JW Charles Financial Services, Inc.
("JWC") against the Company in which JWC alleged that the Company breached the
terms of a warrant to purchase 331,000 shares of the Company's common stock
purchase ("warrant") by failing to prepare and file with the Securities and
Exchange Commission ("SEC") a registration statement covering the common stock
underlying the JWC warrant. JWC was seeking specific performance, i.e.
registering the shares with the SEC, and monetary damages. On or about April 11,
1997 the Company reached an agreement in principle relating to the settlement of
the lawsuit. The lawsuit will be dismissed upon payment of $600,000 to JWC in
consideration for the purchase of the warrant. The JWC warrant will be purchased
by an investor group led by the Company's general counsel and its treasurer and
chief financial officer. It is not expected that the Company's funds will be
utilized. In connection with the purchase of the JWC warrant, it is contemplated
that the Company will grant certain additional consideration to the investor
group, including new warrants to purchase 175,000 shares of common stock at an
exercise price equal to or in excess of the conversion price of the Class C
Preferred Stock. Such warrants will have registration rights and anti-dilution
provisions. The Company has recorded on its financial statements for the year
ended December 31, 1996 a liability and related expense for the settlement of
litigation in the amount of $821,000 representing the estimated difference
between the warrant price and the value of the warrant.
Note 10 - Stockholders' equity
Preferred stock
In 1992, the Board of Directors approved and filed with the state of Florida an
Amendment to the Articles of Incorporation designating 200,000 shares of
preferred stock as Class A Variable Rate Cumulative Convertible Preferred Stock
("Class A Preferred Stock") and 22,500 shares of preferred stock as Class B
Variable Rate Cumulative Convertible Preferred Stock ("Class B Preferred
Stock"). The Class A Preferred Stock and Class B Preferred Stock both have a par
value of $10 per share and are entitled to receive cumulative dividends at a
rate equal to 2% above the 30 day certificate of deposit rate in effect on the
first day of each month at the Texas Commerce Bank. The Company has the right to
redeem the Class A and Class B Preferred Stock for $10 per share plus the amount
of any accrued and unpaid dividends. Shares of Class A and
F-15
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stockholders' equity, Preferred stock, continued
Class B Preferred Stock may be converted into such number of whole shares of
common stock as is determined by multiplying the number of shares of Class A
Preferred Stock by a fraction, the numerator of which is $10 and the denominator
is the conversion price ($.408625). Each share of Class A Preferred Stock will
entitle the holder thereof to that number of votes which is equal to the number
of shares of common stock into which the Class A Preferred Stock is convertible.
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of the Class A Preferred Stock shall be
entitled to distribution before any payments shall be made in respect to the
Class B Preferred Stock or common stock in amounts equal to the par value per
share plus all accrued and unpaid dividends and the holders of Class B Preferred
Stock shall be entitled to distribution before any payments shall be made in the
respect to common stock in an amount equal to the par value per share plus all
accrued and unpaid dividends.
In August 1996 the Company filed with the State of Florida an Amendment to the
Articles of Incorporation amending the designation of 240,000 shares of
preferred stock as Class C Convertible Cumulative Preferred Stock (the "Class C
Preferred Stock"). The Class C Preferred Stock has a par value of $10 per share
and holders are entitled to receive cumulative preferential dividends equal to
8% per annum of the liquidation preference per share of $60.00. Unless
previously redeemed, the Class C Preferred Stock is convertible into shares of
the Company's Common Stock ("Conversion Shares"), at any time commencing
November 21, 1996, at the option of the holder, into such number of shares of
the Company's Common Stock as shall equal $60 divided by the lower of (i) $2.50,
or (ii) the closing bid price for any five consecutive trading days during the
period commencing on September 6, 1996 and ending on March 5, 1998 (subject to
certain anti-dilution adjustments). As of December 31, 1996, none of the shares
of Class C Preferred Stock has been converted. The Class C Preferred Stock is
redeemable at any time prior to September 6, 2000, at the option of the Company
at a redemption price equal to $60 per share plus accrued and unpaid dividends,
provided (i) the Conversion Shares are covered by an effective registration
statement; and (ii) during the immediately preceding thirty (30) consecutive
trading days ending within fifteen (15) days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$8.00 per share. The Class C Preferred Stock is redeemable at any time after
September 6, 2000, at the option of the Company at a redemption price equal to
$90 plus accrued and unpaid dividends, provided the Conversion Shares are
covered by an effective registration statement or the Conversion Shares are
otherwise exempt from registration.
At December 31, 1996, the Company had no shares of Class A Preferred Stock,
7,500 shares of Class B Preferred Stock, and 240,000 shares of Class C Preferred
Stock issued and outstanding.
At December 31, 1996, 30,000 of the 500,000 shares of preferred stock authorized
remain undesignated and unissued. Dividends in arrears at December 31, 1996 were
$19,599 and $288,000 for Class B Preferred Stock and Class C Preferred Stock,
respectively.
Note 11 - Stock-Based Compensation Plans
At December 31, 1996 the Company has five stock based compensation plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed option plans. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method outlined
by FASB Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $(23,064,240) $(551,909)
Pro forma $(25,563,988) $(587,001)
Loss per share As reported $(6.53) $(.39)
Pro forma $(6.90) $(.41)
</TABLE>
F-16
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: expected volatility
of 103% and 103%,
F-17
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-Based Compensation Plans, continued
risk free rates of 5.79% and 5.78%, expected lives of 3 and 3 years and dividend
yield of zero for both years.
<TABLE>
<CAPTION>
1996 1995
---- ----
Options Weighted Ave Options Weighted Ave
and Warrants Exercise Price and Warrants Exercise Price
------------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 850,169 $1.78 615,381 $3.19
Granted 5,322,000 5.45 331,526 1.87
Exercised (188,724) 2.02 0 0.00
Forfeited (222,150) 2.82 (96,738) 2.75
---------- ---- -------- ----
Outstanding at end of year 5,761,295 $5.14 850,169 $1.78
========= =======
Options and Warrants exercisable at year end 2,153,294 588,495
Weighted-average fair value of Options and
Warrants granted during the year $5.45 $1.87
</TABLE>
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options and
Warrants Number
Outstanding at Weighted Average Weighted Exercisable at Weighted
Exercise price 12/31/96 Remaining Life Average Exercise 12/31/96 Average Exercise
Price Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.875 to $2.500 1,701,961 5.7 years $2.00 1,701,961 $2.00
$3.875 to $4.875 746,334 7.1 years 4.34 201,334 4.18
$5.000 to $6.5000 124,500 9.0 years 5.55 0 0.00
$6.750 to $7.000 3,188,500 4.6 years 6.99 249,999 7.00
----------------------------------------------------------------------------------------------------------------
5,761,295 5.3 years $5.14 2,153,294 $2.79
========= ========= ===== ========= =====
</TABLE>
Executive stock option plan
The Company's Executive Stock Option Plan which expired in June 1995, authorized
the granting of stock options to key employees of the Company including
officers. Options granted under the Plan are non-qualified stock options
exercisable at a price not less than the highest bid price per share at which
the stock is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System on the date the option is granted. Options are
exercisable not less than one year or more than five years after the grant date.
As of December 31, 1996, no options for the purchase of common stock were
outstanding. During 1996, 3,780 options were exercised and no options were
exercised in 1995.
Director stock option plan
The Company's Director Stock Option Plan under which Board terminated future
grants in October 1995, authorized the granting of stock options to Directors of
the Company. Options granted under the Plan are non-qualified stock options
exercised for a price equal to the fair market value per share of common stock
on the date of any such grant. Options are exercisable not less than six months
or more than ten years after the date of grant.
As of December 31, 1996, options for the purchase of 8,169 shares of common
stock at prices ranging from $0.875 to
F-18
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-Based Compensation Plans, continued
$3.875 per share were outstanding, all of which are exercisable within 60 days.
During 1996, 15,228 options were exercised and no options were exercised in
1995.
Stock purchase plan
In accordance with the Employee Qualified Stock Purchase Plan adopted in June
1990, employees may contribute up to 10 percent of their base wages towards the
purchase of the Company's common stock. The option price is the lesser of 85% of
the market value on the first business day of the Payment Period (September 1)
or the last business day of the Payment Period (August 31). As of December 31,
1996, the Company had 35,146 shares of common stock reserved for issuance on
exercise of the purchase rights. On August 31, 1996, 913 shares of common stock
were issued at a price of $0.875 per share. On August 31, 1995, 2,080 shares of
common stock were issued at a price of $0.875 per share.
1995 Director stock option plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Director Stock Option and Appreciation Rights Plan, which plan
provides for the issuance of incentive options, non-qualified options and stock
appreciation rights (the "1995 Director Plan").
The 1995 Director Plan provides for automatic and discretionary grants of stock
options which qualify as incentive stock options (the "Incentive Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as options which do not so qualify (the "Non-Qualified Options") to be
issued to directors. In addition, stock appreciation rights (the "SARs") may be
granted in conjunction with the grant of Incentive Options and Non-Qualified
Options.
The 1995 Director Plan provides for the grant of Incentive Options,
Non-Qualified Options, and SARs to purchase up to 250,000 shares of common stock
(subject to adjustment in the event of stock dividends, stock splits, and other
similar events). To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period of exercisability specified therein, it will
expire as to the then unexercised portion. If any Incentive Option,
Non-Qualified Option or SAR terminates prior to exercise thereof and during the
duration of the 1995 Director Plan, the shares of common stock as to which such
option or right was not exercised will become available under the 1995 Director
Plan for the grant of additional options or rights to any eligible employee. The
shares of common stock subject to the 1995 Director Plan may be made available
from either authorized but unissued shares, treasury shares, or both.
The 1995 Director Plan also provides for the grant of Non-Qualified Options on a
discretionary basis pursuant to the following formula: each member of the Board
of Directors then serving shall receive a Non-Qualified Option to purchase
10,000 shares of common stock at an exercise price equal to the fair market
value per share of the common stock on that date. Pursuant to such formula,
directors received options to purchase 10,000 shares of common stock as of
October 17, 1995, and will receive options to purchase 10,000 shares of common
stock on the first business day of each January beginning in 1996. Each option
is immediately exercisable for a period of ten years from the date of grant. The
Company has 250,000 shares of common stock reserved for issuance under the 1995
Director Option Plan. As of December 31, 1996, options exercisable to purchase
190,000 shares of common stock at prices ranging from $1.00 to $1.25 per share
are outstanding and exercisable within 60 days. During 1996, 40,000 options were
exercised.
1995 Employee stock option plan
In October 1995, the stockholders of the Company approved adoption of the
Company's 1995 Employee Stock Option and Appreciation Rights Plan (the "1995
Employee Plan"), which plan provides for the issuance of Incentive Options,
Non-Qualified Options, and SARs.
Directors of the Company are not eligible to participate in the 1995 Employee
Plan. The 1995 Employee Plan provides for the grant of stock options which
qualify as Incentive Stock Options under Section 422 of the Code, to be issued
to officers
F-19
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
who are employees and other employees, as well as Non-Qualified Options to be
issued to officers, employees, and consultants. In addition, SARs may be granted
in conjunction with the grant of Incentive Options and Non-Qualified Options.
F-20
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-based compensation plans, continued
The 1995 Employee Plan provides for the grant of Incentive Options,
Non-Qualified Options, and SARs of up to 400,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). To the extent that an Incentive Option or Non-Qualified Option is not
exercised within the period of exercisability specified therein, it will expire
as to the then unexercisable portion. If any Incentive Option, Non-Qualified
Option or SAR terminates prior to exercise thereof and during the duration of
the 1995 Employee Plan, the shares of common stock as to which such option or
right was not exercised will become available under the 1995 Employee Plan for
the grant of additional options or rights to any eligible employee. The shares
of common stock subject to the 1995 Employee Plan may be made available from
either authorized but unissued shares, treasury shares, or both. The Company has
400,000 shares of common stock reserved for issuance under the 1995 Employee
Plan. As of December 31, 1996, options to purchase 75,000 shares of common stock
with exercise prices of $1.125 have been granted under the 1995 Employee Plan.
To date, no options have been exercised under the 1995 Employee Plan.
Other warrants and options
Pursuant to the terms of a Financial Consulting Agreement dated as of November
3, 1994 between the Company and JW Charles Financial Services, Inc., the Company
issued a Common Stock Purchase Warrant (the "JW Charles Warrant") covering
250,000 (331,126 as adjusted) shares of common stock to JW Charles Financial
Services as partial consideration for its rendering financial consulting
services to the Company. The warrant is exercisable at a price of $1.51 per
share and expires on November 3, 1999.
The JW Charles Warrant (the "Warrant") contain anti-dilution provisions
providing for adjustments in the exercise price. The Warrant also contains
anti-dilution provisions providing for adjustments in the number of shares
covered by the warrant. The holder of the Warrant has no voting, dividend, or
other stockholder rights or privileges unless and until the Warrants have been
exercised. The holder of the Warrant has been granted "piggy back" registration
rights under the Securities Act of 1933 with respect to the Warrants and the
underlying shares of common stock. The Company will pay the expense of such
registration and of such registration qualifications of the Warrant and
underlying shares of common stock under the Securities Act of 1933 of such dates
as the holder of the Warrant may determine (See Note #9).
Pursuant to the issuance of a promissory note by I-Link to Scott Cook, the
Company issued a Common Stock Purchase Option covering 100,000 shares of the
Company's common stock. The option is exercisable at a price of $1.00 and
expires on December 31, 1999.
In April 1996 the Company approved the issuance of 1 million options to John
Edwards at an option price of $7 per share as part of his employment agreement.
The options vest over a 3 year period and expire in 2006.
On July 1, 1996 the Company approved options to purchase 1,500,000 and 500,000
shares of common stock to Clay Wilkes and Alex Radulovic respectively. Each
option has an exercise price of $7.00 per share, vesting in 25% increments in
the event that the average closing bid price of a share of the Company's common
stock for five consecutive trading days exceeds $10, $15, $20 and $25,
respectively. Such option becomes exercisable (to the extent vested) on June 30,
1997, vests in its entirety on June 30, 2001 and lapses on June 30, 2002.
In August 1996, Commonwealth Associates, the Placement Agent for the Company's
offering of Class C Preferred Stock and 8% Convertible Notes, designated Joseph
Cohen as its nominee for election to the Board of Directors and Michael Falk, an
affiliate of Commonwealth Associates, as a non-voting advisor to the Board of
Directors. Commonwealth Associates was also granted, in connection with such
offering, the right to approve the Company's selection of a second outside
director to be nominated for election at the next annual or special meeting of
stockholders. Mr. Cohen serves as a Class II Director of the Company and a
member of the Compensation and Audit Committees of the Board of Directors. The
Company has agreed to issue options to purchase 64,000 shares of Common Stock to
Mr. Cohen, exercisable at the fair market value of the Common Stock on September
30, 1996. Of such options, 24,000 vest and become exercisable immediately upon
grant, and 20,000 shall vest and become exercisable on the first anniversary of
the grant, and 20,000 shall vest and become exercisable on the second
anniversary of the grant.
In August 1996, William Flury, Vice President of Sales & Marketing of I-Link
loaned I-Link the sum of $100,000. The
F-21
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock-based compensation plans, continued
loan plus a loan origination fee of $5,000 was repaid in September 1996. In
connection with such loan, the Company agreed to issue Mr. Flury a warrant to
purchase 5,000 shares of Common Stock for two years at $2.50 per share. The
funds from the loan were used for general working capital purposes of I-Link.
In August 1996, John Edwards, President and Chief Executive Officer of I-Link
loaned I-Link the sum of $131,250 (including a $6,250 original issue discount),
which was repaid in August 1996. In connection with such loan, the Company
agreed to issue Mr. Edwards a warrant to purchase 25,000 shares of Common Stock
for two years at $4.875 per share. Funds from the loan were used to pay a
$100,000 payment due to AT&T and for general working capital purposes of I-Link.
In September 1996, the Company closed a private placement offering of Class C
Preferred Stock. As a result of this transaction, the Company issued a warrant
to purchase 250,000 shares of its Common Stock at an exercise price of $2.50 per
share as compensation to the Placement Agent. In addition, a Consulting
Agreement was entered into with the Placement Agent, in which a warrant to
purchase 500,000 shares of the Company's Common Stock at an exercise price of
$2.50 per share was issued.
John Edwards agreed to amend his employment contract on August 21, 1996, to
reduce his salary from $175,000 to $96,000. In consideration of the salary
reduction, the Company agreed to grant him options, which vested immediately, to
purchase 250,000 shares of Common Stock for 10 years at an exercise price of
$4.875 per share.
In October, 1996 the Company agreed to issue 250,000 shares of common stock each
to William Flury and Karl S. Ryser Jr. pursuant to their employment agreements.
The options were issued at $4.41 based on the closing price of the stock at
grant date. The options vest quarterly over a three-year period and expire in
2000.
During 1996, the Company agreed to issue 343,000 options to employees at a price
equal to the closing stock price on the grant date. The options vest quarterly
over a three-year period and expire in 10 years.
During 1996 the Company issued 120,000 warrants to non-employees at $4 per
share. The warrants expire in 1999.
Note 12 - Geographic segment information
The Company's operations consist of providing diagnostic and clinical outpatient
health care services and business communication services domestically and the
sale and service of used medical equipment in the People's Republic of China
(PRC). Financial information for the different geographic segments is as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1996 Domestic China Corporate Eliminations Consolidated
- ----------------- -------- ----- --------- ------------ ------------
Communications
Network
-------
Healthcare
----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 1,967,384 $ 170,532 $ 0 $ 335,254 $ (90,094) $ 2,383,076
=========== ============ ========== =========== ========== ===========
Operating Profit (Loss) $ 41,615 $ (19,501,391) $ (284,615) $ (358,029) $ (90,094) $(20,192,514)
=========== ============ ========== =========== ========== ===========
Identifiable Assets $ 2,509,402 $ 8,196,473 $ 750,468 $ 185,258 $ 267,771 $ 11,433,830
=========== ============ ========== =========== ========== ===========
Amortization and
Depreciation $ 377,561 $ 690,920 $ 1,191 $ 24,332 $ - $ 1,094,004
=========== ============ ========== =========== ========== ===========
</TABLE>
F-22
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Capital Expenditures $ 0 $ 677,004 $ 0 $ 0 $ - $ 677,004
=========== ============ ========== =========== ========== ===========
</TABLE>
F-23
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Geographic segment information, continued
<TABLE>
<CAPTION>
Year Ended
December 31, 1995 Domestic China Corporate Eliminations Consolidated
- ----------------- -------- ----- --------- ------------ ------------
Communications
Network
-------
Healthcare
----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $2,486,708 $ N/A $ 340,233 $ 423,956 $ (127,944) $3,122,953
========= ============= ============= ========= ========= =========
Operating Profit (Loss) $ 196,714 $ N/A $ (171,083) $ (519,386) $ 0 $ (493,755)
========= ============= ============= ========= ========= =========
Identifiable Assets $2,509,402 $ N/A $ (1,098,742) $ 682,277 $ (682,157) $4,146,683
========= ============= ============= ========= ========= =========
Amortization and
Depreciation $ 377,561 $ N/A $ 13,011 $ 13,511 $ 0 $ 465,020
========= ============= ============= ========= ========= =========
Capital Expenditures $ 0 $ N/A $ 2,046 $ 375 $ -- $ 23,222
========= ============= ============= ========= ========= =========
</TABLE>
The corporate office provides management and operational services for domestic
outpatient health care services. The elimination's represent charges for these
services to entities included in the consolidation.
Note 13 - Related party transactions
In addition to related party transactions disclosed elsewhere, during the first
quarter of 1995, the Company received advances totaling $218,000 from Mortgage
Network International ("MNI"). Henry Y.L. Toh, a Director of the Company, has
management control over MNI. Such advances were previously payable upon demand.
Subsequent to the extension of such advances, the Board of Directors approved
delivery of a promissory note representing the aggregate amount of such
advances, which promissory note matured by its terms on October 1, 1995 and
bears interest at one percent over the prime rate of interest established by
Southwest Bank of Texas, N.A. Subsequently, the Company and MNI modified the
Note such that: (i) the principal amount of $130,000 with interest thereon at
the rate of 10.5% will be paid in thirty-six (36) equal payments of
approximately $4,200 and (ii) the remaining principal amount of $88,000 with
interest thereon at the rate of 10.5% will be paid in twenty-one (21) equal
monthly payments of $4,600.
Note 14 - Employment Agreements
The Company has entered into employment contracts with eight of its executive
officers and management personel. These agreements generally continue until
terminated by the executive or the Company, and provide for salary continuation
for a specified number of months under certain circumstances. Certain of the
agreements provide the employees with certain additional rights, including the
vesting of unvested stock options, in the event of a change of control of the
Company occurs. The agreements contain non-competition and confidentiality
provisions. As of December 31, 1996, if the eight employees under contact were
to be terminated by the Company, the Company's liability would be approximately
$1,425,000.
Note 15 - Subsequent events
On January 13, 1997, pursuant to the terms of a Share Exchange Agreement for the
Acquisition of Family Telecommunications Incorporated by Medcross, Inc.
effective as of January 1, 1997 (the "Exchange Agreement"), the Company acquired
the outstanding stock of Family Telecommunications Incorporated, a Utah
corporation ("FTI"), from the stockholders of FTI, namely, Robert W. Edwards,
Jr. and Jerald L. Nelson. The consideration for the transaction consists of an
aggregate of 400,000 shares of the Company's common stock to be issued by the
Company upon the satisfaction of certain conditions including approval by the
Company's shareholders of an amendment to the Articles of Incorporation
authorizing an increase in the number of shares of common stock from 20 million
to 50 million and no material breach of any representation by the former
stockholders. The purchase price was determined based upon the negotiated value
of the assets and operations of FTI. The acquisition will be accounted for using
the purchase method of accounting.
During 1996 the Company advanced $685,000 to FTI for equipment purchases of
which $120,000 remained outstanding and was included in Other Assets at December
31, 1996.
John W. Edwards, President, a Director and Chief Executive Officer of the
Company, and Robert W. Edwards, Jr., the
F-24
<PAGE>
MEDCROSS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal shareholder and one of the two shareholders of FTI, are brothers.
There was no affiliation or relationship between the Company, its affiliates,
officers or directors or associates of such persons and FTI or any of its
officers, directors or stockholders prior to the execution of the Exchange
Agreement except as set forth herein.
FTI is an FCC licensed long-distance carrier and provider of telecommunications
services.
F-25
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
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.
F-26
<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.
F-27
<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.
F-28
<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.
F-29
<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>
F-30
<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
F-31
<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.
F-32
<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.
F-33
<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.
F-34
<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>
F-35
<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
F-36
<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
F-37
<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
F-38
<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
F-39
<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
F-40
<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
F-41
<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
F-42
<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
F-43
<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
F-44
<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.
F-45
<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.
F-46
<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.
F-47
<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.
F-48
<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).
F-49
<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
F-50
<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
F-51
<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
F-52
<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
F-53
<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
F-54
<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
F-55
<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
F-56
<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
F-57
<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
F-58
<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
F-59
<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
F-60
<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.
F-61
<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
F-62
<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
F-63
<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
F-64
<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).
F-65
<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.
F-66
<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.
F-67
<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.
F-68
<PAGE>
No dealer, salesman or any other person has been authorized in connection
with this offering to give any information or to make any representations other
than those contained in this Prospectus. The Prospectus does not constitute an
offer or a solicitation in any jurisdiction to any person to whom it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the circumstances of the Company or
the facts herein set forth since the date hereof.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
AVAILABLE INFORMATION..........................................................3
PROSPECTUS SUMMARY.............................................................4
RISK FACTORS...................................................................7
THE COMPANY...................................................................22
USE OF PROCEEDS...............................................................24
CAPITALIZATION................................................................24
DIVIDEND POLICY...............................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS..........................................25
BUSINESS OF I-LINK............................................................34
BUSINESS OF THE MEDICAL IMAGING DIVISION......................................45
DESCRIPTION OF PROPERTY.......................................................49
LEGAL PROCEEDINGS.............................................................49
1996 OFFERINGS................................................................50
MANAGEMENT....................................................................52
EXECUTIVE COMPENSATION........................................................55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................63
SELLING SECURITYHOLDERS.......................................................66
MARKET FOR THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS...................82
RECENT TRANSACTIONS...........................................................83
DESCRIPTION OF SECURITIES.....................................................85
PLAN OF DISTRIBUTION..........................................................93
LEGAL MATTERS.................................................................94
EXPERTS.......................................................................94
INDEX TO FINANCIAL STATEMENTS................................................F-1
</TABLE>
331,126 Settlement Shares
8,083,857 Shares of Common Stock
6,046,800 Conversion Shares
750,000 Commonwealth Warrants
750,000 Commonwealth Shares
183,542 Babcock Shares
100,000 Cook Options
100,000 Cook Shares
80,000 E&M Warrants
80,000 E&M Shares
40,000 Mandarino Warrants
40,000 Mandarino Shares
175,000 Hardy Group Warrants
175,000 Hardy Group Shares
MEDCROSS, INC.
----------
PROSPECTUS
----------
[__________], 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 607.0850 of the Florida Business Corporation Act empowers a
corporation to indemnify any person who was or is a party to a proceeding by
reason of the fact that he was or is an officer, director, employee or agent of
the corporation against liability incurred in connection with such proceeding.
Such person must have acted in good faith and in a manner reasonably believed to
be in or not opposed to, the best interests of the corporation. With respect to
any criminal proceeding, such person must have had no reasonable cause to
believe his conduct was unlawful. Any such indemnification may only be made upon
a determination by the corporation that such indemnification is proper because
the person met the applicable standard of conduct.
The Florida Business Corporation Act provides further that the
indemnification permitted thereunder is not exclusive; provided, however,
indemnification is not permitted to be made on behalf of any such person if a
judgment or final adjudication establishes (i) a violation of the criminal law
unless such person had reasonable cause to believe his conduct was lawful or no
reasonable cause to believe his conduct was unlawful; (ii) such person derived
an improper personal benefit from the transaction; (iii) as to any director such
proceeding arose from an unlawful distribution under Section 607.0834; or (iv)
willful misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by the corporation or a shareholder.
The Company's By-Laws provide that the Company shall indemnify any such
person to the fullest extent provided by law and empowers the Company to
purchase and maintain insurance on behalf of any such person.
The Company previously entered into indemnification agreements in 1988
with certain officers and directors of the Company for indemnification against
expenses (including attorneys' fees, through all proceedings, trials, and
appeals), judgments, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending, or contemplated action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
arising from any actual or alleged breach of duty, neglect, effort, or other
action taken or omitted, solely in the capacity as an officer and/or a director
of the Company; provided that no indemnification will be made in respect of any
acts or omissions (a) involving gross negligence or willful misconduct, (b)
involving libel or slander, or (c) based upon or attributable to gaining,
directly or indirectly, any profit or advantage to which he was not legally
entitled.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE
UNENFORCEABLE.
Other Arrangements
The Company maintains a "claims made" officers and directors
liability insurance policy with coverage limits of $3,000,000 and a maximum
$100,000 deductible amount for each claim.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by the Company in connection with
the registration of the securities subject of this registration statement, other
than underwriting discounts and commissions, are estimated as follows:
II-1
<PAGE>
<TABLE>
<S> <C>
SEC Registration Fee $ 26,920.12
Blue Sky Fees and Expenses 10,000.00
Printing and Engraving Expenses 20,000.00
Registrant's Counsel Fees and Expenses 50,000.00
Accountant's Fees and Expenses 40,000.00
Miscellaneous Expenses 3,079.88
-----------
Estimated Total $150,000.00
===========
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
The Registrant has issued the following securities during the past
three years:
In November 1994, the Company issued a Common Stock Purchase Warrant to
JW Charles Financial Services, Inc. to purchase 250,000 shares of Common Stock
(331,126 shares as adjusted) pursuant to the terms of a Financial Consulting
Agreement between the Company and Corporate Management Group, Inc.
Pursuant to a Consulting Agreement dated as of August 6, 1995 between
the Company and Timothy R. Barnes, the Company issued a Common Stock Purchase
Warrant to purchase 36,858 shares of Common Stock to Mr. Barnes.
In October 1995, the Company issued a Common Stock Purchase Option to
Scott Cook to purchase 100,000 shares of Common Stock in connection with a loan
to I-Link, Ltd.
In February 1996, in connection with the purchase of all of the issued
and outstanding shares of I-Link Worldwide Inc., the Company issued an aggregate
of 4 million shares of Common Stock to the owners of I-Link Worldwide Inc.
In February 1996, in connection with loans, the Company issued a Series
II Non-Negotiable 10% Convertible Promissory Note in the principal amount of
$50,000 to Joseph Wong and a Series III Non-Negotiable 10% Convertible
Promissory Note in the principal amount of $50,000 to Trident I, LLC. Each of
the holders of the notes converted $5,000 of the principal amount of the notes
to 70,000 shares of Common Stock in June 1996.
In February 1996, the Company completed a private placement of
$1,000,000 in aggregate principal amount of convertible promissory notes (the
"10% Notes"). Up to $1,250 of each $50,000 in principal amount of the 10% Note
was convertible at any time at the option of the holder, into an aggregate of
350,000 shares of Common Stock at the rate of approximately $.0714 per share,
subject to certain anti-dilution adjustments; and such principal amount was
converted to Common Stock in August 1996. Commonwealth Associates served as the
placement agent for the offering.
On September 6, 1996, the Company closed a private placement of 240,000
shares of Class C Preferred Stock, $10 par value per share. In addition, the
Company issued $717,000 of principal amount of Convertible Promissory Notes
payable on April 1, 1997 (the "Maturity Date") and bearing interest at 8% per
annum (previously defined as the "Convertible Notes"). The unpaid principal
amount of a Convertible Note will be automatically converted into shares of
Class C Preferred Stock at any time prior to the close of business on the
Maturity Date at the rate of $60 per share of Class C Preferred Stock upon
certain conditions being met. Commonwealth Associates acted as the placement
agent for the Class C Offering.
II-2
<PAGE>
The Company issued to Commonwealth Placement Agent Warrants to purchase
up to 250,000 shares of the Company's Common Stock and Consultant's Warrants to
purchase up to 500,000 shares of Common Stock (together previously defined as
the "Commonwealth Warrants"). The Commonwealth Warrants will be exercisable for
five (5) years commencing March 1997 at an exercise price of $2.50 per share,
subject to adjustment.
In April 1996, pursuant to an employment agreement, the Company agreed
to grant to John W. Edwards, President of the Company, an option to purchase 1
million shares of Common Stock of the Company. In consideration for the
amendment of the employment agreement, effective August 21, 1996, the Company
agreed to grant Mr. Edwards options to purchase 250,000 shares of Common Stock.
In June 1996, the Company completed a private placement of $375,000 in
principal amount of Non-Negotiable 8% Promissory Notes and Common Stock Purchase
Warrants to purchase 120,000 shares of Common Stock at an exercise price of
$4.00 per share. Commonwealth served as the placement agent for the offering.
In July 1996, the Company approved the grant of options to purchase
1,500,000 and 500,000 shares of Common Stock, respectively, to Clay Wilkes and
Alex Radulovic, officers of I-Link.
In August 1996, the Company agreed to issue to William H. Flury and
John W. Edwards, officers of the company and/or I-Link, warrants to purchase
5,000 shares and 25,000 shares, respectively, in connection with loans to
I-Link.
In October 1996, pursuant to an employment agreement, the Company
agreed to grant to each of Karl S. Ryser, Jr. and William H. Flury, officers of
I-Link, options to purchase 250,000 shares of Common Stock of the Company.
In January 1997, the Company entered into a Share Exchange Agreement
with Family Telecommunications Incorporated (subsequently renamed I-Link
Communications, Inc. and referred to herein as "FTI") pursuant to which the
Company acquired the outstanding stock of FTI in exchange for 400,000 shares of
Common Stock of the Company subject to the satisfaction of certain conditions.
In April 1997, the Company agreed to issue to the Hardy Group
warrants to purchase an aggregate of 175,000 shares of Common Stock, in
connection with the Settlement Agreement between JW Charles and the Company.
In May 1997 the Company issued additional options to purchase shares of
Common Stock to certain of its officers or officers of I-Link, as follows: John
Edwards and Robert Edwards--500,000 shares of Common Stock each; Karl S. Ryser,
Jr., David Hardy and William Flury--250,000 shares of Common Stock each. In
addition, each of Messrs. Ryser and Hardy received commitments that the Company
would issue each of them options to purchase 300,000 shares of Common Stock, but
only in the event of the closing of a contemplated investment in the Company by
Winter Harbor, L.L.C.
In June 1997, the Company agreed to issue to Winter Harbor, L.L.C.
("Winter Harbor") warrants (the "WH Loan Warrants") to purchase up to 500,000
shares of Common Stock in connection with a loan by Winter Harbor to the
Company. In addition, on the same date the Company executed a letter of intent
with Winter Harbor pursuant to which Winter Harbor contemplates making an
investment in the Company in the amount of $12,100,000. Upon closing of the
Winter Harbor investment, the Company has agreed to issue to Winter Harbor (i)
shares of a new series of preferred stock (the "Series M Preferred Stock") which
will be convertible into an aggregate of 4,400,000 shares of Common Stock, and
(ii) additional warrants to acquire (a) 2,500,000 shares of Common Stock (the
"Series A Warrants"); (b) 2,500,000 shares of Common Stock (the "Series B
Warrants"); and (c) 5,000,000 shares of Common Stock (the "Series C Warrants").
The issuance and/or conversion of Series M Preferred Stock is subject to
approval by the Company's shareholders of an increase in the number of shares of
authorized capital stock at the Company's next annual shareholders meeting.
In August 1997 the Company amended its loan arrangements with Winter
Harbor such that the total amount of indebtedness was increased thereunder. In
connection with such amendment the Company issued an additional 300,000 warrants
to purchase Common Stock to Winter Harbor.
In August 1997, the Company executed an agreement with MiBridge, Inc.
pursuant to which the Company agreed to acquire MiBridge. The closing of the
MiBridge Acquisition occurred on September 2, 1997. The Company agreed it would
issue to the shareholders of MiBridge, as consideration for the purchase of all
II-3
<PAGE>
outstanding MiBridge equity securities, (i) an aggregate $2,000,000 in cash,
payable in quarterly installments for two years, and (ii) an aggregate 1,000
shares of a new series of preferred stock (the "Series D Preferred Stock"). The
1,000 shares of Series D Preferred Stock will be convertible into such number of
shares of Common Stock as shall equal $6,250,000 divided by $9.25 (the "MiBridge
Conversion Price"). 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 MiBridge Conversion Price or the average closing
bid price for the five trading days immediately preceding the date the Company
receives notice of conversion or the automatic conversion date, as the case may
be.
The Company believes that the transactions set forth above were
exempt from registration with the Commission pursuant to Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
Except as disclosed above, no broker-dealer or underwriter was involved in the
foregoing transactions. All certificates representing such securities have been
or will be appropriately legended. The February, June and September 1996
placements were made in reliance upon a claim of exemption pursuant to Rule 506
of Regulation D. Additionally, the participants in the February, June and
September 1996 private placements were accredited investors.
Item 27. Exhibits.
The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
2(a)/6/ Management Agreement Assignment, effective June 1, 1993 between
Florida Medical Enterprises, Inc. and Waters Edge Scanning
Associates, Inc.
2(b)/6/ Lease Assignment and Asset Purchase Agreement dated as of June
1, 1993 between Waters Edge Scanning Associates, Ltd. and
Medcross, Inc.
2(c)/10/ Joint Venture Interest Purchase Agreement, effective October 1,
1994 between Medcross, Inc. and Urology Ultrasound, Inc.
2(d)/15/ Stock Purchase Agreement, dated February 13, 1996, by and among
Medcross, Inc, I-Link, Ltd., and GNET Enterprises, Inc.
2(e) [reserved]
2(f)/19/ Form of 8% Convertible Promissory Note.
2(g) [reserved]
2(h)/17/ Escrow Agreement dated February 21, 1996, by and among Medcross,
Inc., I-Link, Ltd. and De Martino Finkelstein Rosen & Virga.
2(i)/17/ Form of Promissory Note.
2(j)/21/ Share Exchange Agreement for the Acquisition of Family
Telecommunications Incorporated by Medcross, Inc.
3(a)/20/ Amendment to the Amended and Restated Articles of Incorporation
dated August 16, 1996.
3(b)/20/ Composite copy of the Amended and Restated Articles of
Incorporation incorporating all amendments through the date
hereof.
3(c)/8/ Bylaws of the Company, as amended.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
3(d)/16/ Articles of Incorporation of I-Link Worldwide Inc.
3(e)/16/ Bylaws of I-Link Worldwide Inc.
3(f)/22/ Articles of Incorporation of Family Telecommunications
Incorporated and Articles of Amendment to the Articles of
Incorporation
3(g)/22/ Bylaws of Family Telecommunications Incorporated
4(a)/1/ Specimen Common Stock Certificate.
4(b)/7/ Promissory Note payable to Waters Edge Scanning Associates,
Ltd., in the amount of $600,000, dated June 1, 1993.
4(c)/7/ Promissory Note contingently payable to Waters Edge Scanning
Associates, Ltd., in the amount of $365,000, dated June 1, 1993.
4(d)/7/ Promissory Note contingently payable to Waters Edge Scanning
Associates, Ltd., in the amount of $365,000, dated June 1, 1993.
4(e)/8/ Form of Promissory Note payable to limited partners of Medcross
Imaging, Ltd., in the aggregate amount of $75,000, dated October
1, 1993.
4(f)/11/ Series CS Warrant to Purchase Common Shares of Medcross, Inc.
4(g)/13/ Common Stock Purchase Option to Purchase Common Shares of
Medcross, Inc.
4(h)/15/ Form of 10% Convertible Promissory Note dated February 21, 1996.
4(i)/16/ Non-Negotiable 10% Promissory Note payable to Scott Cook in the
amount of $100,000, dated October 19, 1995.
4(j)/16/ Guaranty by and between Medcross, Inc. and Scott Cook, dated
October 19, 1995.
4(k)/16/ Security Agreement by and between I-Link, Ltd., Scott Cook, and
Medcross, Inc. dated October 19, 1995.
4(l)/16/ Common Stock Purchase Option to Purchase Common Shares of
Medcross, Inc. issued to Scott Cook.
4(m)/23/ Form of Convertible Promissory Note issued September 6, 1996.
4(n)/22/ Placement Agent's Common Stock Warrant Agreement and
Certificate.
4(o)/22/ Consultant's Common Stock Warrant Agreement and Certificate.
4(p)/23/ Option to purchase 7,500 shares of Class B Convertible Preferred
Stock of Medcross, Inc., granted by R. Huston Babcock to
Benchmark Equity Group, Inc., dated February 14, 1996.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
4(q)/23/ Option to purchase 160,000 shares of Class A Convertible
Preferred Stock of Medcross, Inc., granted by Four M
International, Ltd. to Commonwealth Associates, dated February
21, 1996.
4(r)/23/ Non-Negotiable 10% Convertible Promissory Note (Series II)
payable to Joseph Wong, in the principal amount of $50,000,
dated February 9, 1996.
4(s)/23/ Non-Negotiable 10% Convertible Promissory Note (Series III)
payable to Trident I, L.L.C., in the principal amount of
$50,000, dated February 21, 1996.
5(a) Opinion of Counsel.
9(a)/4/ Shareholder's Agreement dated February 19, 1992 among Four M
International, Inc., Walnut Capital Corp., Windy City, Inc., and
Canadian Imperial Bank of Commerce Trust Company (Bahamas)
Limited.
9(b)/10/ First Amendment to Shareholder's Agreement.
*10(a)/9/ Director Stock Option Plan.
*10(b)/2/ Executive Stock Option Plan.
10(c)/2/ MR Service Agreement, dated August 14, 1990, between Medcross
Imaging, Ltd. and HealthTrust, Inc. with respect to Edward White
Hospital.
10(d)/2/ MR Service Agreement, dated August 14, 1990, between Medcross
Imaging, Ltd. and HealthTrust, Inc. with respect to South Bay
Hospital.
10(e)/3/ Stock Purchase Agreement, dated February 9, 1992, between
Medcross, Inc., Four M International Limited, Walnut Capital
Corp., Windy City, Inc., and Canadian Imperial Bank of Commerce
Trust Company.
10(f)/5/ First Amendment to Stock Purchase Agreement, dated May 1, 1992,
between Medcross, Inc., Four M International, Inc., Walnut
Capital Corp., Windy City, Inc., and Canadian Imperial Bank of
Commerce Trust Company (Bahamas) Limited, as trustee.
10(g)/10/ Financial Consulting Agreement and Common Stock Purchase Warrant
dated as of November 3, 1994 between Medcross, Inc. and JW
Charles Financial Services, Inc.
10(h)/11/ Consulting Agreement, dated as of August 6, 1995, between the
Company and Timothy R. Barnes.
10(i)/12/ Consulting Agreement, dated September 1, 1995, by and among
Medcross, Inc., Kalo Acquisitions, LLC, and Jason H. Pollak.
10(j)/13/ Amendment to and Restatement of the Amended and Restated
Consulting Agreement, dated March 4, 1996, by and among
Medcross, Inc., Kalo Acquisitions, LLC, and Jason H. Pollak.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
10(l)/14/ MR Service Agreement effective October 1, 1995, by and between
Medcross Imaging, Ltd. and South Bay Hospital.
10(m)/14/ MR Service Agreement effective October 1, 1995, by and between
Medcross Imaging, Ltd. and Edward White Hospital.
*10(n)/16/ Employment Agreement, dated February 4, 1996, between Medcross,
Inc. and Henry Y.L. Toh.
*10(o)/16/ Employment Agreement, dated January 1, 1996, between Medcross,
Inc. and Dorothy L. Michon.
*10(p)/16/ Employment Agreement, dated January 1, 1996, between Medcross,
Inc. and Stephanie E. Giallourakis.
*10(q)/16/ Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Clay Wilkes.
*10(r)/16/ Employment Agreement, dated February 14, 1996, between I-Link
Worldwide Inc. and Alex Radulovic.
*10(s)/16/ 1995 Director Stock Option and Appreciation Rights Plan.
*10(t)/16/ 1995 Employee Stock Option and Appreciation Rights Plan.
*10(u)/16/ Employment Agreement, dated April 8, 1996, between I-Link
Worldwide Inc. and John W. Edwards.
10(v)/18/ Consulting Agreement, effective January 1, 1996, by and between
Windy City, Inc. and the Company.
10(w)/20/ Agreement for Terminal Facility Collocation Space, dated June
21, 1996, by and between I-Link Worldwide Inc. and MPS Telecom,
Inc.
10(x)/22/ Consulting Agreement dated August 21, 1996 between the Company
and Commonwealth Associates.
10(y)/22/ Sales Agency Agreement dated July 1, 1996 between the Company
and Commonwealth Associates and Amendment No. 1 thereto.
10(z)/22/ Commercial Lease dated May 21, 1996 between I-Link Worldwide
Inc. and Draper Land Partnership II and First Amendment dated
July 22, 1996.
10(aa) Commercial Lease dated September 11, 1996 between I-Link
Worldwide Inc. and Draper Land Partnership II and First
Amendment dated October 24, 1996.
*10(bb) Employment Agreement dated October 15, 1996, between I-Link
Worldwide Inc. and Karl S. Ryser, Jr.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
10(cc)/22/ Second Amendment dated November 22, 1995 to Medcross, Inc.
Shareholders' Agreement.
10(dd)/22/ Third Amendment dated January 31, 1996 to Medcross, Inc.
Shareholders' Agreement.
10(ee)/22/ Term Lease Master Agreement dated May 19, 1996 by and
between IBM Credit Corporation and I-Link Worldwide Inc.
10(ff)/22/ 1997 Recruitment Stock Option Plan
10(gg)/22/ Lease Agreement dated July 1, 1996 between Broadway Associates
and FTI Communications
10(hh)/22/ Lease Between Phoenix City Square Partnership and Robert W.
Edwards and Denise A. Edwards
10(ii)/22/ Carrier Agreement between MCI Telecommunications Corporation and
FTI, Inc.
10(jj)/22/ Strategic Member Reseller Agreement between I-Link Worldwide
Inc. and WealthNet Incorporated
10(kk)/22/ Settlement Agreement between WealthNet Incorporated and Family
Telecommunications Incorporated
10(11)/22/ Agreement Regarding Certificate of Deposit between Draper Land
Partnership and I-Link Worldwide Inc.
21 Subsidiaries of the registrant.
23(a) Consent of De Martino Finkelstein Rosen & Virga included in
Exhibit 5(a).
23(b) Consent of Coopers & Lybrand L.L.P.
99(a)/24/ Loan Agreement dated as of June 6, 1997, by and between the
Company and Winter Harbor, L.L.C. ("Lender or "Investor").
99(b)/24/ Promissory Note dated June 6, 1997, in the principal amount
of $2,000,000, made by Company in favor of Lender.
99(c)/24/ Warrant Agreement dated as of June 6, 1997, by and between
the Company and Lender; and related Warrant Certificate.
99(d)/24/ Pledge Agreement dated as of June 6, 1997, by and between the
Company and Lender.
99(e)/24/ Security Agreement dated as of June 6, 1997, by and among Family
Telecommunications Incorporated ("FTI"), I-Link Communications,
Inc. ("I-Link") and Lender.
99(f)/24/ Subsidiary Guaranty dated as of June 6, 1997, by and between I-
Link and Lender.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Title of Exhibit
-------- ----------------
<S> <C>
99(g)/24/ Assignment of Security dated as of June 6, 1997, by and between
I-Link and Lender.
99(h)/24/ Letter of Intent dated June 6, 1997, by and between the Company
and Investor.
99(i)/24/ Term Sheet for Proposed Equity Investment by Winter Harbor,
L.L.C., dated June 6, 1997.
99(j)/24/ Letter of Intent dated June 5, 1997, by and among the Company,
MiBridge, Inc. and Dror Nahumi.
99(k)/21/ Press Release dated January 16, 1997.
99(l) First Amendment to Subsidiary Guaranty, by and among I-Link
Communications, Inc., I-Link Systems, Inc., I-Link Worldwide,
L.L.C. and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(m) First Amendment to Loan Agreement, by and between Medcross, Inc.
and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(n) First Amendment Warrant Agreement, by and between Medcross,
Inc. and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(o) Amended and Restated Security Agreement, by and among I-Link
Systems, Inc., I-Link Communications, Inc., I-Link Worldwide,
L.L.C. and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(p) Worldwide Pledge Agreement, by and between Medcross, Inc.
and Winter Harbor, L.L.C., dated as of August 18, 1997.
99(q) Promissory Note dated August 18, 1997, in the principal amount
of $3,000,000, made by Medcross, Inc. in favor of Winter Harbor,
L.L.C.
</TABLE>
------------------------
/1/ Incorporated by reference to the Company's Registration Statement on
Form S-18 file number 33-27978-A.
/2/ Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1990, file number 0-17973.
/3/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, file number 0-17973.
/4/ Incorporated by reference to the Company's Current Report on
Form 8-K dated March 30, 1992, file number 0-17973.
/5/ Incorporated by reference to the Company's Current Report on
Form 8-K dated May 22, 1992, file number 0-17973.
/6/ Incorporated by reference to the Company's Current Report on
Form 8-K dated June 30, 1993, file number 0-17973.
/7/ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993, file number 0-17973.
/8/ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993, file number
0-17973.
II-9
<PAGE>
/9/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, file number 0-17973.
/10/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, file number 0-
17973.
/11/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 33-63751.
/12/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 33-63749.
/13/ Incorporated by reference to the Company's Registration Statement
filed on Form S-8, file number 333-01525.
/14/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated October 31, 1995, file number 0-17973.
/15/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1995, file number 0-17973.
/16/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the years ended December 31, 1995, filed on
April 15, 1996, file number 0-17973.
/17/ Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996, file number 0-
17973.
/18/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated February 23, 1996, file number 0-17973.
/19/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated September 6, 1996, file number 0-17973.
/20/ Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, file number 0-17973.
/21/ Incorporated by reference to the Company's Current Report on
Form 8-K, dated January 13, 1997, file number 0-17973.
/22/ Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, file number 0-
17973.
/23/ Incorporated by reference to the Company's Registration Statement
on Form SB-2 (File No. 333-17861) filed December 13, 1996.
/24/ Incorporated by reference to the Company's Current Report on
Form 8-K, file number 0-17973.
* Indicates a management contract or compensatory plan or
arrangement required to be filed herewith.
Item 28. Undertakings
(a) Rule 415 Offering. The undersigned Registrant will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act treat each
post-effective amendment as a new registration statement of the
Securities offered, and the offering of the Securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the Securities that remain unsold at the end of the offering.
II-10
<PAGE>
(e) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 22 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the Securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(f) Rule 430A. The undersigned Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the Securities offered in the Registration
Statement, and that offering of the Securities at that time as the
initial bona fide offering of those Securities.
II-11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Registration Statement, as amended, to be signed on its behalf by the
undersigned, in the City of Draper, State of Utah, on September 4, 1997.
MEDCROSS, INC.
By: /s/ John W. Edwards
------------------------------
John W. Edwards, Chairman of the
Board, President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as amended,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John W. Edwards Chairman of the Board, President and September 4, 1997
- ------------------------------ Chief Executive Officer
John W. Edwards
/s/ Karl S. Ryser, Jr. Treasurer and Chief September 4, 1994
- ------------------------------ Financial Officer
Karl S. Ryser, Jr.
/s/ David E. Hardy Secretary September 4, 1997
- ------------------------------
David E. Hardy
/s/ Henry Y.L. Toh Director September 4, 1997
- ------------------------------
Henry Y.L. Toh
/s/ Clay Wilkes Director September 4, 1997
- ------------------------------
Clay Wilkes
/s/ R. Huston Babcock Director September 4, 1997
- ------------------------------
R. Huston Babcock
/s/ Joseph A. Cohen Director September 4, 1997
- ------------------------------
Joseph A. Cohen
</TABLE>
II-12
<PAGE>
Exhibit 5(a)
DE MARTINO FINKELSTEIN ROSEN & VIRGA
1818 N Street, N.W. Suite 400
Washington, D.C. 20036-2492
(202) 659-0494
September 5, 1997
Board of Directors
Medcross, Inc.
13751 S. Wadsworth Park Drive
Suite 200
Draper, Utah 84020
Re: Registration Statement on Form SB-2 (File No. 333-17861)
--------------------------------------------------------
Gentlemen:
We have acted as counsel to Medcross, Inc., a Florida corporation (the
"Company"), in connection with the preparation and filing by the Company of a
registration statement on Form SB-2 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") relating to the offer
and sale of certain securities of the Company (collectively, the "Securities")
by the holders thereof (collectively, the "Selling Security holders").
Capitalized terms used herein but not otherwise defined shall have the
respective meanings attributed to them in the Registration Statement.
We have examined the Articles of Incorporation, as amended, and Bylaws of
the Company, the minutes of various meetings and consents of the Board of
Directors of the Company, forms of certificates representing the Securities,
originals or copies of all such records of the Company, agreements, certificates
of public officials, certificates of officers and representatives of the Company
and others, and such other documents, certificates, records, authorizations,
proceedings, statutes and judicial decisions as we have deemed necessary to form
the basis of the opinion expressed herein. In such examination, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals and the conformity to originals of all documents submitted to
us as copies thereof. As to various questions of fact material to such opinion,
we have relied upon statements and certificates of officers and representatives
of the Company and others.
In connection with the preparation of this opinion, we have reviewed such
questions of law as we have deemed necessary. We do not herein give any opinion
with respect to the laws of any jurisdiction other than the general laws of the
United States of America, the federal securities laws, the laws of the District
of Columbia and the General Corporation Law of the State of Delaware. Except as
otherwise provided herein,
<PAGE>
Board of Directors
Medcross, Inc.
September 5, 1997
Page 2
we have assumed that, insofar as the laws of another jurisdiction may be
applicable to any matters to which this opinion may relate, such laws are
identical to the laws of the District of Columbia; however, we express no
opinion as to the extent to which the laws of the District of Columbia or such
other jurisdiction may apply.
Based upon the foregoing, we are of the opinion that:
1. The Commonwealth Warrants, the E&M Warrants, the Mandarino Warrants
and the Hardy Group Warrants to be offered and sold by the Selling
Securityholders have been duly authorized and validly issued, are fully paid and
nonassessable and, when offered and sold in accordance with the Prospectus, will
be duly authorized, validly issued, fully paid and nonassessable;
2. The 1,476,126 shares of Common Stock issuable upon exercise of the
Commonwealth Warrants, the E&M Warrants, the Mandarino Warrants, the Settlement
Warrants, the Hardy Group Warrants and the Cook Options; the 183,542 shares of
Common Stock issuable upon conversion of the Class B Preferred Stock; and the
6,046,800 shares of Common Stock issuable upon conversion of the Convertible
Notes (assuming conversion of the Class C Preferred Stock issuable upon
conversion of such notes) and the outstanding shares of Class C Preferred Stock
have been duly authorized and reserved for issuance, and when issued, offered
and sold in accordance with the Prospectus, will be duly authorized, validly
issued, fully paid and nonassessable; and
3. The 8,083,857 shares of outstanding Common Stock (including 3,206,122
shares of Common Stock issued in connection with the acquisition of I-Link;
35,000 shares of Common Stock issued upon conversion of the 10% Notes; 70,000
shares of Common Stock issued upon conversion of the Series II Note; 3,858,844
shares of Common Stock issued and subject of the Four M Options and 913,891
shares of Common Stock issued and subject of the Kanter Options) to be offered
and sold by the Selling Securityholders have been duly authorized and validly
issued, are fully paid and nonassessable and, when offered and sold in
accordance with the Prospectus, will be duly authorized, validly issued, fully
paid and nonassessable.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities described therein under the caption "Legal
Matters." We further consent to your filing a copy of this opinion as an exhibit
to the Registration Statement.
De Martino Finkelstein Rosen & Virga
By: /s/ Ralph V. De Martino
---------------------------------
Ralph V. De Martino, a Principal
<PAGE>
EXHIBIT 21
Subsidiaries of Medcross, Inc.
<TABLE>
<CAPTION>
Percentage Jurisdiction of
Name Ownership Organization
<S> <C> <C>
I-Link Systems, Inc. 100% Utah
(formerly I-Link Worldwide, Inc.)
I-Link Communications, Inc. 100% Utah
(formerly Family Telecommunications
Incorporated)
I-Link Worldwide, LLC 100% Delaware
MiBridge, Inc. 100% Utah
(formerly I-Link Mergerco, Inc.,
the surviving entity in merger with
MiBridge, Inc., a New Jersey corporation)
Waters Edge Scanning Associates Inc. 100% Florida
(d/b/a Tampa MRI)
Medcross Imaging Ltd. 81.75% Florida
Medcross Asia Ltd. 100% Hong Kong
Shenyang Medcross Huamei 51% Peoples
Medical Equipment Co, Ltd. Republic of China
</TABLE>
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Form SB-2 (File
No. 333-17861) of our reports dated April 11, 1997, March 11, 1997, and August
6, 1997, on our audits of the financial statements of Medcross, Inc., Family
Telecommunications Incorporated, and MiBridge, Inc., respectively. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
September 5, 1997
<PAGE>
Exhibit 99(l)
FIRST AMENDMENT TO SUBSIDIARY GUARANTY
THIS FIRST AMENDMENT TO SUBSIDIARY GUARANTY is made and entered into as
of August 18, 1997, by and among I-LINK COMMUNICATIONS, INC., a Utah corporation
("Communications"), I-LINK SYSTEMS, INC., a Utah corporation ("Systems"), and
I-LINK WORLDWIDE, L.L.C., a Delaware limited liability company ("Worldwide" and,
together with Communications and Systems, collectively the "Guarantors" and
individually, a "Guarantor"), and WINTER HARBOR, L.L.C., a Delaware limited
liability company (the "Lender").
RECITALS
A. Medcross, Inc., a Florida corporation (the "Borrower"), owns all of
the issued and outstanding capital stock of each of Communications and Systems
and all of the issued and outstanding limited liability company interests of
Worldwide. The Borrower and the Lender have entered into a Loan Agreement dated
as of June 6, 1997, as amended by the First Amendment to Loan Agreement of even
date herewith (as the same may be extended, amended, restated or modified from
time to time, the "Loan Agreement"), pursuant to which the Lender has agreed to
loan to the Borrower of up to $5,000,000. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Loan
Agreement.
B. The Guarantors other than Worldwide guaranteed the obligations of
the Borrower under the Loan Agreement pursuant to a Subsidiary Guaranty dated as
of June 6, 1997 (the "Original Guaranty").
C. As security for the Loan, the Guarantors are required to guarantee
the obligations of the Borrower to the Lender under the Loan Agreement and under
the notes issued pursuant thereto (collectively, the "Note"). Therefore, the
Guarantors have agreed to amend the Original Guaranty to add Worldwide as a
"Guarantor" and to provide that the Guaranteed Obligations, as that term is
defined in the Original Guaranty, include the Additional Loan, as that term is
defined in the First Amendment to Loan Agreement. The Original Guaranty, as
amended hereby, may be referred to hereinafter as the "Guaranty."
D. The Borrower, Worldwide and the other Guarantors share an identity
of interests as members of a consolidated group of companies engaged in
substantially similar businesses. The Borrower provides certain centralized
financial, accounting and
<PAGE>
management services to the Guarantors and the making of the Loan will facilitate
the expansion and enhance the overall financial strength and stability of the
Borrower's corporate group, including Worldwide. Accordingly, Worldwide will
derive substantial benefits as a result of the extensions of credit to the
Borrower under the Loan Agreement, which benefits are hereby acknowledged by
Worldwide.
AGREEMENTS
In consideration of the foregoing Recitals, and of the Loan made or to
be made by the Lender to the Borrower under the Loan Agreement, which will be of
material economic benefit to the Guarantors, the Guarantors agree as follows:
1. Amendments.
(1) Worldwide, jointly and severally with the other
Guarantors, hereby absolutely, unconditionally and irrevocably guarantees as
primary obligor, and not merely as surety, the prompt performance and payment in
full when due, whether at stated maturity, by acceleration or otherwise
(including, without limitation, obligations that would become due but for the
operation of the automatic stay under Section 362(a) of Title 11 of the United
States Code, and including interest, fees and other charges whether or not a
claim is allowed for such obligations in any such bankruptcy proceeding), of all
Guaranteed Obligations, as that term is defined in the Guaranty.
(2) Worldwide shall be deemed a Guarantor for all purposes of
the Guaranty. Worldwide hereby agrees to be bound by all of the terms and
conditions of the Guaranty as if it were an original signatory thereto.
(3) The Guarantors acknowledge and agree that the Guaranteed
Obligations shall include all amounts owing under the Loan Agreement and the
Note, including, without limitation, the Additional Loan made by the Borrower
pursuant to the First Amendment to Loan Agreement.
2. Representations and Warranties. Each and every
representation and warranty set forth in the Guaranty is hereby confirmed and
ratified by the Guarantors, including Worldwide, and such representations and
warranties as so confirmed and ratified shall be deemed to have been made and
undertaken as of the date of this First Amendment to Subsidiary Guaranty.
3. Counterparts. This First Amendment to Subsidiary Guaranty
may be executed in as many counterparts as
- 2 -
<PAGE>
may be convenient and shall become binding when each of the Guarantors has
executed at least one counterpart.
4. Governing Law. This First Amendment to Subsidiary Guaranty
shall be a contract made under and governed by the laws of the State of
Delaware, without regard to the conflicts of law provisions thereof.
5. Binding Effect. This First Amendment to Subsidiary Guaranty
shall be binding upon and shall inure to the benefit of the Guarantors and their
respective successors and assigns, and in particular, any holder of the Note.
6. Reference to the Guaranty. Except as amended hereby, the
Original Guaranty shall remain in full force and effect and is hereby ratified
and confirmed in all respects. On and after the effectiveness of the amendment
to the Guaranty accomplished hereby, each reference in the Original Guaranty to
"this Guaranty", "hereunder", "hereof", "herein" or words of like import, and
each reference to the Original Guaranty in the Loan Agreement or other
agreement, document or instrument executed and delivered pursuant to the Loan
Agreement, shall be deemed a reference to the Original Guaranty, as amended
hereby.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the Guarantors have caused this First Amendment to
Subsidiary Guaranty to be duly executed as of the day and year first written
above.
GUARANTORS:
I-LINK WORLDWIDE, L.L.C.
By: Medcross, Inc., its sole member
By: /s/ John Edwards
---------------------------
John Edwards, President
I-LINK SYSTEMS, INC.
By: /s/ John Edwards
---------------------------
John Edwards, President
I-LINK COMMUNICATIONS, INC.
By: /s/ John Edwards
---------------------------
John Edwards, President
WINTER HARBOR, L.L.C.
By: First Media, L.P., its sole member
By: First Media Corporation, its general partner
By: /s/ Ralph W. Hardy, Jr.
---------------------------
Name: Ralph W. Hardy, Jr.
Title: Secretary
- 4 -
<PAGE>
Exhibit 99(m)
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT is made as of August 18, 1997,
by and between MEDCROSS, INC., a Florida corporation (the "Borrower"), and
WINTER HARBOR, L.L.C., a Delaware limited liability company (the "Lender").
WITNESSETH:
A. The parties hereto are parties to a Loan Agreement (the "Original
Loan Agreement"), dated as of June 6, 1997, pursuant to which Lender agreed to
make a loan to Borrower in a principal amount of up to $2,000,000 (the "Original
Loan").
B. Lender has agreed to make additional loans to Borrower in the amount
of up to $3,000,000 (the "Additional Loan"), of which $500,000 was advanced to
Borrower on August 8, 1997, to be used by Borrower for capital expenditures and
working capital purposes.
C. Borrower has formed I-Link Worldwide, L.L.C., a Delaware limited
liability company ("Worldwide"). Borrower owns beneficially and of record all of
the issued and outstanding limited liability company interests of Worldwide.
D. The parties hereto wish to amend the Original Loan Agreement to
provide for the Additional Loan and to add Worldwide as a subsidiary of
Borrower. The Original Loan Agreement as amended hereby, may be referred to
hereinafter as the "Loan Agreement".
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and in the Loan Agreement, Lender and Borrower agree as
follows:
1. Defined Terms. All capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Loan Agreement.
2. Additional Loan. Lender hereby agrees, upon the terms and conditions
hereinafter set forth, to make the Additional Loan, less the amount of $500,000
advanced to Borrower on August 8, 1997, to Borrower on the date the conditions
set forth in Section 8 have been satisfied or as promptly as practicable
thereafter. The Additional Loan shall be subject to all of the terms and
conditions of the Loan Agreement and shall be deemed to be a part of the "Loan"
as that term is defined in the Loan Agreement, for all purposes of the Loan
Agreement and the Loan
<PAGE>
Documents, except that (a) the Additional Loan shall be evidenced by the
Additional Note, as provided in Section 3 hereof, and (b) the Additional Loan
shall be due in one installment on February 15, 1998.
3. Promissory Note. On or prior to the date of making the Additional
Loan, Borrower shall execute and deliver to Lender a promissory note,
substantially in the form set forth as Exhibit 1 hereto (as the same may be
amended, renewed, restated, increased, consolidated or substituted from time to
time, the "Additional Note") payable to the order of Lender.
4. Interest. The Additional Loan shall bear interest at the rate set
forth in Section 1.3 of the Loan Agreement.
5. Warrants. As further consideration for Lender's commitment to make
the Additional Loan, Borrower has granted to Lender warrants to purchase, for an
aggregate value of $10,000, up to 300,000 additional shares of Borrower's common
stock at a purchase price of $6.38 per share, pursuant to the terms of a Warrant
Agreement of even date herewith (the "First Amendment Warrant Agreement"). The
balance of the $3,000,000 consideration paid by Lender for the Additional Note
and the First Amendment Warrant Agreement, $2,900,000, based on the respective
fair market values of the Additional Note and the Warrant Agreement, shall be
allocated to the Note.
6. Loan and Note; Security Interest. It is the intent of the parties
that the Additional Loan shall be included within the definition of "Loan" in
the Loan Agreement and the other Loan Documents and the Additional Note shall be
included within the definition of "Note" in the Loan Agreement and the other
Loan Documents, so that all provisions in the Loan Agreement and the other Loan
Documents shall be applicable to the Additional Loan and the Additional Note,
except to the extent expressly provided to the contrary in this Amendment. In
particular, without limiting the generality of the foregoing, Borrower agrees
that in addition to the Original Loan, the Additional Loan shall also be secured
by the Amended and Restated Security Agreement, the Pledge Agreement, the
Worldwide Pledge Agreement, the First Amendment Guaranty and the Patent
Assignment, and that such agreements are hereby amended to the extent necessary
to provide for such security and the addition of Worldwide as a subsidiary of
Borrower. The Additional Note, the First Amendment Warrant Agreement, the
Worldwide Pledge Agreement and each other document, agreement or instrument to
be executed and delivered pursuant to this Amendment shall be deemed to be "Loan
Documents" for all purposes of the Loan Agreement and the other Loan Documents.
-2-
<PAGE>
7. Amendments.
(a) The Preamble to the Loan Agreement is hereby amended by
deleting the reference to "limited partnership" in such Preamble and replacing
it with a reference to "limited liability company."
(b) The subsidiary of Borrower formerly known as "I-Link
Communications, Inc." has changed its name to "I-Link Systems, Inc." Therefore,
all references in the Original Loan Agreement or any of the Loan Documents to
"I-Link Communications, Inc." shall be deemed to be references to "I-Link
Systems, Inc."
(c) The subsidiary of Borrower formerly known as "Family
Telecommunications, Inc." has changed its name to "I-Link Communications, Inc."
Therefore, all references in the Original Loan Agreement or any of the Loan
Documents to "Family Telecommunications, Inc." shall be deemed to be references
to "I-Link Communications, Inc."
(d) Article III of the Loan Agreement is hereby amended by
adding a new Section 3.4 which shall read in its entirety as follows:
Section 3.4 Worldwide Pledge Agreement. As further security
for the Loan, Borrower shall execute and deliver to Lender a
pledge agreement in form and substance satisfactory to Lender
(the "Worldwide Pledge Agreement"), pursuant to which Borrower
grants to Lender a security interest in all of the limited
liability company interests of I-Link Worldwide, L.L.C., a
Delaware limited liability company ("Worldwide") owned by
Borrower as collateral security for Borrower's obligations
hereunder and under the Note.
(e) Article 5 of the Original Loan Agreement is hereby amended
to read in its entirety as follows:
ARTICLE V. REPRESENTATIONS AND WARRANTIES
In order to induce Lender to enter into this Agreement
and make the Loan, Borrower represents and warrants as follows:
5.1 Existence and Standing.
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(a) Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Florida, is qualified to do business and in good standing under the
laws of each other jurisdiction in which it conducts its business,
and has all requisite power and authority, corporate or otherwise,
to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, this
Agreement, the Note, the Additional Note, the Pledge Agreement, the
Worldwide Pledge Agreement, the Warrant Agreement, the First
Amendment Warrant Agreement and all other Loan Documents.
(b) Each of I-Link and FTI is a corporation duly incorporated,
validly existing and in good standing under the laws of its state
of incorporation, is qualified to do business and in good standing
under the laws of each other jurisdiction in which it conducts its
business, and has all requisite power and authority, corporate or
otherwise, to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under,
each Loan Document to which it is a party.
(c) Worldwide is a limited liability company duly organized,
validly existing and in good standing under the laws of its state
of formation, is qualified to do business and in good standing
under the laws of each other jurisdiction in which it conducts its
business, and has all requisite power and authority, limited
liability company or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its
obligations under, each Loan Document to which it is a party.
5.2 Authorizations, Compliance with Laws. The execution, delivery
and performance by each of Borrower, I-Link, FTI and Worldwide of
each Loan Document to which it is a party, and of each other
document required to be executed and delivered by it pursuant to
this Agreement or any other Loan Document, have been duly
authorized by all necessary corporate action and do not and will
not (i) violate (A) any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to Borrower, I-Link, FTI
or Worldwide, (B) any provision of the Certificate of Incorporation
or By-laws of Borrower, I-
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<PAGE>
Link or FTI or (C) any provision of the Certificate of Formation or
the Operating Agreement of Worldwide; or (ii) result in a breach of
or constitute a default under any agreement or instrument to which
Borrower, I-Link, FTI or Worldwide is a party or by which any of
their properties may be affected; or (iii) result in the creation
of a lien, charge or encumbrance of any nature upon Borrower's, I-
Link's, FTI's or Worldwide's properties or assets other than as
contemplated by this Agreement.
5.3 Financial Statements. Borrower has delivered to Lender true
and complete copies of (a) the audited consolidated financial
statements of Borrower for the fiscal years ended December 31,
1996, and December 31, 1995, and (b) the unaudited consolidated
financial statements of Borrower as of June 30, 1997, and for the
six month period then ended (the "Financial Statements"). The
Financial Statements are true and complete in all material respects
(including, without limitation, a disclosure of all material
contingent liabilities) and present fairly the financial condition
and results of operations of Borrower and its subsidiaries, as of
the dates and for the periods indicated and have been prepared in
accordance with generally accepted accounting principles,
consistently applied, subject in the case of statements for interim
periods to normal year-end adjustments and the absence of
footnotes.
5.4 Capitalization. All of the issued and outstanding capital
stock of Borrower has been duly and validly issued, and is fully
paid and nonassessable. All of the issued and outstanding capital
stock of each of I-Link and FTI has been duly and validly issued,
and is fully paid and nonassessable and is owned by Borrower free
and clear of any liens, security interests or other claims or
encumbrances, except those granted to Lender pursuant to the terms
of this Agreement and the other Loan Documents. All of the issued
and outstanding limited liability company interests of Worldwide
have been duly and validly issued, and are fully paid and
nonassessable and are owned by Borrower free and clear of any
liens, security interests or other claims or encumbrances, except
those granted to Lender pursuant to the terms of this Agreement and
the other Loan Documents. Except as set forth on Schedule 5.4
attached hereto, neither Borrower, I-Link, FTI, Worldwide nor any
other person has any commitment or
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<PAGE>
obligation, either firm or conditional, to issue, deliver, purchase
or sell, under any offer, option agreement, bonus agreement,
purchase plan, incentive plan, compensation plan, warrant,
conversion rights, contingent share agreement, stockholders
agreement, partnership agreement or otherwise, any capital stock,
membership interests or other equity securities or securities
convertible into shares of capital stock, membership interests or
other equity securities of Borrower, I-Link, FTI or Worldwide.
5.5 No Consent. No authorization, consent, approval, license,
exemption of or filing or registration with any court or
governmental department or agency or any other person is or will be
necessary for the valid execution, delivery and performance by
Borrower, I-Link, FTI and Worldwide of this Agreement, the Note,
the Additional Note, the Pledge Agreement, the Worldwide Pledge
Agreement, the Guaranty, the Security Agreement, the Warrant
Agreement, the First Amendment Warrant Agreement or any other
document required to be executed and delivered by Borrower, I-Link,
FTI or Worldwide pursuant to this Agreement or the First Amendment
to this Agreement.
5.6 Binding Obligations. This Agreement (as amended pursuant to
the First Amendment hereto), the Note, the Additional Note, the
Pledge Agreement, the Worldwide Pledge Agreement, the Guaranty, the
Security Agreement, the Warrant Agreement, the First Amendment
Warrant Agreement and all other documents required to be executed
and delivered by Borrower, I-Link, FTI and Worldwide pursuant to
this Agreement or the First Amendment hereto have been executed and
delivered by a duly authorized officer of Borrower, I-Link, FTI or
Worldwide and constitute legal, valid and binding obligations of
Borrower, I-Link, FTI and Worldwide, enforceable in accordance with
their respective terms.
5.7 Litigation. There are no actions, suits or proceedings
pending, or, to the knowledge of Borrower, threatened against or
affecting Borrower, I-Link, FTI or Worldwide or any of their
properties before any court or governmental department or agency
which materially adversely affects the transactions contemplated by
this Agreement or which could have a material adverse effect on the
business, properties, prospects, operation or condition (financial
or otherwise) of Borrower, I-Link, FTI or Worldwide.
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<PAGE>
5.8 No Default. Neither Borrower nor I-Link nor FTI nor Worldwide
is in material default in the performance, observance or
fulfillment of any of the obligations or conditions contained in
any material agreement or instrument to which it is a party, nor
with respect to any order, judgment, writ, injunction or decree of
any court, governmental authority or arbitration board.
5.9 Compliance with Laws. Each of Borrower, I-Link, FTI and
Worldwide has complied and is in compliance in all material
respects with all applicable federal, state and local laws. Each of
Borrower, I-Link, FTI and Worldwide has obtained all necessary
licenses and permits required for the conduct of its business and
operations or such licenses and permits have been applied for and
are now being diligently pursued.
5.10 Taxes. Except as set forth on Schedule 5.10 attached hereto,
each of Borrower, I-Link, FTI or Worldwide has filed all tax
returns and reports (federal, state and local) required to be filed
by it, and has paid all taxes shown thereon, including interest and
penalties, and all assessments received by it (except to the extent
that the same are being contested in good faith by appropriate
proceedings diligently prosecuted and as to which adequate reserves
have been set aside on the books of Borrower, I-Link, FTI or
Worldwide, as appropriate, in conformity with generally accepted
accounting principles).
5.11 Title to Properties. Each of Borrower, I-Link, FTI and
Worldwide has good and marketable title to all of its property and
assets and valid and enforceable leasehold interests in the
property which it holds under lease, all such property, assets and
leasehold interests being free and clear of any and all mortgages,
deeds of trust, assignments, liens, security interests, charges,
encumbrances or adverse claims of any nature whatsoever, and no
mortgages, deeds of trust, financing statements or other evidences
of security interests covering all or any of the aforesaid property
are on file among the records of any public office. Each of
Borrower, I-Link, FTI and Worldwide owns or possesses the valid
right to use all the patents, patent applications, patent and know-
how licenses, inventions, technology, permits, trademark
registrations and applications, trademarks, service
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<PAGE>
marks, trade names, copyrights, product designs, applications,
formulae, processes, circulation, and other subscriber lists,
industrial property rights and licenses and rights in respect of
the foregoing used or necessary for the conduct of its business
(collectively, "proprietary rights"). Borrower is not aware of any
existing or threatened infringement or misappropriation of (a) any
such proprietary rights of others by Borrower or any of its
subsidiaries or (b) any proprietary rights of Borrower or any of
its subsidiaries by others.
5.12 Absence of Undisclosed Liabilities. Except for (i)
obligations under the Loan Documents, and (ii) liabilities incurred
in the ordinary course of business (other than for borrowed money),
neither Borrower, nor I-Link nor FTI nor Worldwide has any material
liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise.
5.13 Solvency. Each of Borrower, I-Link, FTI and Worldwide has
received, or has the right to receive, consideration which is the
reasonable equivalent value of the obligations and liabilities that
it has incurred to Lender. Neither Borrower, nor I-Link nor FTI nor
Worldwide is insolvent as defined in Section 101 of Title 11 of the
United States Code or any applicable state insolvency statute, nor,
after giving effect to the consummation of the transactions
contemplated herein, will Borrower, I-Link, FTI or Worldwide be
rendered insolvent by the execution and delivery of this Agreement,
the Note, the Additional Note or the other Loan Documents to
Lender. Neither Borrower, nor I-Link nor FTI nor Worldwide is
engaged, and is not about to engage, in any business or transaction
for which the assets retained by it shall be an unreasonably small
capital, taking into consideration the obligations to Lender
incurred hereunder and under the Loan Documents. Neither Borrower,
nor I-Link nor FTI nor Worldwide intends to, nor believes that it
will, incur debts beyond its ability to pay them as they mature.
5.14 Material Misstatement. No statement made herein or in any
other Loan Document or information, exhibit or report furnished by
Borrower, I-Link, FTI or Worldwide to Lender in connection with
this Agreement or its negotiation, contains any material
misstatement
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<PAGE>
of fact or omits to state a material fact or any fact necessary to
make the foregoing not misleading.
(f) Sections 6.2(g), 6.3(b), 7.1(c) through (h), 7.1(j) and
8.2 of the Original Loan Agreement shall be amended by adding the language ",
Worldwide" after each reference to "I-Link" therein.
(g) Section 7.1(i) of the Original Loan Agreement shall be
amended by adding the following language at the end of clause (ii) thereof: "or
Borrower shall cease or fail to own, directly or indirectly, beneficial and
legal title to all of the issued and outstanding membership interests of
Worldwide."
(h) Section 7.1(d) of the Original Loan Agreement is hereby
amended in its entirety to read as follows:
(d) Borrower, I-Link, FTI or Worldwide shall fail to perform or
observe any other term, covenant or agreement contained in this
Agreement, the Note, the Additional Note, the Guaranty, the
Security Agreement, the Pledge Agreement, Worldwide Pledge
Agreement, the Warrant Agreement, the First Amendment Warrant
Agreement or any other Loan Document, and any such failure remains
unremedied for thirty days after the occurrence of such failure; or
Borrower shall fail to amend its Articles of Incorporation by no
later than September 30, 1997, to increase its authorized capital
to cover the number of shares issuable upon the exercise of the
warrants granted pursuant to the Warrant Agreement and the First
Amendment Warrant Agreement or, shall fail to reserve the
appropriate number of shares of such capital stock for issuance
upon exercise of such warrants; or
8. Conditions to Effectiveness. The amendments set forth in Section
7 shall be effective upon satisfaction of all of the following conditions:
(a) Lender shall have received all of the following, on or before
the Closing Date, in form and substance satisfactory to Lender:
(i) The Additional Note, duly executed and delivered by
Borrower;
(ii) A First Amendment to Subsidiary Guaranty, in form and
substance reasonably satisfactory to Lender, duly executed and delivered by
I-Link, FTI and Worldwide;
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<PAGE>
(iii) An Amended and Restated Security Agreement, in form
and substance reasonably satisfactory to Lender, duly executed and delivered by
I-Link, FTI and Worldwide, together with appropriate UCC-1 financing statements
duly executed and delivered by Worldwide;
(iv) The Worldwide Pledge Agreement, duly executed and
delivered by Borrower, together with appropriate UCC-1 financing statements duly
executed and delivered by Borrower;
(v) The First Amendment Warrant Agreement and the Warrant
Certificate relating thereto, duly executed and delivered by Borrower;
and
(vi) Certified copies of the resolutions of the Board of
Directors of each of Borrower, I-Link and FTI evidencing approval of the
execution, delivery and performance of this Agreement, the Additional Note, the
First Amendment Warrant Agreement, the First Amendment to Subsidiary Guaranty,
the Amended and Restated Security Agreement, the Worldwide Pledge Agreement and
other matters contemplated hereby (including, without limitation, the issuance
of the additional warrants).
(b) Borrower shall have paid to Lender all interest accrued on
the Demand Promissory Note dated August 7, 1997, on the date of the first
disbursement of the Additional Loan, and Lender shall, after such first
disbursement, cancel such Demand Promissory Note and return it to Borrower.
(c) Lender shall have received such other agreements,
certificates, opinions of counsel and documents as Lender may reasonably
require.
9. Representations and Warranties. Borrower hereby represents and
warrants to Lender that the representations and warranties set forth in Article
V of the Loan Agreement, as amended hereby, and in the Loan Documents are true
and correct in all material respects on the date hereof as if made on and as of
the date hereof. Borrower is in compliance on the date hereof with all the
applicable terms and provisions of the Loan Agreement and the Loan Documents and
no Event of Default or any event which with the lapse of any applicable grace
period or the giving of notice or both would constitute an Event of Default has
occurred and is continuing on the date hereof.
10. Counterparts. This Amendment may be executed in as many
counterparts as may be convenient and shall become binding when each party
hereto has executed at least one counterpart.
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<PAGE>
11. Governing Law. This Amendment shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without regard to the
conflicts of law provisions thereof.
12. Effect of Amendment. Except as amended hereby, the Original Loan
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. On and after the effectiveness of the amendment to
the Loan Agreement accomplished hereby, each reference in the Original Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like
import, and each reference to the Loan Agreement in the Note or other agreement,
document or instrument executed and delivered pursuant to the Original Loan
Agreement, shall be deemed a reference to the Original Loan Agreement, as
amended hereby.
13. No Other Modifications; Same Indebtedness. The modifications
effected by this Amendment and by the other documents and instruments
contemplated hereby shall not be deemed to provide for or effect a repayment and
re-advance of any portion of the Loan now outstanding, it being the intention of
Borrower and Lender that the portion of the Loan outstanding under the Original
Loan Agreement, as amended by this Amendment, be and is the same indebtedness as
that owing under the Original Loan Agreement immediately prior to the
effectiveness hereof.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first above written.
MEDCROSS, INC.
By: /s/ John Edwards
---------------------------------
John Edwards
President
WINTER HARBOR, L.L.C.
By: First Media, L.P., its member
By: First Media Corporation,
its sole general partner
By: /s/ Ralph W. Hardy, Jr.
----------------------------
Name: Ralph W. Hardy, Jr.
Title: Secretary
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<PAGE>
Exhibit 99(n)
WINTER HARBOR, L.L.C.
AND
MEDCROSS, INC.
FIRST AMENDMENT WARRANT AGREEMENT
DATED AS OF AUGUST 18, 1997
<PAGE>
FIRST AMENDMENT WARRANT AGREEMENT dated as of August 18, 1997, between
WINTER HARBOR, L.L.C., a Delaware limited liability company (hereinafter
referred to as the "Initial Holder") and MEDCROSS, INC., a Florida corporation
(the "Company").
W I T N E S E T H :
WHEREAS, the Company proposes to issue to the Initial Holder warrants
("Warrants") to purchase up to an aggregate of 300,000 shares of Common Stock
(as that term is defined in Section 8.5 below) of the Company; and
WHEREAS, the Initial Holder has committed, subject to the terms of the Loan
Agreement, dated as of June 6, 1997, as amended by the First Amendment to Loan
Agreement of even date herewith (the "Loan Agreement"), pursuant to which the
Initial Holder will lend to the Company an aggregate principal amount of up to
$5,000,000; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the date of execution of the First Amendment to Loan Agreement (the
"Closing Date") in consideration for, and as part of the compensation in
connection with, the Initial Holder's commitment under the First Amendment to
Loan Agreement;
NOW, THEREFORE, in consideration of the premises, the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Initial Holder is hereby granted the right to purchase, at
any time from the date hereof until 5:30 P.M., Delaware time, August 18, 2002
(the "Warrant Exercise Term"), up to an aggregate of 300,000 shares of the
Company's Common Stock (the "Warrant Shares") at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $6.38 per Share,
subject to the terms and conditions of this Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 The Warrants initially are exercisable at an aggregate initial
exercise price of $6.38 per share payable by
<PAGE>
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Warrant Shares purchased at the Company's principal offices, the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the Warrant Shares so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Common Stock underlying the Warrants). In the case of the purchase
of less than all the Warrant Shares purchasable under any Warrant Certificate,
the Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Shares purchasable thereunder.
3.2 Cashless Exercise.
(a) At any time during the Warrant Exercise Term, each Holder
may, at its option, exchange the Warrants represented by such Holder's Warrant
Certificate, in whole or in part (a "Warrant Exchange"), into the number of
fully paid and non-assessable Warrant Shares determined in accordance with this
Section 3.2, by surrendering such Warrant Certificate at the principal office of
the Company or at the office of its transfer agent, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of Warrant
Shares to be exchanged and the date on which the Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall
take place on the date specified in the Notice of Exchange, or, if later, the
date the Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the Warrant Shares issuable upon such Warrant Exchange and, if
applicable, a new Warrant of like tenor evidencing the balance of the Warrant
Shares remaining subject to the Holder's Warrant Certificate, shall be issued as
of the Exchange Date and delivered to the Holder within three days following the
Exchange Date. In connection with any Warrant Exchange, the Holder's Warrant
Certificate shall represent the right to subscribe for and acquire the number of
Warrant Shares (rounded to the next highest integer) equal to (A) the number of
Warrant Shares specified by the Holder in its Notice of Exchange (the "Total
Share Number") less (B) the number of Warrant Shares equal to the quotient
obtained by dividing (i) the product of the Total Share Number and the existing
Exercise Price (as hereinafter defined) per Share by (ii) the Market Price (as
hereafter defined) of a share of Common Stock.
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(b) As used in this Agreement, the phrase "Market Price" at any
date shall be deemed to be the last reported sale price, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted to trading or by the Nasdaq Stock Market, National Market ("Nasdaq"),
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted by Nasdaq, the average closing bid price as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on Nasdaq, as determined in
good faith by resolution of the Board of Directors of the Company, based on the
best information available to it for the two days immediately preceding such
issuance or sale and the day of such issuance or sale.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for Warrant Shares or other securities, properties or
rights underlying such Warrants, shall be made forthwith (and in any event
within three business days thereafter) without charge to the Holder thereof,
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the Warrant
Shares (and/or other securities, property or rights issuable upon the exercise
of the Warrants) shall be executed on behalf of the Company by the manual or
facsimile signature of the then present Chairman or Vice Chairman of the Board
of Directors or President or Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature of the
then present Secretary or Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
5. Restriction on Transfer of Warrants.
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<PAGE>
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Shares shall bear a legend substantially similar to the
legend set forth in Section 7.1. The Holder of a Warrant Certificate, by its
acceptance thereof, agrees that the Warrants are being acquired as an investment
and not with a view to the distribution thereof.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $6.38. The adjusted exercise price shall be the price which shall result from
time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The Warrants, the
Warrant Shares and any of the other securities issuable upon exercise of the
Warrants have not been registered under the Securities Act of 1933, as amended
(the "Act"). Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Shares and any of the other securities issuable upon
exercise of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration statement under
the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar
rule under such Act relating to the disposition of securities), or (iii) an
opinion of counsel, if such opinion shall be reasonably satisfactory to counsel
to the issuer, that an exemption from registration under such Act is available.
7.2 Piggyback Registration. If at any time the Company proposes to
register any of its securities under the Act (other than in connection with a
merger or pursuant to Form S-8), it will give written notice by registered mail,
at least thirty days prior to the filing of each such registration statement, to
each Holder of the Warrants and/or the Warrant Securities of its intention to do
so. If any Holder of the Warrants and/or Warrant Securities notifies the Company
within twenty days after receipt of any such notice of its or their desire to
include any such securities in such proposed registration statement, the Company
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<PAGE>
shall afford each such Holder of the Warrants and/or Warrant Securities the
opportunity to have any such Warrants and/or Warrant Securities registered under
such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 Demand Registration.
(a) At any time from and after the date hereof, the Holders of
the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter
defined) of such securities (assuming the exercise of all of the Warrants) shall
have the right (which right is in addition to the registration rights under
Section 7.2 hereof), exercisable by written notice to the Company, to have the
Company prepare and file with the Securities and Exchange Commission (the
"Commission"), on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for such Holders, in order to comply with
the provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for nine consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten days after receiving notice from the Company of such request.
(b) The Company agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein,
if the Company shall not have complied with Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Warrants and/or Warrant Securities, the Company agrees that upon twenty days
prior written notice of election of a Majority of the Holders of the Warrants
and/or Warrant Securities, and the failure of the Company to comply with Section
7.4(a) on or before the expiration of such twenty day period, it shall
repurchase (i) any and all Warrant Securities at the higher of the Market Price
(as defined in Section 3.2(b)) per share of Common Stock on (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and (ii) any
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and all Warrants at such Market Price less the exercise prices of such Warrants.
Such repurchase shall be in immediately available funds and shall close within
two days after the later of (i) the expiration of the period specified in
Section 7.4(a) or (ii) the delivery of the written notice of election specified
in this Section 7.3(c).
7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within ninety-five days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Warrant Securities such number of prospectuses as shall
reasonably be requested. Best efforts shall include the reasonable efforts to
insure the availability of financial statements and other matters necessary to
effectuate the filing.
(b) The Company shall pay all costs (excluding fees and expenses
of Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. If the
Company shall fail to comply with the provisions of Section 7.4(a), the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), be liable for any and all incidental, special and consequential
damages and damages due to loss of profit sustained by the Holder(s) requesting
registration of their Warrant Securities. Notwithstanding anything herein to the
contrary, provided the Company complies with the provisions of Section 7.3(c),
the Company shall have no liability under the foregoing sentence of this Section
7.4(b).
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of
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the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant
to a registration statement, and their successors and assigns, shall severally,
and not jointly, indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, for specific inclusion in such registration statement.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall use its best efforts not to permit the
inclusion of any securities other than the Warrants and Warrant Securities to be
included in any registration statement filed pursuant to Section 7.3 hereof or
permit any other registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section 7.3 hereof
(except registration statements on Form S-8 or filed pursuant to contractual
commitments existing on the date hereof), without the prior written consent of
the Holders of the Warrants and Warrant Securities representing a majority of
such securities. In the event the Company is required to include securities
other than the Warrants and Warrant Securities in a registration statement filed
under Section 7.3, the Holders shall be entitled to one additional right to
demand the preparation and filing of a registration under Section 7.3.
(h) The Company shall furnish to each broker-dealer
participating as an underwriter, if any, a signed counterpart, addressed to such
broker-dealer or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the
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closing under the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's financial statements
included in such registration statement, in each case covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company, as soon as practicable, but in any event not
later than forty-five days after the end of the twelve-month period beginning on
the day after the end of the fiscal quarter of the Company during which the
effective date of the Registration Statement occurs (ninety days in the event
that the end of such fiscal quarter is the end of the Company's fiscal year),
shall make generally available to its security holders, in the manner specified
in Rule 158(b) of the Rules and Regulations of the Commission, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations of the Commission, which statement need not be audited unless
required by the Act, covering a period of at least twelve consecutive months
after the effective date of the Registration Statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering and to the managing underwriters, if any, copies
of all correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriter to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities laws or
rules of the NASD. Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall reasonably request.
(k) The Company shall enter into an underwriting agreement with
the managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting. Such agreement shall be satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the
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Company and such other terms as are customarily contained in agreements of that
type used by the managing underwriter.
The Holders shall be parties to any underwriting agreement relating to
an underwritten sale of their Warrant Securities and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(1) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Securities, shall mean Holders
who hold in excess of fifty percent of the then outstanding Warrants or Warrant
Securities that (i) are not held by the Company, an affiliate (other than a
Holder), officer, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price.
(a) Except as hereinafter provided, in case the Company shall at
any time after the date hereof issue or sell any shares of Common Stock (other
than the issuances or sales referred to in Section 8.7 hereof), including (x)
shares held in the Company's treasury, (y) shares of Common Stock issued upon
the exercise of any options, rights or warrants to subscribe for shares of
Common Stock and (z) shares of Common Stock issued upon the direct or indirect
conversion or exchange of securities for shares of Common Stock, for a
consideration per share less than the lower of the Exercise Price in effect
immediately prior to the issuance or sale of such shares or the Market Price (as
defined in Section 3.2(b)) per share of Common Stock on the date immediately
prior to the issuance or sale of such shares or without consideration, then
forthwith upon such issuance or sale, the Exercise Price shall (until another
such issuance or sale) be reduced to the price (calculated to the nearest full
cent) equal to the quotient derived by dividing (A) an amount equal to the sum
of (X) the product of (a) the lower of (i) the Exercise Price in effect
immediately prior to such issuance or sale and (ii) the Market Price per share
of Common Stock on the date immediately prior to the issuance or sale of such
shares, in either event, reduced, but not below the par value of the Common
Stock, by the
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positive difference between the (u) Market Price per share of Common Stock on
the date immediately prior to the issuance or sale and (v) the amount per share
received in connection with such issuance or sale, multiplied by (b) the total
number of shares of Common Stock outstanding immediately prior to such issuance
or sale plus, (Y) the aggregate of the amount of all consideration, if any,
received by the Company upon such issuance or sale, by (B) the total number of
shares of Common Stock outstanding immediately after such issuance or sale;
provided, however, that in no event shall the Exercise Price be adjusted
pursuant to this computation to an amount in excess of the Exercise Price in
effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock, as provided by Section 8.3
hereof.
(b) In addition to the foregoing, in the event the closing bid
price of the Company's Common Stock is less than $6.38 at any time during the
period commencing on the date hereof and ending on August 18, 2002 (the
"Adjustment Period") the Exercise Price shall be adjusted as herein provided. In
the event the closing bid price of the Common Stock is less than $6.38 for five
consecutive trading days during the Adjustment Period, the Exercise Price shall
be reduced to the lower of the then current Exercise Price or the lowest of the
average closing bid price of the Common Stock for five consecutive trading days
during the Adjustment Period. In no event shall the Exercise Price be adjusted
below $2.75 on account of this adjustment in this subparagraph 8(b).
(c) For the purposes of this Section 8 the term "Exercise Price"
shall mean the Exercise Price per share of Common Stock set forth in Section 6
hereof, as adjusted from time to time pursuant to the provisions of this Section
8.
(d) For the purposes of any computation to be made in accordance
with this Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common Stock
for a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if shares of Common Stock
shall be sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price) before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or others performing similar
services, or any expenses incurred in connection therewith.
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(ii) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company) of shares of Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
(iii) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of stockholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (d)(ii) of this Section 8.1.
(v) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares issued or issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities.
8.2 Options, Rights, Warrants and Convertible and Exchangeable
Securities. In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share less than the Exercise Price in effect or the Market
Price immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, or without consideration, the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable under such options, rights or warrants shall be deemed
to be issued and outstanding at the time such options, rights or warrants were
issued, and for
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a consideration equal to the minimum purchase price per share provided for in
such options, rights or warrants at the time of issuance, plus the consideration
(determined in the same manner as consideration received on the issue or sale of
shares in accordance with the terms of the Warrants), if any, received by the
Company for such options, rights or warrants.
(b) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in accordance with the terms of the Warrants) received by
the Company for such securities, plus the minimum consideration, if any,
receivable by the Company upon the conversion or exchange thereof.
(c) If any change shall occur in the price per share provided
for in any of the options rights or warrants referred to in subsection (a) of
this Section 8.2, or in the price per share at which the securities referred to
in subsection (b) of this Section 8.2 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case may
be, shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant to
the exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
(d) Notwithstanding the foregoing, the Exercise Price shall
not be adjusted to a price less than $2.75 per share as adjusted from time to
time in accordance with paragraph 8.3 (the "Base Price") on account of this
paragraph 8.2 unless the "consideration per share" referred to above for any
such issuance or sale is less than the Base Price.
8.3 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise of each Warrant shall be
adjusted to the nearest
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full amount by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Securities
issuable upon exercise of the Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
8.5 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock, consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Warrant either shares of Common Stock or a like number of
such securities with greater or superior voting rights.
8.6 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provisions of this
subsection shall similarly apply to successive consolidations or mergers.
8.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the conversion or exercise of securities outstanding
on the date hereof;
(b) If the amount of said adjustment shall be less than two
cents ($.02) per Warrant; provided, however, that in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time
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of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents ($.02) per
Warrant; or
(b) Upon the exercise of options (i) granted to employees or
issued to consultants of the Company or warrants which, in each such case, are
outstanding as of the date of this Agreement, and (ii) options granted to
employees or consultants of the Company pursuant to stock option plans adopted
by the Board of Directors of the Company and approved by the Compensation
Committee of the Board of Directors and by the Initial Holder after the date
hereof.
8.9 Dividends and Other Distributions. In the event that the
Company shall at any time prior to the exercise of all Warrants declare a
dividend (other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, securities (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this subsection 8.9.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
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10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times after September 15, 1997, reserve and keep available out of its authorized
shares of Common Stock, solely for the purpose of issuance upon the exercise of
the Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof. The Company
agrees that, upon exercise of the Warrants and payment of the Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Warrants to be listed (subject
to official notice of issuance) on all securities exchanges on which the Common
Stock may then be listed and/or quoted.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or
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merger) or a sale of all or substantially all of its property assets and
business as an entirety shall be proposed;
then, in any one or more of said events the Company shall give written notice of
such event at least fifteen days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices.
All notices requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to 13751 South Wadsworth Park Drive,
Suite 200, Draper, Utah 84020 or to such other address as the Company may
designate by notice to the Holders.
14. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
15. Termination. This Agreement shall terminate at the close of
business on August 18, 2002. Notwithstanding the foregoing, the indemnification
provisions contained herein shall survive such termination.
16. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
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The Company and each Holder hereby agree that any action, proceeding or
claim against it arising out of, or relating in any way to, this Agreement shall
be brought and enforced in the State or Federal courts located in the State of
Delaware, and irrevocably submits to such jurisdiction, which jurisdiction shall
be exclusive. The Company and each Holder hereby irrevocably waive any objection
to such exclusive jurisdiction or inconvenient forum. Any such process or
summons to be served upon the Company or any Holder (at the option of the party
bringing such action, proceeding or claim) may be served by transmitting a copy
thereof, by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 13 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
party so served in any action, proceeding or claim. The Company and each Holder
agree that the prevailing party in any such action or proceeding shall be
entitled to recover from the other party all of its reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
17. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
18. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
20. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Initial Holder and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of the
Company and the Initial Holder and any other Holder(s) of the Warrant
Certificates or Warrant Securities.
21. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
Warrant Agreement to be duly executed, as of the day and year first above
written.
MEDCROSS, INC.
By: /s/ John Edwards
--------------------------------
Name: John Edwards
Title: President
Winter Harbor, L.L.C.
By: First Media, L.P., its member
By: First Media Corporation, its sole general partner
By: /s/ Ralph W. Hardy, Jr.
--------------------------
Name: Ralph W. Hardy, Jr.
Title: Secretary
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THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
EXERCISABLE ON OR BEFORE
5:30 P.M., DELAWARE TIME, AUGUST 18, 2002
No. 1
300,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Winter Harbor, L.L.C., or
registered assigns, is the registered holder of 300,000 Warrants to purchase
initially, at any time from the date hereof until 5:30 p.m. Delaware time on
August 18, 2002 ("Expiration Date"), up to 300,000 fully-paid and non-assessable
shares of common stock, par value $.007 per share ("Common Stock") of Medcross,
Inc., a Florida corporation (the "Company"), at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $6.38 per
share of Common Stock upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the First Amendment Warrant Agreement dated
as of August 18, 1997 between the Company and Winter Harbor, L.L.C. (the
"Warrant Agreement"). Except as otherwise provided in Section 3.2 of the Warrant
Agreement, payment of the Exercise Price shall be made by certified or official
bank check in New York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., Delaware time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants pursuant to the Warrant Agreement, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and/or number of the Company's securities issuable
thereupon may, subject to certain conditions, be adjusted. In such event, the
Company will, at the request of the holder, issue a new Warrant Certificate
evidencing the adjustment in the Exercise Price and the number and/or type of
securities issuable upon the exercise of the Warrants; provided, however, that
the failure of the Company to issue such new Warrant Certificates shall not in
any way change, alter or otherwise impair, the rights of the holder as set forth
in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Warrant Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of August 18, 1997
MEDCROSS, INC.
By
---------------------------
Name:
------------------------
Title:
-----------------------
[SEAL]
- 2 -
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
Medcross Inc. in the amount of $____________, all in accordance with the terms
hereof. The undersigned requests that a certificate for such securities be
registered in the name of _________________________ whose address is
_____________________________________________ and that such Certificate be
delivered to _______________________ whose address is _____________________
_________________________.
Dated:
Signature
---------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
- -------------------------------
Insert Social Security or Other
Identifying Number of Holder
<PAGE>
ASSIGNMENT FORM
The Holder hereby assigns and transfers unto
Name
- ----------------------------------------------------------------------
(Please typewrite or print in block letters)
Address
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
the right to purchase Common Stock of __________ represented by this Warrant to
the extent of ___________ shares of Common Stock as to which such right is
exercisable and does hereby irrevocably constitute and appoint ________________
Attorney, to transfer the same on the books of ____________ with full power of
substitution in the premises.
Date: ____________________, 199_
- ----------------------------------
Name of Registered Holder
- -----------------------------------
Signature
- -----------------------------------
Signature, if held jointly
<PAGE>
Exhibit 99(o)
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT is made and entered into
as of August 18, 1997, by and among I-LINK SYSTEMS, INC., a Utah corporation
with its principal place of business at 13751 South Wadsworth Park Drive, Suite
200, Draper, UT 84020 ("Systems"), I-LINK COMMUNICATIONS, INC., a Utah
corporation, with its principal place of business at 13751 South Wadsworth Park
Drive, Suite 200, Draper, UT 84020 ("Communications"), I-LINK WORLDWIDE, L.L.C.,
a Delaware limited liability company, with its principal place of business at
13751 South Wadsworth Park Drive, Suite 200, Draper, UT 84020 ("Worldwide" and
together with Systems and Communications, collectively, the "Debtors" and
individually, a "Debtor"), and WINTER HARBOR, L.L.C., a Delaware limited
liability company with its principal place of business at 11400 Skipwith Lane,
Potomac, Maryland 20854 (the "Secured Party").
RECITALS
A. Medcross, Inc., a Florida corporation (the "Company"), owns all of
the issued and outstanding shares of the capital stock of each of Communications
and Systems, and all of the issued and outstanding limited liability company
interests of Worldwide. The Company and the Secured Party have entered into a
Loan Agreement dated as of June 6, 1997, as amended by the First Amendment to
Loan Agreement of even date herewith (as the same may be extended, amended,
restated or modified from time to time, the "Loan Agreement"), which is hereby
incorporated herein by this reference, pursuant to which the Secured Party has
agreed to loan to the Company up to $5,000,000 (the "Loan"). All capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed to such terms in the Loan Agreement. The proceeds of the Loan will be
provided to the Debtors for the acquisition of assets, for capital expenditures
and for working capital purposes.
B. The Debtors have guaranteed the obligations of the Company under the
Loan Agreement and the notes thereunder (the "Notes") pursuant to the terms of a
Subsidiary Guaranty dated as of June 6, 1997, as amended by the First Amendment
to Subsidiary Guaranty, of even date herewith (as so amended, the "Guaranty").
C. The Company and the Debtors share an identity of interests as
members of a consolidated group of companies engaged in substantially similar
businesses. The Company provides certain centralized financial, accounting and
management services to the Debtors, and the making of the Loan will facilitate
the expansion and enhance the overall financial strength and stability of the
Company's corporate group, including the Debtors. Accordingly, the Debtors will
derive substantial benefits as a result of the extensions of credit to the
Company under the Loan Agreement, which benefits are hereby acknowledged by the
Debtors, and the Debtors, therefore, desire to enter into this Amended and
Restated Security Agreement.
<PAGE>
2
AGREEMENTS
In consideration of the foregoing Recitals, and of the Loan made or to
be made by the Secured Party to the Company under the Loan Agreement, which will
be of material economic benefit to the Debtors, the Debtors and the Secured
Party agree as follows:
1. GRANT OF SECURITY INTEREST. In order to secure the payment and
performance of all of the obligations of the Debtors under the Guaranty and the
payment and performance of all of the obligations of the Company to the Secured
Party under the Loan Agreement and the Notes, plus interest accrued thereon
(being hereinafter collectively referred to as the "Obligations"), the Debtors
hereby grant to the Secured Party a first priority perfected security interest
in all of their respective right, title and interest in and to all of their
personal property, both tangible and intangible and of every kind and
description, whether now or hereafter existing, or now owned or hereafter
acquired, and wherever located, and all proceeds, products, replacements,
additions, accessions and/or substitutes therefor, including, without
limitation, all goods, machinery, equipment, furniture, furnishings, fixtures,
inventory, accounts, chattel paper, instruments and general intangibles, as such
terms, may be defined in the Uniform Commercial Code in the jurisdiction in
which such assets are located (other than equipment leased to any Debtor and any
leases which by their terms prohibit the grant of security interests in, or
assignments of, such Debtor's leasehold interest therein), and the proceeds and
products of any and all of the foregoing assets and properties described in this
Section 1, including proceeds of insurance policies relating to any and all of
the foregoing assets and properties. All of the foregoing shall be hereinafter
referred to as the "Collateral."
2. WARRANTIES AND COVENANTS OF THE DEBTORS. Each of the Debtors
represents, warrants and covenants that:
(a) the Collateral (and all records pertaining thereto) will at all
times be kept in their current locations and no Debtor will change the location
at which any of the Collateral is usually kept or the location of any of their
respective chief executive offices or principal places of business without
giving thirty days prior written notice to the Secured Party;
(b) The Debtors own and have possession of the Collateral;
(c) all the Collateral is genuine and enforceable and, except as
permitted in the Loan Agreement, free from liens, adverse claims, charges,
encumbrances, taxes or assessments, other than the liens created hereby, and the
Debtors shall defend the same against all claims and demands of all persons at
any time claiming against the same or any interests therein adverse to the
Secured Party;
(d) all items of the Collateral comply with applicable laws,
including, where applicable, Federal Reserve Regulations and any state consumer
credit and usury laws;
<PAGE>
3
(e) no financing statement covering any of the Collateral, and
naming any secured party other than the Secured Party, is on file in any public
office;
(f) The Debtors will, at their sole cost and expense, maintain,
replace, repair, service and take other action as may be necessary from time to
time to keep and preserve their inventory, machinery and equipment in general
repair and good working order and any inventory, machinery or equipment which
wears out or is destroyed will be replaced or restored if necessary for the
operation of the businesses of any of the Debtors in the ordinary course. The
Debtors will within 10 days notify the Secured Party of any event comprising
significant loss or decrease in the value of the Collateral in excess of $5,000;
(g) The Debtors will comply with all laws, rules and regulations
relating to, and shall pay prior to delinquency, all license fees, registration
fees, taxes and assessments and all other charges, which may be levied upon or
assessed against, or which may become security interests, liens or other
encumbrances upon the ownership, operation, possession or maintenance of the
Collateral; provided that no Debtor shall be required to comply with any such
law, rule or regulation or to pay any such tax or assessment or other such
charge, the validity of which is being contested by any Debtor in good faith by
appropriate proceedings commenced and prosecuted with due diligence and with
respect to which adequate reserves have been established and are being
maintained in accordance with generally accepted accounting principles;
(h) The Debtors will execute and at their expense file and refile
such financing statements, continuation statements and other documents in such
offices as the Secured Party may deem necessary or appropriate in order to
protect or preserve the Secured Party's security interest in the Collateral;
(i) No Debtor will sell, offer to sell, hypothecate or otherwise
dispose of any material part of the Collateral (including proceeds) subject
hereto, or any part thereof or interest therein at any time other than in the
ordinary course of business and in exchange for Collateral of like value in
which the Secured Party shall have a security interest;
(j) The Debtors will at all times keep accurate records with
respect to the Collateral which are as complete and comprehensive as those which
are customarily maintained by those engaged in similar businesses, and the
Secured Party will have the right to inspect such records at such times and from
time to time as the Secured Party may reasonably request;
(k) The Debtors will provide any service and do any other acts or
things necessary to keep the Collateral free and clear of all defenses, rights
of offset and counterclaims; the Secured Party may, at any time prior to
termination hereof, require the Debtors from time to time to deliver to the
Secured Party (i) schedules describing all the
<PAGE>
4
Collateral subject hereto and (ii) instruments and chattel paper included in the
Collateral, appropriately assigned and endorsed to the Secured Party;
(l) The Debtors will maintain insurance on the Collateral as
required under Section 6.1(e) of the Loan Agreement. In the event of failure to
provide and maintain insurance as herein provided, the Secured Party may, at its
option, provide such insurance and the Debtors hereby promise to pay the Secured
Party on demand the amount of any disbursements made by the Secured Party for
such purpose. Risk of loss or damage shall accrue to the Debtors to the extent
of any deficiency in any effective insurance. The Debtors shall furnish to the
Secured Party certificates or other evidence satisfactory to the Secured Party
of compliance with the foregoing insurance provisions. The Debtors shall give
immediate written notice to the Secured Party and to the insurers of any loss or
damage to the Collateral or any part thereof in excess of $5,000 and shall
promptly file all necessary or appropriate proof of loss with the insurers. Any
amounts collected or received under any such insurance policies may be applied
by the Debtors either to the replacement or restoration of the Collateral or to
any of the Obligations secured hereby in the manner provided in Section 8
hereof; and
(m) The Debtors shall not change their respective names, identity
or corporate structure, voluntarily or involuntarily.
3. AUTHORITY TO COLLECT. Except as otherwise hereinafter set forth,
unless and until the occurrence of an event which constitutes an Event of
Default hereunder or which upon the giving (or receiving) of notice or the lapse
of time or both would constitute such an Event of Default, the Debtors shall
continue to collect, and upon the occurrence of such an event, the Debtors may,
at the direction of the Lender, continue to collect, at their own expense, all
amounts due and to become due under any accounts, chattel paper, instruments or
general intangibles and in connection therewith may take such action as they may
deem necessary, advisable, convenient or proper for the enforcement, collection,
adjustment, settlement or compromise thereof.
4. EVENTS OF DEFAULT. The term "Event of Default" shall have the
meaning assigned to it in the Loan Agreement.
5. REMEDIES. Upon the occurrence of an Event of Default, the Secured
Party shall have the right to declare immediately due and payable all of the
Obligations, as provided in the Loan Agreement, without other notice or demand,
and to terminate any commitments to make loans or otherwise extend credit to the
Company. The Secured Party shall have all the rights and remedies of a secured
party under the Uniform Commercial Code and all other rights, privileges, powers
and remedies provided by law or equity.
<PAGE>
5
Without limiting the generality of the foregoing, after the occurrence
of an Event of Default:
(a) the Secured Party shall have the power to notify the account
debtor or debtors obligated under any accounts, chattel paper, instruments and
general intangibles of the assignment of such accounts, chattel paper, and
general intangibles to the Secured Party and of its security interest therein
and to direct such account debtor or debtors to make payment of all amounts due
or to become due to any Debtor thereunder directly to the Secured Party and,
upon such notification to the account debtor or debtors, to enforce collection
of any thereof in the same manner and to the same extent as any Debtor might
have done. The funds so collected shall be held as security for the payment of
the Obligations secured hereby and applied in the manner provided in Section 8
hereof.
The Debtors hereby constitute and appoint the Secured Party as their
true and lawful attorney, in the place and stead of the Debtors and with full
power of substitution, either in the Secured Party's own name or in the name of
any Debtor, to ask for, demand, collect, receive and give acquittance for any
and all monies due or to become due under and by virtue of any account, chattel
paper, instruments and general intangibles, to endorse checks, drafts, orders
and other instruments for the repayment of monies payable to any Debtor on
account thereof, and to settle, compromise, prosecute or defend any action,
claim or proceeding with respect thereto and to sell, assign, pledge, transfer
and make any agreement respecting, or otherwise deal with, the same; provided,
however, that nothing herein contained shall be construed as requiring or
obligating the Secured Party to make any demand, or to make any inquiry as to
the nature or sufficiency of any payment received by it, or to present or file
any claim or notice or to take any action with respect to any account, chattel
paper, instruments or general intangible or the monies due or to become due
thereunder or the property covered thereby, and no action taken or omitted to be
taken by the Secured Party with respect to any account, chattel paper,
instruments or general intangible shall give rise to any defense, counterclaim
or set off in favor of any Debtor or to any claim or action against the Secured
Party;
(b) The Debtors will deliver to the Secured Party from time to
time, as requested by the Secured Party, current lists of the Collateral;
(c) No Debtor will dispose of the Collateral, except on terms
approved in writing by the Secured Party;
(d) The Debtors will collect, assemble and deliver all of the
Collateral and books and records pertaining thereto, to the Secured Party at a
reasonably convenient place designated by the Secured Party; and
(e) the Secured Party may, to the extent permitted by law, enter
onto any Debtor's premises and take possession of the Collateral, and assign,
sell, lease or otherwise
<PAGE>
6
dispose of any Debtor's interests in the Collateral for the account of any
Debtor and the Debtors shall then be liable for the difference between the
payments and other amounts due under the Loan Agreement and amounts received
pursuant to such assignment or contract of sale or lease or other disposition of
any Debtor's interests in the Collateral and the amount of such difference shall
then be immediately due and payable. The Secured Party may, in its sole
discretion, designate a custodian or agent to take physical possession of the
Collateral. The Secured Party shall give the Debtors reasonable notice of the
time and place of any public sale of the Collateral or the time after which any
private sale or other intended disposition thereof is to be made. The
requirement of reasonable notice shall be met if notice of the sale or other
intended disposition is mailed, by first class mail, postage prepaid, to the
Debtors at their respective addresses set forth in Section 16 hereof or such
other address as the Debtors may by notice have furnished the Secured Party in
writing for such purpose, at least fifteen days prior to the time of such sale
or other intended disposition.
Each purchaser at any such sale shall hold the property sold absolutely
free from any claim or right on the part of any Debtor, and the Debtors hereby
waive (to the extent permitted by law) all rights of redemption, stay and/or
appraisal which they now have or may at any time in the future have under any
rule of law or statute now existing or hereafter enacted.
6. POWERS OF THE SECURED PARTY. The Debtors appoint the Secured Party
their true attorney in fact to perform any of the following powers, which are
coupled with an interest, and are irrevocable until termination of this Amended
and Restated Security Agreement and may be exercised by the Secured Party's
officers and employees, or any of them, upon the occurrence of an Event of
Default hereunder:
(a) to perform any obligation of any Debtor hereunder in such
Debtor's respective name or otherwise;
(b) to give notice of the Secured Party's rights in the Collateral,
to enforce the same, and make extension agreements with respect thereto;
(c) to release persons liable on the Collateral and to give
receipts and acquittance and compromise disputes in connection therewith;
(d) to release security;
(e) to resort to security in any order;
(f) to prepare, execute, file, record or deliver notes,
assignments, schedules, designation statements, financing statements,
continuation statements, termination statements, statements of assignment and
applications or registration or like papers to perfect, preserve or release the
Secured Party's interest in the Collateral;
<PAGE>
7
(g) to verify facts concerning the Collateral by inquiry of
obligors thereon, or otherwise;
(h) to endorse, collect, deliver and receive payment under
instruments for the payment of money constituting or relating to Collateral;
(i) to prepare, adjust, execute, deliver and receive payment under
insurance claims;
(j) to exercise all rights, powers and remedies which any Debtor
would have, but for this Amended and Restated Security Agreement, under all of
the Collateral subject to this Amended and Restated Security Agreement; and
(k) to do all acts and things and execute all documents in the
names of any Debtor or otherwise, deemed by the Secured Party as necessary,
proper and convenient in connection with the preservation, perfection or
enforcement of its rights hereunder.
7. REMITTANCES. The Debtors agree that upon the occurrence and during
the continuance of an Event of Default or a Potential Default all cash or
proceeds received by any Debtor as a result of the sale, lease or other
disposition of any Collateral, whether received by any Debtor in the exercise of
their collection rights hereunder or otherwise, shall be, at Secured Party's
discretion, remitted to the Secured Party or deposited to an account for the
benefit of the Secured Party (according to its instructions) in the form
received (properly endorsed to the order of the Secured Party or for collection
in accordance with the Secured Party's instructions) not later than the banking
business day following the day of receipt, to be held as security for the
payment of the Obligations secured hereby and applied by the Secured Party as
provided in Section 8 hereof. The Debtors agree not to commingle any such
collections or proceeds with any of its other funds or property and agree to
hold the same upon an express trust for the Secured Party until remitted to the
Secured Party.
8. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere in
this Amended and Restated Security Agreement, all proceeds of the sale of the
Collateral by the Secured Party hereunder, and all other monies received by the
Secured Party pursuant to the terms of this Amended and Restated Security
Agreement (whether through the exercise by the Secured Party of its rights of
collection or otherwise), including, but not limited to, any awards or other
amounts payable upon any condemnation or taking by eminent domain, shall be
applied, as promptly as is practicable after the receipt thereof by the Secured
Party as follows:
FIRST: to the payment of all fees and expenses incurred by the Secured
Party or any custodian appointed hereunder, if not previously paid by any
Debtor, and all expenses incurred
<PAGE>
8
by the Secured Party in connection with any sale of the Collateral, including,
but not limited to, the expenses of taking, advertising, processing, preparing
and storing the Collateral to be sold, all court costs and fees and expenses of
counsel to the Secured Party in connection therewith, to the payment of all
expenses to be paid by any Debtor pursuant to Section 17 of this Amended and
Restated Security Agreement, and to the payment of all amounts for which the
Secured Party is entitled to indemnification hereunder and all advances made by
the Secured Party hereunder to the account of any Debtor and the payment of all
costs and expenses paid or incurred by the Secured Party in connection with the
exercise of any right or remedy hereunder, to the extent that such advances,
costs and expenses shall not theretofore have been reimbursed to the Secured
Party by any Debtor;
SECOND: to the payment to the Secured Party of the interest then due
and payable on the Notes;
THIRD: to the payment to the Secured Party of the principal then due
and payable on the Notes;
FOURTH: to the payment to the Secured Party of any other amount owing
to the Secured Party under the Loan Agreement and any other documents related
thereto or under any other agreement of the Company or any Debtor with the
Secured Party; and
FIFTH: only if all of the foregoing have been paid in full, to the
Debtors.
Notwithstanding the sale or other disposition of any Collateral by the
Secured Party hereunder, the Debtors, jointly and severally, shall remain liable
for any deficiency.
9. RIGHTS CUMULATIVE. The rights, privileges, powers and remedies of
the Secured Party shall be cumulative and no single or partial exercise of any
of them shall preclude the further or other exercise of the same or any other of
them. No delay or failure of the Secured Party in exercising any right, power,
privilege or remedy hereunder shall affect such right, power, privilege or
remedy. No single or partial exercise of any right, power, privilege or remedy
or any abandonment or discontinuance of steps to enforce such right, power,
privilege or remedy shall affect such right, power, privilege or remedy. Any
waiver, permit, consent or approval of any kind by the Secured Party of any
default hereunder, or any such waiver of any provisions or conditions hereof,
must be in writing and shall be effective only to the extent set forth in
writing and shall not constitute a waiver of any subsequent or other default.
Failure of the Secured Party to insist upon strict performance or compliance by
any Debtor of any covenants, warranties or agreements in this Amended and
Restated Security Agreement shall not constitute a waiver of any subsequent or
other failure to perform or comply with any covenants, warranties or agreements.
<PAGE>
9
10. CONTINUING AGREEMENT. This is a continuing agreement and shall
remain in full force and effect and be binding upon the Debtors and the
successors and assigns of the Debtors until all of the Obligations shall have
been fully satisfied and discharged.
11. REINSTATEMENT OF AGREEMENT. If the Secured Party shall have
proceeded to enforce its rights under this Amended and Restated Security
Agreement and such proceedings shall have been discontinued or abandoned for any
reason prior to the issuance of any judgment or award, then the Debtors and the
Secured Party shall be restored respectively to their positions and rights
hereunder, and all rights, remedies and powers of the Debtors and the Secured
Party shall continue as though no such proceeding had been initiated. In the
event of litigation arising under this Amended and Restated Security Agreement,
the prevailing party shall be entitled to, in addition to all other damages and
remedies, reasonable attorneys' fees.
12. ASSIGNMENT. The Secured Party may assign and transfer any of the
Obligations of the Debtors and may deliver the Collateral, or any part thereof,
to the assignee or transferee of any such obligation, who shall become vested
with all the rights, remedies, powers, security interests and liens herein
granted to the Secured Party in respect thereto; and the Secured Party shall
thereafter be relieved and fully discharged from any liability or obligation
under this Amended and Restated Security Agreement. No Debtor shall have the
right to assign this Amended and Restated Security Agreement without the prior
written consent of the Secured Party.
13. DUTIES WITH RESPECT TO COLLATERAL. With respect to the Collateral,
the Secured Party shall be under no duty to send notices, perform services, pay
for insurance, taxes or other charges or take any action of any kind in
connection with the management thereof and its only duty with respect thereto
shall be to use reasonable care in its custody and preservation while in its
possession, which shall not include any steps necessary to preserve rights
against prior parties.
14. PERFORMANCE OF OBLIGATIONS BY THE SECURED PARTY. If any Debtor
shall fail to do any act or thing which they have covenanted to do hereunder, or
if any representation or warranty of any Debtor shall be breached, the Secured
Party may (but shall not be obligated to) perform such act or thing on behalf of
any Debtor or cause it to be done or remedy any such breach, and there shall be
added to the liabilities of the Debtors hereunder the cost or expense incurred
by the Secured Party in so doing, and any and all amounts expended by the
Secured Party in taking any such action shall be repayable to it upon demand
being made to the Debtors therefore and shall bear interest at the rate provided
for in the Notes, from and including the date advanced to the date of repayment.
15. MISCELLANEOUS. After due consideration and consultation with their
attorneys, the Debtors voluntarily and knowingly, to the extent permitted by
law, agree as follows: (a) the Debtors waive, except as expressly provided in
the Loan Agreement,
<PAGE>
10
presentment, protest, notice of protest, notice of dishonor and notice of
nonpayment with respect to the Collateral to which the Secured Party is entitled
hereunder; (b) the Debtors waive any right to direct the application of payments
or security for the Obligations of the Debtors hereunder, or the indebtedness of
customers of any Debtor, and any right to require proceedings against others or
to require exhaustion of the security; (c) the Debtors consent to the extension
or forbearance of the terms of the Obligations or indebtedness of customers, the
release or substitution of security, and the release of guarantors, if any; and
(d) the Debtors waive notice or a judicial hearing prior to the exercise by the
Secured Party of any right or remedy provided by this Amended and Restated
Security Agreement and also waive their rights, if any, to set aside or
invalidate any sale duly consummated in accordance with the provisions of this
Amended and Restated Security Agreement on the grounds that the sale was
consummated without a prior judicial hearing.
16. NOTICES. All notices or demands of any kind which may be required
or which the Secured Party desires to serve upon any Debtor under the terms of
this Amended and Restated Security Agreement shall be served upon such Debtor by
personal service or by mailing a copy thereof by first class mail, postage
prepaid, addressed to such Debtor, at the respective addresses set forth in
Section 8.3 of the Loan Agreement with the respective addresses of the Debtors
being the address of the Company in the Loan Agreement. Service by mail shall be
determined to be effective when deposited in the mails.
17. EXPENSES. The Debtors agree to pay on demand all fees, costs and
expenses of the Secured Party, or of any custodian or agent designated by the
Secured Party, including the fees and out-of-pocket expenses of legal counsel,
independent public accountants and other outside experts retained by the Secured
Party in connection with the negotiation, administration or enforcement of this
Amended and Restated Security Agreement or any other instrument or document
delivered pursuant hereto.
18. LAW APPLICABLE. This Amended and Restated Security Agreement shall
be governed by and construed in accordance with the laws of the State of
Delaware other than the conflicts of law provisions thereof.
19. SEVERABILITY OF PROVISIONS. If any provision of this Amended and
Restated Security Agreement shall be held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or any remaining provisions of this Amended and Restated Security Agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
11
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Security Agreement to be duly executed as of the day and year first
written above.
WINTER HARBOR, L.L.C.
By: First Media, L.P., its member
By: First Media Corporation, its
sole general partner
By: /s/ Ralph W. Hardy, Jr.
------------------------------
Name: Ralph W. Hardy, Jr.
Title: Secretary
I-LINK COMMUNICATIONS, INC.
By: /s/ John Edwards
------------------------------------
John Edwards, President
I-LINK SYSTEMS, INC.
By: /s/ John Edwards
------------------------------------
John Edwards, President
I-LINK WORLDWIDE, L.L.C.
By: Medcross, Inc., its member
By: /s/ John Edwards
--------------------------------
John Edwards, President
<PAGE>
Exhibit 99(p)
WORLDWIDE PLEDGE AGREEMENT
THIS WORLDWIDE PLEDGE AGREEMENT is made and entered into as of August
18, 1997, by and between MEDCROSS, INC., a Florida corporation (the "Pledgor"),
and Winter Harbor, L.L.C., a Delaware limited liability company (the "Pledgee").
RECITALS
The Pledgor and the Pledgee have entered into that certain Loan
Agreement dated as of June 6, 1997, as amended by the First Amendment to Loan
Agreement of even date herewith (as the same may be extended, amended, restated
or modified from time to time, the "Agreement"), pursuant to which the Pledgee
has agreed to make a Loan to the Pledgee in the aggregate principal amount of up
to $5,000,000. Capitalized terms used herein and not otherwise defined shall
have the meanings assigned to them in the Agreement. As security for the Loan,
the Pledgor has agreed to enter into this Pledge Agreement.
AGREEMENTS
In consideration of loans, credit or other financial accommodation
extended or continued from time to time to the Pledgor by the Pledgee, the
Pledgor does hereby agree as follows:
1. Pledge.
(a) The Pledgor hereby grants to the Pledgee, as security for
the obligations of the Pledgor under the Agreement and the notes issued pursuant
thereto (the "Notes"), a first priority security interest in, and pledges,
assigns, hypothecates and transfers to the Pledgee, all of the Pledgor's
interests in and right and title to, all of the issued and outstanding limited
liability company interests of I-Link Worldwide, L.L.C. (the "Collateral").
(b) The Pledgor covenants and agrees with the Pledgee that
from and after the date of this Pledge Agreement and until the obligations of
the Pledgor under the Loan Agreement are fully satisfied:
(i) At any time and from time to time, upon the
reasonable written request of the Pledgee, and at the sole expense of the
Pledgor, the Pledgor will promptly and duly execute and deliver any and all such
instruments and documents and take such action as the Pledgee may reasonably
deem desirable to obtain the full benefits of this Pledge Agreement and of the
rights and powers herein granted, including, without limitation, the execution
and filing of any financing or continuation statements under the Uniform
Commercial Code with respect to the lien and security interest granted hereby.
The Pledgor also hereby authorizes the Pledgee to file any such financing or
continuation statement without the signature of the Pledgor to the extent
permitted by applicable law. If any of the Collateral shall be or become
evidenced by any Instrument (as defined in Section 9-105(1)(i) of the UCC), the
Pledgor
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agrees to pledge such Instrument to the Pledgee and shall duly endorse such
Instrument in a manner satisfactory to the Pledgee and deliver the same to the
Pledgee.
(ii) For the Pledgee's further security, the Pledgor
agrees that the Pledgee shall have a special property interest in all of the
Pledgor's books and records pertaining to the Collateral and, upon the
occurrence and during the continuance of any Event of Default (as defined in the
Loan Agreement), and upon reasonable notice from the Pledgee, the Pledgor shall
permit any representative of the Pledgee to inspect such books and records and
will provide photocopies thereof to the Pledgee.
(iii) The Pledgor will not change its name, identity or
corporate structure in any manner which might make any financing or continuation
statement filed in connection herewith seriously misleading within the meaning
of Section 9-402(7) of the UCC (or any other then applicable provision of the
UCC) unless the Pledgor shall have given the Pledgee at least 30 days prior
written notice thereof and shall have taken all action (or made arrangements to
take such action substantially simultaneously with such change if it is
impossible to take such action in advance) necessary or reasonably requested by
the Pledgee to amend such financing statement or continuation statement so that
it is not seriously misleading or to file a new appropriate financing statement.
The Pledgor will not change its principal place of business or remove its
records from its office located at 13751 South Wadsworth Park Drive, Suite 200,
Draper, Utah 84020, unless it gives the Pledgee at least 30 days prior written
notice thereof and has taken such action as is necessary to cause the security
interest of the Pledgee in the Collateral to continue to be perfected.
(c) The Pledgor and the Pledgee agree that the Collateral
shall be subject to the terms and conditions hereinafter set forth as collateral
security for the obligations of the Pledgor to the Pledgee under the Loan
Agreement.
2. Representations and Warranties. The Pledgor represents and
warrants to the Pledgee as follows:
(a) the Collateral constitutes all of the limited liability
company interests of I-Link Worldwide, L.L.C. ("Worldwide");
(b) the Collateral is validly issued, fully paid and
nonassessable and is not subject to any liens, charges or encumbrances
whatsoever, except for the security interest granted pursuant hereto;
(c) there are no existing options, warrants or other rights
to purchase any of the Collateral;
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(d) the execution, delivery and performance of this Pledge
Agreement will not conflict with, result in a breach of or constitute a default
under any indenture or agreement to which the Pledgor or Worldwide is a party or
by which any of them is bound, or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever on any of their respective
property or assets;
(e) this Pledge Agreement constitutes the legal, valid and
binding obligation of the Pledgor, enforceable in accordance with its terms;
(f) the Pledgor has all requisite power and authority to enter
into this Pledge Agreement and to carry out the transactions contemplated
hereby; and
(g) no consent or approval of any person or entity is or will
be required in connection with the execution, delivery and performance of this
Pledge Agreement.
3. Term. The Collateral shall constitute security for the
performance by the Pledgor of its obligations and liabilities under the
Agreement until the principal and interest due on the Notes are paid in full and
the Agreement shall have terminated, at which time the Pledgee shall deliver
prepare, execute, deliver and file all documents necessary to evidence the
termination of the security interest pursuant hereto, and this Pledge Agreement
shall thereupon terminate.
4. Voting. While the Collateral continues to be pledged to the
Pledgee, such Collateral shall remain in the name of the Pledgor, and the
Pledgor shall have and exercise all rights of ownership, including the right to
vote the Collateral; provided, however, that the Pledgor shall not vote the
Collateral in any manner that is inconsistent with the provisions of the
Agreement or this Pledge Agreement. If an Event of Default shall occur, the
Pledgee shall be entitled to the remedies set forth in Section 6 hereof.
5. Adjustments. The Pledgor agrees that in the event that during
the term of this Pledge Agreement any dividend, distribution, reclassification,
readjustment or other change is declared or made with respect to the Collateral,
or any subscription, warrant or other option is exercisable with respect to the
Collateral, it shall cause all new, substituted or additional limited liability
company interests or other securities issued by reason of any such change or
option to be pledged to the Pledgee in the same manner as the Collateral
originally pledged hereunder. There likewise shall be pledged to the Pledgee, to
be added to the pledged property and subject to the pledge, any and all
additional issued limited liability company interests of Worldwide to the
Pledgor by way of dividend, splits, rights, new securities or otherwise, to the
end that all the issued and outstanding limited liability company interests of
Worldwide will be pledged to Pledgee, subject to the pledge.
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6. Remedies. If an Event of Default shall occur, the Pledgee may,
after fifteen days prior notice to the Pledgor, sell, assign and deliver the
whole or, from time to time, any part of the Collateral or any interest or part
thereof, at any private sale or at public auction, for cash, or credit or for
other property, for immediate or future delivery, and for such price or prices
and on such terms as the Pledgee reasonably may determine to be commercially
reasonable. The Pledgee shall give the Pledgor reasonable notice of the time and
place of any public sale of the Collateral or the time after which any private
sale or other intended disposition thereof is to be made. The requirement of
reasonable notice shall be met if notice of such sale or other intended
disposition is mailed, by certified or registered mail, return receipt
requested, to the Pledgor at the address set forth in Section 9 at least fifteen
days prior to the time of such sale or other intended disposition. The Pledgor
hereby waives and releases any and all right or equity of redemption whether
before or after sale hereunder. At any such sale the Pledgee may bid for and
purchase for its own account the whole or any part of the Collateral so sold,
free from any such right or equity of redemption. Upon completion of the sale,
Pledgee shall deliver the Collateral, or any portion thereof, to the purchaser
or purchasers thereof. The net proceeds of any such sale shall be applied as
follows:
(i) First, to the expenses of the sale and enforcement of this
Pledge Agreement, including but not limited to, attorneys' fees and expenses,
including attorneys' fees out of court, in trial, on appeal, in bankruptcy
proceedings, or otherwise;
(ii) Second, to the payment of the Pledgor's obligations under
the Agreement, including, without limitation, the payment of interest and
principal under the Notes; and
(iii) Third, only after payment in full of the above, to the
payment to the Pledgor of any excess proceeds, along with any Collateral
remaining unsold, subject to the receipt of notice of and the provisions of any
other agreement between the parties with respect to the disposition of said
excess proceeds or unsold Collateral. Notwithstanding the sale or other
disposition of the Collateral by the Pledgee hereunder, the Pledgor shall remain
liable for any deficiency.
7. Encumbrances. During the term of this Pledge Agreement
specified in Section 3, the Pledgor shall not sell, assign, transfer or
otherwise dispose of, grant any option to any individual or entity other than
the Pledgee with respect to, or mortgage, pledge or otherwise encumber any of
the Collateral.
8. Miscellaneous.
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8.1 Transfer taxes, if any, applicable to any transfer of the
Collateral upon the occurrence of an Event of Default or upon termination of
this Pledge Agreement shall be payable by the person or persons to whom the
shares are being transferred; provided, however, that the Pledgor agrees to
reimburse the Pledgee promptly for all such transfer taxes which the Pledgee may
be required to pay.
8.2 No single or partial exercise of any power hereunder shall
preclude other or future exercise thereof or the exercise of any other power.
The holder of the Notes may proceed against any portion of the security held
therefor in such order and in such manner as the holder may see fit, without
waiver of any rights with respect to any other security.
8.3 The Pledgee may deal in any manner with the Notes, the
Agreement or any other agreement required thereby without notice to or the
consent of the Pledgor, including, without limitation, in the following manner:
(a) to modify, supplement or otherwise change any terms
of the Notes, the Agreement or any such other agreement (subject to any right of
the Pledgor to consent to any modification of or supplement or change to any
such terms); to grant any extension or renewal of the Notes, the Agreement or
such other agreement; to grant any other waiver or indulgence with respect to
the Notes, the Agreement or such other agreement; and to effect any release,
compromise or settlement with respect to the Notes, the Agreement or such other
agreement; and
(b) to consent to the substitution, exchange or release
of all or any part of any other security (other than the Collateral) at any time
held by the Pledgee as security or surety for the obligations secured hereby.
9. Notices. All notices required to be sent hereunder shall be
in writing and shall be sent by registered mail, return receipt requested, to
the parties as follows:
To the Pledgor:
Medcross, Inc.
13751 South Wadsworth Park Drive
Suite 200
Draper, Utah 84020
Attention: John W. Edwards, President
<PAGE>
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To the Pledgee:
Winter Harbor, L.L.C.
11400 Skipwith Lane
Potomac, Maryland 20854
Attention: Ralph W. Hardy, Jr.
Addresses may be changed by notice in writing to the other parties.
10. Choice of Law, etc. This Pledge Agreement shall be construed
and enforced under and governed by the laws of the State of Delaware, other than
the conflicts of law provisions thereof. This Pledge Agreement embodies the
entire agreement and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, and this
Pledge Agreement may not be modified or amended or any term or provision hereof
waived or discharged except in writing signed by the party against whom such
amendment, modification, waiver or discharge is sought to be enforced. This
Pledge Agreement shall be binding on the successors, assigns, and legal
representatives of the parties hereto and shall inure to the benefit of and be
enforceable by their successors, assigns, and legal representatives; provided,
however, that neither the Collateral nor this Pledge Agreement may be assigned
or transferred in whole or in part, voluntarily or involuntarily, by the Pledgor
without the prior written consent of the Pledgee, and the Pledgee may assign
this Pledge Agreement and all of its rights hereunder without any consent of the
Pledgor. The headings of this Pledge Agreement are for the purpose of reference
only and shall not limit or otherwise affect the meaning hereof. The Pledgor
shall take such further actions as may be reasonably requested by the Pledgee
from time to time in order to perfect the security interest of the Pledgee
hereunder and to assure and confirm onto the Pledgee its rights, powers and
remedies hereunder.
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IN WITNESS WHEREOF, the parties hereto have caused this Worldwide
Pledge Agreement to be executed on their behalf all as of the day and year first
above mentioned.
MEDCROSS, INC.
By: /s/ John Edwards
--------------------------------
John Edwards
President
WINTER HARBOR, L.L.C.
By: First Media L.P., its member
By: First Media Corporation, its
sole general partner
By: /s/ Ralph W. Hardy, Jr.
------------------------
Name: Ralph W. Hardy, Jr.
Title: Secretary
<PAGE>
Exhibit 99(q)
PROMISSORY NOTE
$3,000,000 August 18, 1997
FOR VALUE RECEIVED, the undersigned, MEDCROSS, INC., a Florida corporation
(the "Maker"), promises to pay to the order of WINTER HARBOR, L.L.C., a Delaware
limited liability company (the "Payee"), on or before February 15, 1998 (the
"Maturity Date"), the principal sum of $3,000,000, or, if less, the aggregate
amount advanced to the Maker by the Payee pursuant to the Amendment described
below, together with interest thereon as provided herein (the "Note"). All
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Loan Agreement, as that term is defined below.
1. Interest. The unpaid principal balance of this Note shall bear interest
at the rates determined in accordance with the provisions of that certain Loan
Agreement dated as of June 6, 1997, as amended by the First Amendment to Loan
Agreement of even date herewith (the "Amendment"), between the Maker and the
Payee (as the same may be amended, modified, extended or restated, the "Loan
Agreement"). Interest accrued hereunder shall be paid quarterly on the last
business day of each calendar quarter until all principal and interest hereunder
is paid in full at the repayment or maturity of the Loan.
2. Principal Repayment. The aggregate principal balance of this Note shall
be due and payable in one installment on February 15, 1998.
3. Prepayments. This Note may be voluntarily prepaid in whole or in part
without premium or penalty at any time and from time to time; provided, however,
that each partial prepayment shall be in the aggregate principal amount of not
less than $100,000 or an integral multiple of $50,000 in excess thereof. In
making a prepayment in whole, the Maker shall pay all accrued interest through
the date of such prepayment.
4. Payment on Business Days. If any payment of principal or interest on
this Note shall become due on a Saturday, Sunday or public holiday, such payment
may be made on the next succeeding business day, and such extension of time in
such case shall be included in the computation of interest in connection with
such payment.
5. Form of Payment. All payments made pursuant to the terms of this Note
shall be made in lawful money of the United States of America and shall be
payable to the Payee at its principal office located at 11400 Skipwith Lane,
Potomac, Maryland 20854 or at such other place as the Payee shall have
designated to the Maker in writing.
6. Choice of Law. This Note shall be governed by and construed in
accordance with the laws of the State of Delaware with the exception of the
conflicts of laws provisions thereof.
<PAGE>
7. Events of Default. Upon the occurrence of any Event of Default, the
Payee may at its option by written notice to the Maker declare the entire unpaid
principal amount of this Note, together with all unpaid interest and all other
amounts payable hereunder, immediately due and payable.
8. Collection Expenses. If at any time the indebtedness evidenced by this
Note is collected through legal proceedings or this Note is placed in the hands
of attorneys for collection, the Maker and each endorser of this Note hereby
jointly and severally agree to pay all costs and expenses (including reasonable
attorneys' fees) incurred by the holder of this Note in collecting or attempting
to collect such indebtedness.
9. Waivers. To the extent permitted by law, except as otherwise provided
herein or in the Loan Agreement, the Maker and each endorser of this Note, and
their respective successors and assigns, hereby severally waive presentment;
protest and demand; notice of protest, demand, dishonor and nonpayment;
diligence in collection, and any relief whatever from the valuation or
appraisement laws of any state.
IN WITNESS WHEREOF, the Maker has executed this Note as of the date
and year first above written.
MEDCROSS, INC.
By: /s/ John Edwards
--------------------------------
John Edwards
President
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