-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vpj3J3OUwrI2cmnkGObL0QbHHpjgUoZuUW1/MdP/FJEQYsv9q3zj/UMaDvwWF5b6 YBqKwLVHjcbG8ijO8dId3A== 0000849145-97-000005.txt : 19970515 0000849145-97-000005.hdr.sgml : 19970515 ACCESSION NUMBER: 0000849145-97-000005 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDCROSS INC CENTRAL INDEX KEY: 0000849145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 592291344 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17973 FILM NUMBER: 97603728 BUSINESS ADDRESS: STREET 1: 3227 BENNET ST N CITY: ST PETERSBURG STATE: FL ZIP: 33713 BUSINESS PHONE: 8135211793 MAIL ADDRESS: STREET 1: 3227 BENNET STREET NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33713 10QSB/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A#2 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-17973 MEDCROSS, INC. (Exact name of small business issuer as specified in its charter) FLORIDA 59-2291344 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3227 Bennet Street North, St. Petersburg, Florida 33713 (Address of principal executive offices) (813) 521-1793 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at July 31, 1996 Common Stock, par value $0.007 8,493,065 Traditional Small Business Disclosure Format (Check One): Yes No X 1
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements MEDCROSS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (unaudited) Assets June 30 1996 Current assets Cash and cash equivalents $ 383,954 Accounts receivable less allowance of $681,600 910,124 Inventory 830,098 Prepaid expenses 95,383 Total current assets 2,219,559 Property and equipment 4,167,967 Less accumulated depreciation 2,033,450 Net property and equipment 2,134,517 Investment in unconsolidated subsidiary 6,250 Intangible assets, net of amortization of $227,691 770,041 Other assets 30,482 Total assets $ 5,160,849 Liabilities and Stockholders' Equity Current liabilities Accounts payable and accrued expenses $ 2,483,634 Advance deposits received 233,728 Accrued royalty fees 450,000 Note payable - related party 663,500 Note payable - other 1,805,000 Current portion of long-term debt - related party 39,230 Current portion of long-term debt - other 488,957 Current obligations under capital lease 173,216 Total current liabilities 6,337,265 Long-term debt - related 68,579 Obligations under capital leases 317,977 Minority equity interest in consolidated subsidiaries 333,165 Commitments and contingencies Stockholders' equity Preferred stock 75,000 Common stock 59,112 Other stockholders' equity (2,030,249) Total stockholders' equity (1,896,137) Total liabilities and stockholders' equity $ 5,160,849
The accompanying notes are an integral part of these consolidated financial statements. 2
MEDCROSS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 Health care service revenue $ 582,490 $ 758,359 $1,174,670 $ 1,537,963 Equipment sales and service - - - 337,889 Network service revenue 55,338 - 72,364 - Net operating revenue 637,828 758,359 1,247,034 1,875,852 Cost of goods sold - equipment sales and service - 54,641 - 239,798 Salaries and benefits 542,635 311,487 795,083 640,418 Repairs and maintenance 74,944 77,542 143,907 154,488 Network expenses 224,302 - 322,535 - Provision for doubtful accounts 49,619 ( 3,943) 90,863 323,645 Depreciation and amortization 195,818 116,741 525,191 234,693 Acquired in-process research and development - - 4,777,943 - Other operating expenses 418,103 297,748 1,091,295 614,536 Operating loss ( 867,593) ( 95,857) (6,499,783) ( 331,726) Interest expense 75,127 41,692 1,067,776 80,820 Other (income) expense 2,765 ( 19,583) ( 12,762) ( 23,399) Loss before minority interest in net loss of consolidated subsidiaries and income tax provision ( 945,485) ( 117,966) (7,554,787) ( 389,147) Minority interest in net loss of consolidated subsidiaries ( 2,006) ( 20,623) ( 63) ( 7,844) Loss before income tax provision ( 943,479) ( 97,343) (7,554,724) ( 381,303) Income tax provision - - - - Net loss $( 943,479) $( 97,343) $(7,554,724) $( 381,303) Loss per common share after preferred dividends $( .21) $( .07) $( 2.03) $( .25) Weighted average common shares outstanding 4,535,539 1,749,163 3,753,470 1,749,163
The accompanying notes are an integral part of these consolidated financial statements. 3
MEDCROSS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 Cash provided (used) by operating activities $( 253,491) $ 105,914 $( 866,315) $ 155,982 Cash flows from investing activities Purchase of property and equipment ( 659,888) ( 375) ( 666,715) ( 15,375) Proceeds from sale of property and equipment 3,171 4,500 3,251 4,500 Net cash provided (used) by investing activities ( 656,717) 4,125 ( 663,464) ( 10,875) Cash flows from financing activities Proceeds (reduction) of notes payable - related party 5,500 - ( 117,833) 218,000 Proceeds (reduction) of notes payble - other 284,860 - 1,300,425 ( 101,000) Release of certificate of deposit as collateral - - 60,000 - Reduction of long-term debt - other - ( 97,285) - ( 194,571) Proceeds from capital leases 659,888 - 659,888 - Reduction of long-term debt - related ( 9,676) - ( 51,751) - Reduction of capital lease obligations ( 213,065) ( 60,851) ( 286,354) (120,251) Issuance of common stock 1,336 - 1,979 - Additional paid-in capital 180,433 - 304,086 - Minority interest distributions ( 36,865) - ( 36,865) ( 36,500) Net cash provided (used) by financing activities 872,411 ( 158,136) 1,833,575 (234,322) Effect of foreign currency translation on cash flows - ( 1,870) 1 ( 1,858) Increase (decrease) in cash and cash equivalents ( 37,797) ( 49,967) 303,797 ( 91,073) Cash and cash equivalents at beginning of period 421,751 320,051 80,157 361,157 Cash and cash equivalents at end of period $ 383,954 $ 270,084 $ 383,954 $ 270,084
The accompanying notes are an integral part of these consolidated financial statements. Supplemental cash flow information In February 1995 a holder of Class B Preferred Stock converted 9,350 shares into 227,714 shares of Common Stock. In February 1996, the Company acquired all of the issued and outstanding shares of I-Link Worldwide, Inc. in exchange for the issuance of 4,000,000 shares of Common Stock of the Company, of which 2,600,000 shares are held in escrow. 4 Supplemental Cash Flow Information - continued In February 1996, a holder of Class A Preferred Stock converted 40,000 shares into 978,891 shares of Common Stock. In April 1996, holders of certain promissory notes issued by the Company in February 1996 converted $10,000 in the aggregate into 140,000 shares of Common Stock. In June 1996, holders of certain promissory notes issued by the Company in June 1993 converted $180,542 in the aggregate into 64,372 shares of Common Stock. In June, 1996, a holder of Class A Preferred Stock converted 160,000 shares into 3,915,570 shares of Common Stock. 5 MEDCROSS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Financial Statements In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three-month and six-month periods ended June 30, 1996 and June 30, 1995, (b) the financial position at June 30, 1996, and (c) cash flows for the three-month and six-month periods ended June 30, 1996 and June 30, 1995, have been made. The unaudited consolidated financial statements and notes are presented as permitted by Form 10-QSB. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 1995. The results of operations for the three-month and six-month periods ended June 30, 1996 are not necessarily indicative of those to be expected for the entire year. Note 2 - Acquisition of subsidiary In February 1996, the Company closed its acquisition of all of the issued and outstanding common stock of I-Link Worldwide Inc., a Utah corporation ("I-Link") from ILINK, Ltd., a Utah limited partnership in exchange for the issuance of an aggregate of 4,000,000 shares of common stock of the Company. The acquisition was accounted for using the purchase method of accounting. The results of operations of the acquired enterprise are included in the consolidated financial statements beginning February 13, 1996. Pursuant to the terms of the stock purchase agreement, 2,600,000 shares of the common stock issued pursuant to the acquisition of I-Link were placed in escrow to be released as follows: 1. 1,600,000 shares of common stock are to be released upon the receipt of proceeds greater than or equal to $4,000,000 from the sale of the Company's securities pursuant to the conduct of one or more private or public offerings prior to December 31, 1996; and 2. 1,000,000 shares of common stock are to be released upon the first to occur of the following: (i) the monthly revenue derived from subscribers serviced by I-Link and revenue derived from the sale of related products and/or services equals or exceeds $1,000,000; or (ii) the number of subscribers serviced by I-Link exceeds 100,000 one year from the date of receipt by the Company of gross proceeds equal to $4,000,000 from the sale of its securities pursuant to one or more private or public offerings. The acquisition cost of $2,800,000 (representing 1,400,000 shares issued to date) was allocated to the net liabilities of $2,003,000 (based on their fair market value) with the balance of $4,803,000 allocated to in-process research and development and software costs acquired. These were expensed as technological feasibility of the in-process technology had not yet been established and the technology had no alternative future use. I-Link is in the business of delivering business communications services via the emerging worldwide data communication networks (which includes the Internet). I-Link seeks to provide business communications solutions and enhanced capabilities to existing users of traditional telecommunications services, at substantial cost savings to its customers through utilization of the Internet and other existing data communications networks. I-Link's first business communications product is marketed under the name "Fax4Less[TM]". 6 Note 2 - Acquisition of subsidiary - continued The following presents the proforma financial information of the Company and I- Link, as applicable for the six months ended June 30, 1996 and 1995 assuming such transaction had occurred on January 1, 1995:
Six Months Ended Net Loss Per June 30, 1996 Revenue Net Loss Common Share Company1/ $1,247,034 $(7,554,724) $(2.03) I-Link2/ 48,585 ( 139,683) Combined 1,295,619 (7,694,407) Proforma adjustment - 5,678,360 Proforma combined $ 1,295,619 $(2,016,047) $( .51) Six Months Ended Net Loss Per June 30, 1995 Revenue Net Loss Common Share Company $ 1,875,852 $( 381,303) $( .25) I-Link 102,368 ( 570,879) Combined 1,978,220 ( 952,182) Proforma adjustment - (5,870,442) Proforma combined $ 1,978,220 $(6,822,624) $(2.19) 1/Includes I-Link operations from February 13, 1996 through June 30, 1996 2/For the period January 1, 1996 through February 12, 1996.
Note 3 - Notes Payable Simultaneous with the closing of its acquisition of I-Link, the Company completed a private placement of $1,000,000 in aggregate principal amount of convertible promissory notes (the "10% Notes"). The 10% Notes are payable upon the earlier of August 31, 1996 (subject to extension) or the Company's receipt of proceeds of at least $4,000,000 from subsequent debt or equity offerings. The 10% Notes bear interest payable semi-annually at the rate of 10% until August 31, 1996 (13% after such date if the term of the 10% Note is extended). Up to $1,250 of each $50,000 in principal amount of note is convertible at any time at the option of the holder, into a maximum of 350,000 shares of Common Stock at the rate of approximately $.0714 per share, subject to certain antidilution adjustments. The 10% Notes may be extended until February 28, 1997 upon payment by the Company of 2.5% of the then outstanding principal balance of the 10% Note. The proceeds of such offering were used to pay outstanding accounts payable and other debts of I-Link. The Company has recorded interest expense (non-cash) of $945,000 related to these promissory notes. The interest expense is calculated as the difference between the conversion price per common share per the promissory notes as compared to the market price for the common stock on the date the promissory notes were issued. The interest expense was recognized over the period between the date the promissory notes were issued and the date the promissory notes could be first converted. In addition, the Company assumed notes payable to limited partners of ILINK, Ltd. in the amount of $643,333 and to other parties in the amount of $104,575. In June 1996, the Company issued promissory notes in the amount of $375,000. These promissory notes were due on the earlier of December 31, 1996 or the receipt of at least $4.8 million from debt or equity financings, with interest at the rate of 8% per annum. The proceeds of the promissory notes were used for I-Link working capital purposes. These notes were paid in full in September 1996. 7 Note 4 - Long Term Debt As part of the common stock acquisition of I-Link, the Company assumed the obligations under capital leases in the amount of $99,001. The leases vary in rates and have terms from 36 to 41 months expiring February 1998. Monthly payments total approximately $2,000. Note 5 - Commitments and Contingencies The portion of the I-Link common stock purchase price placed in escrow will be released upon the satisfaction of the contingencies described in Note 2 above. Note 6 - Earnings Per Common Share Earnings per common share are based upon the weighted average number of common shares outstanding and the dilutive effect of common stock equivalents consisting of stock options and convertible preferred stock. Note 7 - Lease Commitments I-Link leases approximately 1,500 square feet of space, which housed its corporate offices in Austin, Texas. Such lease has a term of three years, which is scheduled to expire on November 30, 1997 but which I-Link is negotiating to terminate. Pursuant to the terms of such lease, I-Link pays rent on a monthly basis of $1,740. I-Link has recently entered into a ten-month lease for 5,000 square feet of space in Austin, Texas, which housed its corporate offices. Pursuant to such lease, I-Link will pay rent of $5,000 per month. I-Link also leases several other spaces to house its POPs throughout the United States. Such spaces vary in size and are rented on a month-to-month basis. I-Link currently leases and occupies approximately 6,500 square feet of office space, in Draper Utah, pursuant to a commercial lease dated May 21, 1996, with an unrelated third party. The initial lease term is five years commencing on July 8, 1996 at a base rent of $5,451 per month. In addition, I-Link will be responsible for certain improvements to such facilities above $97,120. Note 8 - Geographic Segment Information The Company's operations consist of providing network services and diagnostic and clinical outpatient health care services domestically and the sale and service of used medical equipment in the People's Republic of China (PRC). The corporate office provides management and operational services for network services and domestic outpatient health care services. The eliminations represent charges for these services to entities included in the consolidation. Financial information for the different geographic segments is as follows:
Domestic Six Months Ended Network Corporate/ June 30, 1996 Health Care Services China Management Eliminations Consolidated Revenue $ 1,052,090 $ 72,364 $ - $ 167,675 $( 45,095) $ 1,247,034 Operating Profit (Loss) $ 93,233 $(6,362,212) $( 18,098) $( 167,611) $( 45,095) $(6,499,783) Identifiable Assets $ 2,753,208 $ 1,284,191 $1,011,818 $ 261,482 $( 149,850) $ 5,160,849
8
Domestic Six Months Ended Network Corporate/ June 30, 1995 Health Care Services China Management Eliminations Consolidated Revenue $ 1,373,862 $ - $ 337,889 $ 245,315 $( 81,214) $ 1,875,852 Operating Profit (Loss) $ 237,130 $ - $( 242,151) $( 245,491) $( 81,214) $( 331,726) Identifiable Assets $ 3,363,018 $ - $ 1,009,718 $ 201,175 $( 66,064) $ 4,507,847
Note 9 - Amendment of Form 10-QSB for the Period Ended June 30, 1996 The Company has amended its filing of Form 10-QSB/A#1 for the period ended June 30, 1996 based on its audit of the year ended December 31, 1996 financial statements. The amendments are primarily associated with (1) the expensing of acquired in-process research and development costs acquired as part of the acquisition of I-Link in February 1996 which were originally capitalized and other minor adjustments related to the purchase price allocation; (2) recording of interest expense (non-cash) related to promissory notes issued with a convertible feature into common stock at a conversion price per common share below the market value of the common stock; (3) correction of capitalized lease costs and related obligations; and (4) a correction of the calculation of weighted average shares outstanding calculation. The following table reflects the correctons made to the three months and six months ended June 30, 1996:
As Reported in Amendment #1 Adjustments As Adjusted ------------- ----------- ----------- Income statement for three months ended June 30, 1996: Depreciation & amortization 515,923 ( 320,105) 195,818 Other operating expenses 623,103 ( 205,000) 418,103 Net loss (1,468,584) 525,105 ( 943,479) Loss per common share after preferred dividends ( .17) ( .04) ( .21) Income statement for the six months ended June 30, 1996: Depreciation & amortization 797,626 ( 272,435) 525,191 Acquired in-process research & development 2,034,103 2,743,840 4,777,943 Other operating expenses 1,129,888 ( 38,593) 1,091,295 Interest expense 122,766 945,000 1,067,766 Net loss (4,176,912) ( 3,377,812) ( 7,554,724) Loss per common share after preferred dividends ( .52) ( 1.51) ( 2.03) Balance sheet as of June 30, 1996: Property & equipment 4,304,454 ( 136,487) 4,167,967 Less accumulated depreciation 2,045,950 ( 12,500) 2,033,450 Intangible assets, net of amortization 3,243,844 ( 2,473,803) 770,041 Current obligations under capital lease 230,918 ( 57,702) 173,216 Obligations under capital leases 396,762 ( 78,785) 317,977 Other stockholder's equity 431,054 ( 2,461,303) (2,030,249)
9 Item 2 - Management's Discussion and Analysis The following discussion should be read in conjunction with the information contained in the financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis set forth in the Company's Form 10-KSB/A#1 for the fiscal year ended December 31, 1995. Certain statements contained herein are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that could prove not to be accurate. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. The Company's ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the existence of demand for and acceptance of the Company's products and services, regulatory approvals and develpments, economic conditions, the impact of competition and pricing results of financing efforts and other factors affecting the Company's business that are beyond the Company's control. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release the result of any revisions to these forward-looking statements that may be made to reflect future events or circumstances. Results of Operations The following Table represents the net operating revenue and operating profit (loss) of the Company for each category of service offered. The net operating revenue and operating profit (loss) shown are net of intercompany transactions that were eliminated in consolidation. 9
Three Months Six Months Ended June 30 Ended June 30 1996 1995 1996 1995 NET OPERATING REVENUE Diagnostic Imaging $ 521,200 $ 677,044 $1,052,090 $ 1,373,862 Sales and Services of Medical Equipment - - - 337,889 Network Services 55,338 - 72,364 - Management and Other 61,290 81,315 122,580 164,101 $ 637,828 $ 758,359 $ 1,247,034 $ 1,875,852 OPERATING PROFIT (LOSS) Diagnostic Imaging $ 26,271 $ 90,945 $ 93,233 $ 237,130 Sales and Services of Medical Equipment ( 16,326) ( 31,164) ( 18,098) ( 242,151) Network Services ( 780,725) - (6,362,212) - Management and Other ( 96,813) ( 155,638) ( 212,706) ( 326,705) $( 867,593) $( 95,857) $(6,499,783) $( 331,726)
Diagnostic Imaging Net operating revenue from diagnostic imaging services decreased by 23.4% for the three and six months ended June 30, 1996, respectively, as compared to the same periods in 1995. Medcross Imaging, Ltd. accounted for $107,802 and $260,783 of the decrease for the three and six months ending June 30, 1996, as compared to the same period in 1995. This decrease in revenue is mainly due to the decrease in the average revenue per patient, which was caused by a decrease in the per patient charge to the hospital clients pursuant to service contracts placed into effect on October 1, 1995. These contracts extended the service period to the hospitals from February 29, 1996 to February 28, 1997. While the charge per procedure is reduced, each hospital must meet specific monthly minimums quotas. The decrease in average revenue per patient was offset by an increase of 39% and 5% in the number of procedures performed for the three months and six months ended June 30, 1996, respectively, compared to the corresponding period in 1995. 10 MRI revenue of Tampa MRI decreased $34,273 and $20,472 for the three and six ending June 30, 1996, respectively, as compared to the same periods in 1995. This decrease in due to a decrease in the average revenue per patient offset by increases in the number of procedures performed of 19% for the three-month period ending June 30, 1996 and 28% for the six-month period ended June 30, 1996, as compared to the same periods in the prior year. Tampa MRI has obtained and will continue its efforts to obtain managed care contracts. The participation in the managed care environment has caused a decrease in the charges per procedure, however, these decreases have been significantly offset by increases in the number of procedures performed. The revenue of the ultrasound operations decreased 16% and 21% for the three-month and six-month periods ending June 30, 1996, respectively, as compared to the same periods in 1995. This decrease is mainly due to the decrease in the number of procedures performed of 12% and 13% for the three months and six months ending June 30, 1996, respectively, as compared to the same periods in 1995. The operating profit from diagnostic imaging services, while remaining profitable, decreased by $64,674 and $143,897 for the three and six month periods ended June 30, 1996, respectively, as compared to the same periods in 1995. These decreases were caused by a decline in operating profit from Medcross Imaging, Ltd. of $79,791 and $182,665 for the three-month and six-month periods ending June 30, 1996, respectively, compared to the corresponding periods of the prior year. This decline was offset by an increase in operating profit from MRI operations of Tampa MRI of $11,515 for the three months ended June 30, 1996 and $53,836 for the six months ended June 30, 1996, as compared to the same periods in 1995. In addition, the operating profit from the ultrasound operations increased $3,602 for the three months ended June 30, 1996 and decreased $15,068 for the six months ended June 30, 1996 as compared to the prior year. The decline in the MRI operating profit for the three-month and six-month periods ending June 30, 1996 was a result of the decrease in MRI revenue, offset by a decrease in total other operating expenses for diagnostic imaging of $91,170 for the three months ended June 30, 1996 and $177,875 for the six months ended June 30, 1996 as compared to the same period in 1995. During the past several years, there has been increasing pressure from federal and state regulatory and legislative bodies to prevent physicians from referring patients to diagnostic imaging facilities in which they have an ownership interest. Legislation passed in the State of Florida, where all of the Company's diagnostic imaging services operate, placed a fee cap on diagnostic imaging services. An injunction has been obtained preventing the State of Florida from enforcing the fee cap. See "Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-KSB/A#1 for the year ended December 31, 1995. Sales and Service of Medical Equipment The Company sells and services used and refurbished computerized tomography (CT) scanners in the People's Republic of China through a joint venture company, Shenyang Medcross Huamei Medical Equipment Company, Ltd. (SMHME), of which it owns 51%. In the first quarter 1995, the Company's Beijing office, which was closed on May 31, 1995, completed the installation of two CT scanners. The responsibilities for the parts depot and the inventory of the Company's Beijing office were transferred to SMHME. The Company has elected to fully reserve for all amounts due from the sale of the CT scanners sold by its Beijing office. This resulted in an expense of $281,438 in the first quarter of 1995 and an allowance for doubtful accounts of $315,753 as of June 30, 1996. The Company has held discussions regarding the sale of its Beijing operations. No assurance can be given regarding the outcome of such discussions. Management and Other Net operating revenue from management and other activities decreased by $20,025 in the second quarter of 1996 as compared to the same period in 1995 and by $41,521 for the six months ended June 30, 1996 as compared to the same period in 1995. The decrease was primarily related to the management contracts with Bay Area Renal Stone Center ("BARSC"). The BARSC contract accounted for $11,775 and $23,550 in management fees for the three and six month periods in 1995, respectively, and no management fees in 1996. The net operating loss from management and other activities decreased 38% and 35% in the three-month and six-month periods ended June 30, 1996, respectively, as compared to the same periods in 1995. This decrease in net operating loss was due to the decreased corporate overhead expenses of $78,850 and $155,520 for the three-month and six- month periods ended June 30, 1996, respectively, as compared to the same periods 11 in the prior year. These decreases were offset by the decreases in net operating revenue. Salaries and benefits decreased 42% and 48% for the three- month and six-month periods ended June 30, 1996, respectively, as compared to the same periods of 1995. Network and Related Services The operating revenue of network and related services from I-Link, was $55,338 for the second quarter of 1996 and $72,364 for the six months ended June 30, 1996. The net operating loss from network and related services was $780,725 and $6,362,212 for the three and six months ending June 30, 1996. This was mainly due to acquired in-process research and development expense of $4,777,943 in the first quarter of 1996 recorded pursuant to the purchase of the common stock of I-Link by the Company. Excluding the acquired in-process research and development expense, the operating loss of network and related services was $780,725 and $1,548,269 for the three and six months ending June 30, 1996. Consolidated Operating Results Net operating revenue of the Company decreased $120,531 in the second quarter of 1996 as compared to the same quarter of 1995 and $628,818 for the six months ended June 30, 1996 compared to the same period in the prior year. This decrease was mainly due to the sale of CT scanners in China during the first quarter of 1995 and not in 1996 and the decrease in the net operating revenue of diagnostic imaging services in 1996 as compared to 1995. Salaries and benefits decreased by $91,638 and $218,249 for the three and six months ending June 30, 1996, respectively, as compared to the same periods in 1995. The decrease was offset by the inclusion of salaries and benefits of $322,786 and $372,914 from network and related services during the second quarter 1996 and the six months ended June 30, 1996, respectively. The decrease in repairs and maintenance was mainly due to diagnostic imaging. Depreciation and amortization increased $399,812 in the second quarter of 1996 as compared to the second quarter of 1995 due to the inclusion of I-Link, offset by a decrease from diagnostic imaging. Depreciation and amortization increased $290,498 for the six months ended June 30, 1996 compared to the six months ended June 30, 1995 due to the inclusion of I-Link, offset by a decrease from diagnostic imaging. The provision for doubtful accounts increased $53,562 in the second quarter of 1996 as compared to second quarter of 1995 and decreased $232,782 for the six months ended June 30, 1996 compared to the six months ended June 30, 1995. This change is due to the collection, in the second quarter of 1995 of amounts previously written-off, and the write-off of the receivables due from the foreign operations in the first quarter of 1995, none of which occurred in 1996. Other operating expenses increased $120,355 in the second quarter of 1996 compared to the second quarter of 1995. This increase is due to the inclusion of $197,750 from network and related services, offset by decreases of $77,395 from diagnostic imaging, sales and service of medical equipment, and management and other activities. In the six months ended June 30, 1996, other operating expenses increased $476,759 compared to six months ended June 30, 1995. This increase is due to the inclusion of operating expenses from network and related services of $645,725 offset by a decrease of $168,966 from diagnostic imaging, sales and service of medical equipment, and management and other activities. Liquidity and Capital Resources The working capital position of the Company was a deficit of $4,117,706 at June 30, 1996 and $315,573 at December 31, 1995, which includes $488,957 at June 30, 1996 and $669,799 at December 31, 1995 of the current portion of long-term debt, which may be payable in common stock of the Company, and $1,465,000 million in promissory notes issued concurrent with and subsequent to the I-Link acquisition. Cash flow used by operating activities was $253,491 and $866,315 for the three and six months ending June 30, 1996 compared to cash flow provided by operations of $105,914 and $155,982 for the same periods in 1995. Cash flow used by operating activities includes $206,597 and $807,153 attributable to the inclusion of I-Link in 1996. Investing activities expenditures during the first six months of 1996 related to the purchase of additional computer equipment for I-Link. 12 During the six months ending June 30, 1996, the Company reduced its long term debt and capital lease obligations by $51,754 and $286,354, respectively, notes payable to related parties by $73,333, notes payable to others by $24,435 and the outstanding balance of its line of credit by $60,000. These reductions include indebtedness of I-Link. The inclusion of I-Link in the first quarter of 1996 increased capital lease obligations by $99,001, notes payable to related parties by $693,333, and notes payable to others of $104,575. As of June 30, 1996, the balance outstanding under the line of credit was $340,000. The Company was in violation of loan covenants regarding cash balances, consolidated equity ratios, debt to equity ratios, cash flow coverage ratios and past days sales in accounts receivable under the line of credit at June 30, 1996, However, the FUNB has waived such non-compliance through June 30, 1996. The Company and FUNB have reached an agreement pursuant to which the Company has agreed to secure alternative financing to repay amounts outstanding under the Line of Credit by June 30, 1996. The Company was unable to secure such financing, so that the Company will be 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 thereafter. Concurrent with the Company's acquisition of the securities of I-Link in February 1996, the Company issued an aggregate of $1 million in 10% Notes and received net proceeds of $845,000. The proceeds of such offering were used to pay operating expenses and certain other indebtedness of I-Link. In the second quarter of 1996, three loans evidenced by promissory notes were made, totalling $500,000, were made to the Company. The proceeds of these notes were used to pay operating expenses and certain outstanding indebtedness of I-Link. Warrants to purchase up to 145,000 shares of the common stock of the Company were issued in conjunction with these promissory notes. During the first quarter of 1995, the Company received advances totaling $218,000 from Mortgage Network International, payable on demand. The Company's Vice Chairman/President has management control over Mortgage Network International. The advances were subsequently formalized by the Company issuing a Promissory Note bearing interest at 1% over prime rate of Southwest Bank of Texas, N.A. with a maturity of October 1, 1995. Subsequent to October 1, 1995, the Company and Mortgage Network International modified the note such that: (i) a principal payment in the amount of $88,000 is due and payable on December 31, 1996; (ii) interest thereon is payable monthly at a rate of 10.5%; and (iii) the remaining principal amount of $130,000 with interest thereon at the rate of 10.5% will be paid in 36 equal monthly payments of $4,225.32 beginning December 10, 1995. The Company will require additional financing in order to successfully integrate the business of I-Link, to fund the cash flow operating deficit of I-Link, to expand its business and to discharge outstanding indebtedness, including the 10% Notes, the Mortgage Network International advances, and the outstanding balance of the Company's line of credit with First Union National Bank. Additional funding through one or more debt or equity offerings in the capital markets will be necessary to continue to implement the growth of the Company's business and expand its operations, including those of I-Link. The availability of such capital sources will depend on prevailing market conditions, interest rates, and financial position and results of operations of the Company. Therefore, there can be no assurance that such financing will be available or that the Company will not be required to issue significant debt or equity securities in order to obtain such financing. PART II - OTHER INFORMATION Item 1. Legal Proceedings A Complaint was filed on April 12, 1996, by JW Charles Financial Services, Inc. ("JWC") against the Company in Palm Beach County Florida Circuit Court, JW Charles Financial Services, Inc. v. Medcross, Inc., Case No: CL96-3218. JWC was issued a Common Stock Purchase Warrant ("Warrant") on or about November 3, 1994 by the Company. The alleged terms of the Warrant granted JWC the right to purchase from the Company 250,000 shares of the Company's Common Stock subject to adjustment. On or about February 12, 1996, JWC made written demand to the Company to invoke its rights to have the common shares underlying the Warrant registered pursuant to the terms of the Warrant. The Complaint alleges that the Company breached the terms of the Warrant by failing to prepare and file with the Securities and Exchange Commission ("SEC"), a registration statement covering the common stock underlying JWC's Warrant. JWC alleges a breach of contract; andrequests specific performance, i.e., registering the shares with the SEC, against the Company. JWC also demands damages in the amount of $2,728,478.00 plus interest, reasonable attorneys fees, and forum costs. The Company believes that it has a meritorious defenses to the Complaint. 13 On May 6, 1996, the Company filed an Answer, Affirmative Defenses and Counterclaim to the Complaint filed by JWC. The Company's counterclaim seeks damages, cancellation of warrants, and interest and costs. Item 5. Other Information In August 1996, William Flury, Vice President of 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 funds from the loan were used to general working capital purposes of I-Link. On August 6, 1996, John Edwards, President and Chief Executive Officer of I-Link, loaned I-Link the sum of $131,250 (including a $6,250 original issued discount), which sums are 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. Effective July 30, 1996, Joel S. Kanter, previously a Director of the Company, resigned for personal reasons. On July 17, 1996, the Company announced that it has commenced a Private Placement of up to 240,000 shares of its Class C Preferred Convertible Cummulative Redeemable Preferred Stock, $10 par value per share, at $60 per share. The offering is being conducted on a "best efforts, minimum-maximum" basis as to an aggregate of $4.8 and $14.4 million, respectively. The Company prepared and disseminated the information in accordance with Rule 135c under the Securities Act of 1933. On June 21, 1996, I-Link entered into an Agreement for Terminal Facility Collocation Space with MFS Telecom, Inc. ("MFS"). Under the agreement, I-Link has the right, but is not obligated, to elect to occupy certain office and storage space and to utilize MFS co-location services within commercial buildings at one or more lease hold sites held by MFS for the placement and operation of I-Link's telecommunications equipment and cabling. The agreement provides that MFS will make facilities in 21 major cities throughout the U.S. available to I-Link and excepts to have an additional 30 sites in the US and 7 international sites available to I-Link by year end. I-Link may elect to occupy any of such sites on a location-by-location basis. Although minimum occupancy terms, rentals, and service charges vary some from site to site and will be set forth in schedules to the agreement, rentals presently range from $500-1,000 per month with a $500 per month average and an $800 one-time initial charge per site and certain other additional charges for power, cross-connection fees, and alike to be agreed upon at the time of the election to occupy that site. Management of I-Link believes that the MFS agreement provides agreement with the opportunity to avail itself of strategic locations for pops at competitive rates together with co-location and administrative services provided by MFS without the burden of long-term leases. In June 1996, John Edwards, President and Chief Executive Officer of I-Link, was selected to fill a vacancy on the Board of Directors of the Company as a Class III Director. On April 29, 1996, the Company was notified that I-Link was in breach of its contractual obligation to make payments to Spyglass. Spyglass provides software licenses to I-Link. I-Link was obligated to pay Spyglass Initial and Quarterly Minimum License Fees in the amount of $45,000 and $63,750, respectively no later than 30 days subsequent to the end of each calendar quarter that the payments were due. Total indebtedness claimed by Spyglass is $273,606, including late payment fees. The Company was notified by Spyglass that it claims the right to terminate the agreement in its entirety in the event the breach of the agreement is not cured within 30 days. Management of I-Link is discussing the matter with Spyglass but there can be no assurance that a satisfactory resolution will be obtained. 14 On April 8, 1996, I-Link entered into a three year Employment Agreement with John Edwards. Pursuant to the terms of the Employment Agreement, Mr. Edwards will be employed as the Chief Executive Officer and a Director of I-Link, and will be required to devote substantially all of his working time to the business and affairs of I-Link. Mr. Edwards is entitled under his Employment Agreement to receive compensation at the rate of $175,000 per year and is entitled to a profitability bonus in the discretion of the I-Link Board of Directors and to participate in fringe benefits of the Company as are generally provided to Executive Officers. In addition, Mr. Edwards is entitled to receive an option to purchase 1 million shares of Common Stock of the Company at an exercise price of $7.00. Of such options, 83,333 vest and become exercisable upon the first calendar day of each quarter for the 12 quarters after April 8, 1996. In the event of termination by I-Link or in the event of a "Change in Control" (as defined in the agreement), Mr. Edwards is entitled to receive, as liquidated damages and severance pay, an amount equal to the monthly capital and Compensation (as defined in the agreement) for the remaining term of the agreement. The agreement contains non-competition and confidentiality provisions. I-Link is a party to a 12-month consulting agreement with Benchmark Equity Group, Inc., dated August 10, 1995, pursuant to which I-Link is obligated to pay $6,000 per month to Benchmark Equity Group, Inc. for consulting services rendered. Those payments accrued and are deferred pending the Company's obtaining stockholders equity of $2,500,000. $73,000 in consulting fees are due and payable to Benchmark Equity Group, Inc. Benchmark Equity Group, Inc. is also party to certain options to purchase shares of Common Stock owned by Four M International, Ltd. and party to certain options to purchase shares of Common Stock owned by R. Huston Babcock, M.D. See Item 11 - Security Ownership of Certain Beneficial Owners and Management in the Company's Form 10-KSB/A#1 for the year ended December 31, 1995. I-Link has entered into a consulting agreement with T6-G Limited Partnership for two years commencing upon the successful completion of at least $4 million in funding. The agreement requires the payment of $70,000 payable monthly over 24 months. In addition, I-Link is indebted to T6-G Limited Partnership in the amount of $300,000. T6-G Limited Partnership owns a 9.5% interest in ILINK, Ltd. Item 6(a) - Exhibits Page 3(a) Amendment to the Amended and Restated Articles of Incorporation dated August 15, 1996. 3(a).1 3(b) Composite copy of the Amended and Restated Articles of Incorporation incorporating all amendments through the date of the filing of this Form 10-QSB. 3(b).2 10(a) Agreement for Terminal Facility Collocation Space, dated June 21, 1996, by and between I-Link Worldwide, Inc. and MFS Telecom, Inc. 10(a).1 11 Statement regarding computation of earnings per common share. 11.1 27 Financial Data Schedule 27.1 99(c) Press Release dated July 17, 1996 99(c).1 Item 6(b) - Reports on Form 8-K An amendment to the report on Form 8-K dated February 23, 1996 was filed by the Company regarding the acquisition of the securities of I-Link Worldwide Inc., the completion of a private placement of $1,000,000 in aggregate principal amount of convertible promissory notes, and the conversion of Class A Preferred Stock into Common Stock. The amendment included financial statements of the business acquired and proforma financial statements. A report on Form 8-K was filed by the Company regarding the complaint filed by JW Charles Financial Services, Inc., the appointment of Clay Wilkes as a director of the Company and appending an updated Statement of Risk Factors. A report on Form 8-K was filed by the Company regarding the resignation of Po Shin Wong as the Chairman of the Board of Directors and a director of the Company, for personal reasons. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. MEDCROSS, INC. (Registrant) Date: December 12, 1996 By: /s/ JOHN EDWARDS John Edwards President, Chief Executive Officer By: /s/ Karl S. Ryser, Jr. Karl S. Ryser, Jr. Chief Financial Officer, Treasurer 16 -----END PRIVACY-ENHANCED MESSAGE-----