UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
MEDCARE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 87-0429962 B
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 West 22nd Street, Suite 1210, Oak Brook, Illinois 60523
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 611-3388
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Securities to be registered pursuant to Section 12(b) of the Act: None
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Securities to be registered pursuant
to Section 12(g) of the Act: Common Stock, $.001 par value
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Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( X )
Aggregate market value of Common Stock, $0.001 par value, held by non-affiliates
of the registrant as of March 24, 1998: $65,551,734. Number of Common Stock,
$0.001 par value, outstanding as of February 17, 1998: 6,992,185.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following document are incorporated by reference
into this report on From 10-K where indicated: NONE
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ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submissions of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrants' Common Equity and Related 15
Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 8. Financial Statements 20
Item 9. Changes in and Disagreements With Accountants on Accounting 20
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports 25
on Form 8-K
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the discussion in this
Annual Report on Form10-KSB contains certain forward-looking statements that
involve risk and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
document should be read as being applicable to all related forward-looking
statements wherever they appear in this document. The Company's actual results
could differ materially from those discussed here. Factors that could cause
differences include those discussed below in "Risk Factors", as well as
discussed elsewhere herein.
THE COMPANY
SUMMARY OF BUSINESS
MedCare Technologies, Inc. ("MedCare" or the "Company") has developed The
MedCare Program, a non-surgical, non-drug, non-invasive and cost effective
treatment program for urinary incontinence (UI), as well as pelvic pain, chronic
constipation, fecal incontinence, and disordered defecation. The MedCare Program
is a multi-modality program based primarily on behavioral techniques for
treatment. These techniques include biofeedback using electromyography (EMG),
pelvic floor muscle exercises, and bladder and bowel retraining. The program is
designed to activate and strengthen the various sensory response mechanisms that
maintain bladder and bowel control. The therapy is provided through computerized
instrumental EMG biofeedback and is based on operant conditioning strategies
whereby specific physiological responses are progressively shaped, strengthened,
and coordinated.
Affecting an estimated 25 million Americans, urinary incontinence is the
involuntary loss of bladder control and represents a significant cause of
disability and dependence. Incontinence is one of the most prevalent, yet
severely unrecognized problems in health care today. And as society ages, the
physical, emotional and financial costs to those suffering and the costs to
their caregivers, as well as the health care system, is expected to increase
dramatically.
Despite the prevalence of incontinence, it is widely under diagnosed and under
reported primarily because of the social stigma attached to UI. Many individuals
are either too ashamed or too embarrassed to report the problem to their doctor
or to a health care professional. Instead, a large number of people prematurely
turn to the use of absorbent materials and supportive aids without having their
condition properly diagnosed and treated. When sufferers do inquire, they
discover that very few doctors are knowledgeable about UI. In fact, so few
medical professionals have the adequate training to diagnose and offer treatment
options that the U.S. Department of Health and Human Services, Agency for Health
Care and Policy and Research, has recommended that information about UI be
included in the curricula of undergraduate and graduate health professional
schools.
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URINARY INCONTINENCE
In March 1996, the US. Department of Health and Human Services published a
Clinical Practice Guideline which estimated that urinary incontinence affects
approximately 13 million Americans (of which 85% are woman) at an annual cost of
$16 billion. Because the incidence of incontinence is so widely under reported
and under diagnosed, many industry observers believe that the total number of
sufferers is well over 25 million, with approximately one third of these
individuals also experiencing problems with bowel control.
While most people associate the lack of bladder control with very old people,
urinary incontinence affects adults of all ages and crosses all social,
economic, racial and gender lines. Ingrid Nygaard, Assistant Professor of
Obstetrics and Gynecology at the University of Iowa, conducted a study with
144 female exercisers between the ages of 18 and 21. An amazing 28% of these
relatively young individuals experienced urine loss at some point.
The psychosocial impact of UI imposes a tremendous burden on individuals, their
families and health care providers. Patients experience odor, dampness,
discomfort, depression, withdrawal from daily activities and a significant
quality of life problem. Social interaction with friends and family, and even
sexual activity, is restricted or avoided in the presence of incontinence. Many
UI sufferers eventually confine themselves to a life of exile in their own
homes. The U.S. Department of Health states that urinary incontinence is one of
the major reasons why people institutionalize elderly family members, accounting
for upwards of 50% of all admissions into nursing homes.
Incontinence is a symptom rather than a disease. UI can be caused from a variety
of pathologic, anatomic and physiological factors including: Damage to pelvic
muscles from pregnancy; spina bifida; spinal injury; bladder infections; drug
side effects; multiple sclerosis; Parkinson's disease; stroke; diabetes; age-
related changes in lower urinary tract; obesity and surgery (hysterectomy,
cesarean section or prostatectomy) that may damage the bladder or urinary tract.
For example, each year about 500,000 men undergo surgery for prostate cancer and
approximately 10% of these patients suffer sphincter damage during the
procedure, leading to incontinence.
There are six types of UI: urge, stress, overflow, reflex, functional and mixed.
Of these six, urge and stress incontinence account for over 90% of all urinary
incontinence.
THE MEDCARE PROGRAM FOR INCONTINENCE
The MedCare Program is individualized for each patient's needs and
circumstances. It focuses on their clinical, cognitive, and residential status
to produce a comprehensive program for bladder and bowel disorder sufferers. The
MedCare Program is a multi-modality program based primarily on behavioral
techniques for treatment. These techniques include biofeedback using EMG, pelvic
floor muscle exercises, and bladder and bowel retraining. The Program is
designed to activate and strengthen the various sensory response mechanisms that
maintain bladder and bowel control. The therapy is provided through computerized
instrumental EMG (electromyography) biofeedback and is based on operant
conditioning strategies whereby specific physiological responses are
progressively shaped, strengthened, and coordinated. All patients entering the
MedCare Program are
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initially evaluated by a physician and a biofeedback clinician whose expertise
is in bowel and bladder control.
The MedCare Program is individualized for each patient's needs and
circumstances. It focuses on their clinical, cognitive, and residential status
to produce a comprehensive program for bladder and bowel disorder sufferers. The
fundamental goals for the MedCare Program, as they relate to bladder and bowel
function, are:
1. Increase the strength and tone of the pelvic floor muscles that prevent
incontinence;
2. Augment the motor efficiency of the striated pelvic floor muscles;
3. Enhance sensory-response systems that trigger motor activity that prevent
or limit incontinence;
4. Decrease abnormal motor substitutions that are ineffective in preventing
incontinence;
5. Reestablish normal muscle activity that may contribute to voiding and
defecation dysfunction;
6. Provide patients with strategies that establish normal bowel and bladder
habits;
7. Reduce incontinence and symptoms of urgency and frequency.
To reach these goals the MedCare Program may use the following treatments or
procedures:
1. Biofeedback using EMG (electromyography);
2. Bladder ultrasound;
3. Aerodynamicist;
4. Electrical stimulation of the pelvic floor muscles;
5. Anorectal Manometry;
6. Weighted vaginal cones;
7. Rectal pressure balloons;
8. Pelvic floor muscle exercises;
9. Various behavioral programs for bladder and bowel re-training;
10. Behavioral strategies and home programs which generalize gains made within
each treatment session to the patient's life situation.
The following disorders respond to this treatment:
Urinary Dysfunction
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1. Stress incontinence;
2. Urge incontinence;
3. Mixed stress and urge incontinence;
4. Bladder disorders secondary to neurologic disorders;
5. Urinary frequency and urgency;
6. Hyperactive or dyssynergic sphincters;
7. Pelvic floor muscle strengthening prior to bladder suspension surgery;
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Bowel Dysfunction
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1. Fecal incontinence, idiopathic, or due to muscle or nerve damage from
obstetrical trauma, or surgery;
2. Disordered defecation caused by excessive spasm or activity of the pelvic
floor muscles, i.e. constipation, acquired megacolon;
3. Bowel disorders secondary to neurologic disorders, i.e. CVA (stroke),
incomplete spinal cord injury, multiple sclerosis, spina bifida, etc.;
4. Hirschbrung's disease;
5. Irritable bowel syndrome;
6. Adjunct to surgical procedures such as muscle transpositions, ostomy
reversal surgeries, anal spincteroplasty, and imperforated anus;
Pelvic Floor Disorders
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1. Levator ani syndrome;
2. Perineal descent syndrome;
3. Spastic floor syndrome.
ADMISSION TO THE MEDCARE PROGRAM
Admission into The MedCare's Program is by a physician's order for pelvic floor
muscle strengthening or pelvic floor muscle spasm. The referral may come from a
physician who has completely evaluated the patient and has determined that EMG
biofeedback therapy in conjunction with behavioral programs is a reasonable
treatment for the patient. The referral may also come from a physician who would
like more assessment of the patient. In that case, the patient would be referred
to the physician working with MedCare's program for evaluation to see if he or
she is an appropriate candidate for EMG biofeedback therapy. A patient can also
self refer to the MedCare program, but must first be evaluated by the physician
working with MedCare's program to see if they are appropriate. The cost of the
MedCare program is covered by most insurance companies.
COURSE OF TREATMENT
The MedCare Program begins by having the clinician review the patients medical
history. The clinician then conducts an in depth verbal interview with the
patient regarding his or her bladder or bowel dysfunction. A patient diary is
then given to the patient to fill out for a week at a time to better keep track
of their symptoms. This diary is reviewed each visit and helps to track patient
progress and improvement. The patient then undergoes a physical assessment
which varies according to the patients disorder and symptoms. In the case of
bladder dysfunction the physical assessment may include EMG measures of the
pelvic floor showing baselines, maximum contraction/relaxation, and degree of
maladaptive abdominal substitution with attempts at pelvic floor muscle
contraction. A bladder scan, catheterization, or aerodynamicist may also be
done. These help to evaluate the patients post void residual volumes, bladder
compliance, presence of uninhibited bladder contractions, and sensation related
to increasing levels of bladder infusion. In the case of bowel dysfunction the
physical assessment consists of EMG measures of the pelvic floor muscles showing
baselines, maximum contraction/relaxation, degree of maladaptive abdominal
substitution with attempts at pelvic floor muscle contractions, and the ability
to relax with defecation maneuvers. Anal
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manometry, may also be done, to show the dynamic characteristics of the pelvic
floor, coordination and synchrony of the internal and external anal sphincters,
and sensation in response to varying degrees of rectal distention.
After the evaluation identifies the patients dysfunctional motor patterns, the
MedCare treatment program is then individualized to include the modalities that
will be used and a home exercise program. At each consecutive treatment session
the patient's progress is reviewed, new goals are set, and the patient's program
is changed to accommodate their current situation and symptoms.
LENGTH OF TREATMENT
Treatment sessions are usually one hour in length, one week apart initially with
the inter treatment interval increasing thereafter for most ambulatory non
neurological compromised outpatients. As a result most patients will be seen
over a three to four month period with an average of six to eight treatment
sessions. MedCare's program relies on patients following a specific individual
home exercise program that is updated during each treatment session. However, if
the patient's condition demands more intensive therapy (e.g. neurologic
disorders, cognitive dysfunction, pediatric patients), or if the patient's
ability to perform the home program is compromised the treatment sessions may
need to be scheduled more frequently and over a longer period of time.
CONTRADICTIONS TO TREATMENT
The most significant contradictions to MedCare's program is the patient's lack
of motivation, inability to follow directions, and failure to remember to do
their home exercise program. However, since each patient is assessed carefully
and followed closely, the clinician can determine if the patient will benefit
from the program. If the patient is found to be inappropriate for therapy, other
methods of treatment will be offered such as regular toileting or adaptive
equipment. In addition, the evaluating physician may also determine
contradictions to therapy such as anatomic obstruction, severe descensus,
prolapse, or severe neurologic disorder.
EFFECTIVENESS OF THE MEDCARE PROGRAM
The value and effectiveness of neuromuscular reeducation therapy and behavioral
techniques has been well documented by many notable and respected researchers.
Studies in the various application of biofeedback (EMG) combined with
behavioural treatments report a range of 54% to 95% improvement in incontinence
across different patient groups. The researchers of one such study were
able to obtain a mean 82% reduction in stress incontinence and a range of 30% to
100% reduction in urge incontinence. With regard to fecal incontinence with
various age groups, including geriatric patients and children with spina bifida,
reports indicate a range of 66% to 77% using behavioural and neuromuscular
re-education techniques. A combined analyses of 22 articles that dealt with
behavioral techniques in community dwelling adults were reviewed by a
subcommittee of behavioral experts and then by external reviewers. The number of
patients (both male and female) studied in the combined analyses was 887, with
an average age of 53 years. The number of baseline incontinent episodes ranged
from 4 to 21 per week, per article, with an overall average of 6 per week. Based
on the weighted combined data, the average
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percent reduction in incontinence frequency at the end of treatment was 64.6%,
with a 95% confidence interval ranging from 58.8% to 70.4%.
Successful application of behavioural treatment and neuromuscular re-education
therapy using biofeedback is highly dependent on the knowledge and skill of the
health care provider. This very important factor is the principle reason for
such a wide percentage range in the studies mentioned above. In contrast,
MedCare's protocols are in depth, standardized and comprehensive. All MedCare
trained clinicians receive training in every aspect of the treatment program,
including familiarity with evaluation techniques, anatomic and physiologic
correlates of the different forms and symptoms of bladder dysfunction,
instrumentation and behavioral principles that guide the MedCare program
for incontinence.
EXPANSION OF THE MEDCARE PROGRAM
The MedCare Program is available through the practices of physicians (urologist,
urogynecologist, gastroenterologist, and/or colon rectal surgeon) either in a
private office, clinic, or a hospital setting.
For the physician, the MedCare Program is a turn key system that includes
equipment, trained personnel, model policies and procedures, billing and
collections assistance and an active marketing program in each local community
where the Program is available. Inclusive of equipment and training costs, each
site is expected to cost around $20,000 to establish.
As of March 6, 1998, the Company had established (as noted with an " * ") or was
in the process of opening a total of twenty four (24) MedCare Program sites in
the following cities: Norman, OK* (Dr. Michael M. Blue), Winter Park, FL* (Dr.
Jake Jacobo), Denver, CO* (Dr. Rueven Rosen), Raleigh, NC* (Dr. Richard D.
Kane), Kankakee, IL* (Dr. Joel Slutsky), Kingwood, TX* (Dr. Robert Rosen),
Toledo, OH* (Dr. Gregory Haselhahn), Lake Worth, FL* (Dr. Mark Lieberfarb),
Coral Springs, FL* (Dr. Michael Lazzopina), Phoenix, AZ* (Dr. William Crisp),
Fremont, CA* (Dr. Scott Kramer), New York, NY (Dr. Robert Gluck), New Rochelle,
NY (Dr. Larry Roberts), Roswell, GA (Dr. Omar Eubanks), Baltimore, MD (Dr. Marci
Roenneberg), Stanford, CT (Dr. Jon Waxberg), West Orange, NJ (Dr. Yitzhak
Berger), Clackamas, OR (Dr. Herbert Tirjer), Dallas, TX (Dr. Brian Feagins),
Amherst, OH (Dr. Steven Leslie), Columbus, OH (Dr. Stephen Richards),
Alexandria, VA (Dr. A. Roger Weiderhorn), Albany, NY (Dr. B. Orakondy), Mine
Hill, NJ (Dr. Marc Colton).
MARKETING OF THE MEDCARE PROGRAM
In a study of 3,638 patients over age 20 who saw their physicians during an 11
week period, 43% of women and 11% of men (33% overall) reported current UI. 75%
of these patients had not yet informed a health care professional, however, more
than a third said they would see a physician if treatment were available. In the
meantime, many are prematurely drawn to the use of absorbent products as a
result of extremely effective marketing by major manufacturers, such as Kimberly
Clark, Procter & Gamble and Johnson & Johnson, thus allowing millions of
sufferers to hide their condition without anyone ever discovering their UI and
resulting in an average sufferer waiting between 7 and 9 years before seeking
help.
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This study reveals the crux of the problem: a significant number of incontinence
sufferers do not seek medical guidance of any kind either because they are too
embarrassed, believe their condition is a normal part of aging or bearing
children or are not aware that a genuine medical treatment is available. This
general ignorance on the part of the patient is compounded by the fact that so
few people in the medical community are knowledgeable.
When an effort is made to educate and market to incontinence sufferers, most are
amazed at the significant drawing power of simple marketing and sales programs.
For example, The New York Times reported an incidence in which the authors of
"Staying Dry: A Practical Guide to Bladder Control" (Dr. Kathryn L. Burgio, K.
Lynette Pearce and Dr. Angelo J. Lucco) were rejected by 50 publishers before
Johns Hopkins Press accepted the manuscript. Within several days of a mention of
the book in an Ann Landers column, Johns Hopkins Press was flooded by over
20,000 letters. Within a matter of months, over 50,000 copies of the book had
been sold, becoming the biggest selling book of its kind in such a short period
of time.
MedCare's marketing and sales strategy is designed to promote general awareness
of incontinence and that an effective treatment program is readily available.
The majority of the Company's advertising is directed towards the sufferer
through a combination of brochures, print ads, direct mail, radio, TV, doctor
referrals, seminars and general public relations within a defined area. The
Company's past experience with such marketing has been favorable, with print
and referrals being the best source of new patient flow.
The Company targets much of its marketing and advertising to those individuals
that are prime candidates, namely women over the age of 35, men who have
undergone prostate surgery, nursing home residents, new mothers, female athletes
and current incontinence patients. A secondary audience for MedCare's
advertising will be friends and family and the professional audience, which
includes gynecologists/obstetricians, general practitioners, family
practitioners, geriatricians, gastroenterologists, nurse practitioners, and
nursing home administrators. Past experience indicates that once an effective
marketing program has been launched, continued draw comes from word of mouth
referrals from patients and doctor referrals.
COMPETITIVE TREATMENT OPTIONS FOR UI
Some currently available alternatives for the treatment of urinary incontinence
include:
ABSORBENT PRODUCTS AND DIAPERS: Similar to baby diapers, adult diapers and pads
capture urine upon leakage. While the product has improved over the last few
years, most users find the bulky size, inconvenience, lack of control over
urine flow, discomfort from wetness, embarrassment over the appearance and odor
of urine and ongoing cash outlay to be major disadvantages.
It has been estimated that the typical UI sufferer in the United States spends
between $1200 to $1500 annually on these types of products. Retail sales of
adult absorbent products surpassed $1.6 billion last year according to industry
sources, compared to $496 million in 1987 and just $173 million in 1982. Early
dependency on absorbent products is often a deterrent to continence
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by giving the wearer a false sense of security and removes their motivation to
seek evaluation and treatment. When used improperly, absorbent products may
contribute to skin breakdown and urinary tract infections. As a result,
meticulous care and frequent changes are required.
SURGERY: A variety of surgical procedures are utilized more for stress
incontinence than urge or mixed incontinence. Surgeries usually involve
elevating and stabilizing the urethra and the bladder neck in order prevent
hypermobility. These procedures are delicate, complicated procedures whose
success depends on a number of factors, including the degree of the pathology
and the operating physician's experience. Accordingly, outcomes are generally
varied. Surgery is quite an expensive and traumatic procedure requiring a
hospital stay and several weeks of recovery time. A typical bladder suspension,
for example, costs over $10,000 to perform. An estimated 60,000 bladder
suspension procedures are performed annually in America.
INDWELLING CATHETERS: An indwelling, or Foley, catheter is a closed sterile
system inserted into the bladder through the urethra in order to allow for
drainage of the bladder directly through a tube into a urine collection bag.
While the individual typically remains dry, most experience the inconvenience of
the long tube and collection bag. For continuous users, urinary tract infections
are of concern.
IMPLANTING DEVICES AND INJECTABLE MATERIALS: Implantation of foreign
materials
into the body, such as an artificial sphincter, are used relatively infrequently
due to the highly invasive and high complication rate as compared with other
procedures. Injectables, which include collagen, polytetrafluoroethylene and
other materials, are inserted into the tissue surrounding the urethral sphincter
using a small-gauge hypodermic needle under local anaesthesia. The injection of
the material increases muscle tone of the sphincter by increasing bulk and
offering greater resistance to urine flow.
Periurethral injections generally show promise when used in patients suffering
from specific anatomical defects, principally intrinsic sphincteric deficiency,
thus limiting its use to about 10% to 15% of the UI population. In addition to
the high cost of such injections, around $2,500, there is some degree of side
effects.
ELECTRICAL STIMULATION: Electrical stimulation involves the application of a low
level electric current to stimulate or inhibit the pelvic muscles or their nerve
supply.
MECHANICAL DEVICES: Most mechanical devices, such as vaginal pessaries,
diaphragm rings and other inflatable and non-inflatable devices, work by
supporting the urethrovesical junction. Despite their wide availability, these
products have not gained wide acceptance among UI sufferers. In addition to the
difficulty of properly fitting patients with these devices, other potential
adverse side effects include vaginal discharge and tissue erosion.
DRUGS: Drugs typically used for the treatment of incontinence act on the nerve
receptors associated with the bladder neurotransmitter system and generally
alleviate the symptoms in part but are seldom curative. Drugs also may cause
adverse side effects, often affecting the cardiovascular and circulatory
systems, along with the possibility of urinary retention and
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unwanted interactions with other drugs. Currently, most drugs require continual,
life long usage in order to control urinary incontinence symptoms.
"MA & PA" CLINICS: At present, there are a number of small incontinence clinics,
or ancillary programs, offered by doctors, hospitals or therapists, scattered
across North America that use a combination of currently available non-invasive
alternative treatment options to treat UI patients. While most of these clinics
have limited financial strength for adequate marketing and advertising and often
operate a "ma and pa" type of business, the Company expects better financed and
more sophisticated competition to emerge in the future.
IGNORANCE OF SUFFERERS AND THE MEDICAL COMMUNITY: The greatest
competition, by
far, comes from the ignorance of the marketplace. A significant number of
incontinence sufferers do not seek medical guidance of any kind either because
they are too embarrassed, believe that their condition is a normal part of aging
or bearing children or are not aware that a genuine medical treatment is
available. Not only are UI sufferers ignorant of the care and treatment options
available for their condition, but so are a vast number of people in the medical
profession. In fact, so few doctors are knowledgeable about UI that the Agency
for Health Care Policy and Research recommended that information about UI be
included in the curricula of undergraduate and graduate health professional
schools.
EMPLOYEES
At December 31, 1997, the Company employed 17 full time persons. As of March 6,
1998, the Company employed 27 full time persons. To the best of the Company's
knowledge, none of the Company's officers or directors is bound by restrictive
covenants from prior employers. None of the Company's employees are represented
by labor unions or other collective bargaining groups.
RISK FACTORS
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
Since inception, the Company has primarily been engaged in the research and
development of its treatment program for bladder and bowel incontinence and has
incurred significant operating losses. While there is ample evidence that
significant demand exists for a treatment program such as MedCare's, there is no
guarantee that MedCare will be successful in achieving its operating goals
or successful in gaining wide acceptance among physicians or sufferers.
RELIANCE ON SKILLED AND KEY PERSONNEL
As a part of its expansion plans, the Company plans to recruit and train highly
skilled personnel. There can be no assurances that these highly skilled
individuals, such as registered nurses, will be readily. The Company is also
dependent upon a number of key management personnel. The loss of the services of
one or more key individuals would have a material adverse effect on the Company.
The Company's success will also depend on its ability to attract and retain
other highly qualified scientific and management personnel.
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PROTECTION OF PROPRIETARY TREATMENT PROGRAM
The Company's ability to compete and expand effectively will depend, in part, on
its ability to develop and maintain certain proprietary aspects of its treatment
program for bladder and bowel incontinence and its business and marketing models
and strategies. The Company relies on an unpatented proprietary treatment
protocol and there can be no assurances that others may not independently
develop the same or similar program or otherwise obtain access to the Company's
unpatented proprietary protocols.
In addition, there can be no assurance that any confidentiality agreements
between the Company and its employees will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use or disclosure of such trade secrets, know-how or other
proprietary information. While certain proprietarial aspects of MedCare's
clinical and business protocols remain an important part of the business, the
Company believes its long term success as a business will depend primarily upon
it's high quality clinical outcomes and service, continued business development
and marketing skills.
REIMBURSEMENT AND RELATED MATTERS
In both the United States and elsewhere, sales of health care products and
services are dependent, in part, on the availability of reimbursement from third
party payors, such as government and private insurance plans. In the United
States and in certain foreign countries, third-party reimbursement is currently
generally available for certain procedures, such as surgery and biofeedback
training by EMG application, and generally unavailable for patient management
products such as diapers, pads, and urethral plugs. While the Company's
treatment program is currently covered by third party payers, there can be no
assurances that such coverage will remain in effect in the future.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of early stage development and technology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Future announcements concerning the Company, its competitors or other
technology companies including the development of new treatment protocols, drugs
or therapies, technological innovations, governmental regulations, developments
in patent or other proprietary rights, litigation or public concern as the
safety of the services and products offered by the Company or others and general
market conditions may have a significant effect on the market price of the
Common Stock. The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying any dividends in the foreseeable future.
ANTI-TAKEOVER PROVISIONS
The Company is subject to provisions of the Delaware General Corporation Law,
which may make certain business combinations more difficult.
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EXECUTIVE OFFICERS
Each executive officer is elected to office by the Board of Directors and holds
the office until his successor is elected and qualified. The executive officers
of the Company are:
HARMEL S. RAYAT (36) Chairman of the Board, Chief Executive Officer, Chief
Financial Officer and Director. Mr. Rayat is one of the co-developers of the
MedCare Program. Mr. Rayat has been in the venture capital industry since 1981
and since January 1993 has been the President of Hartford Capital Corporation, a
company specializing in providing early stage funding and investment banking
services to emerging growth corporations. From 1989 through December 1992, Mr.
Rayat was the President of K.S. Rayat & Company, an investment banking and
venture capital company, where he was responsible for research, due diligence
and investment strategy in early stage, start up venture capital investments.
Mr. Rayat has been a director of the MedCare Technologies since September 1995,
its president from June, 1996 to July 1997, and its Chairman and Chief Executive
Officer since July 1997 to present. Mr. Rayat also serves as a Director of
American Alliance Corporation, and Scottsdale Scientific, Inc., non-reporting
companies trading on the NASD OTC Bulletin Board.
JEFFREY S. ARONIN (31) President, Chief Operating Officer, and Director. Mr.
Aronin has extensive experience in the health care industry, with particular
expertise in Corporate Development, Sales Management, Health Care Marketing and
Managed Health Care. Mr. Aronin joined Carter Wallace, a major pharmaceutical
firm, in May of 1989. At Carter Wallace, Mr. Aronin held many positions as he
advanced through management in sales marketing and managed care. In September
1995, Mr. Aronin left Carter Wallace to join American Health Products
Corporation, where he ran the Marketing division and focused on Marketing and
Business Development and made significant contributions toward the growth of
AHPC's business. Mr. Aronin joined MedCare Technologies as its President and
Chief Operating Officer on July 8, 1997, at which time he also became a member
of the Board of Directors of the Company. He holds a degree in marketing and
financing, as well as an MBA in management.
VALERIE BOELDT-UMBRIGHT (31) Vice President of Clinical Services, and Director.
Mrs. Boeldt-Umbright is registered nurse, with a Bachelors of Science degree in
community health education from Northern Illinois University. With over two
years of actual management experience in the day-to-day operation of the
Incontinence Clinic in Chicago, Mrs. Boeldt-Umbright has supervised personnel,
dealt with insurance and reimbursement matters, marketing and physician
interaction and referrals. She has instructed patients in biofeedback for their
pelvic floor muscles, established individualized neuromuscular re-education
programs, written new clinical protocols and articles for publication and has
worked as a member of a university team to provide excellent care and medical
treatment for patients. Mrs. Boeldt-Umbright was a nurse insurance examiner in
the PMI Division of Equifax Systems from October 1991 to September 1992. From
June 1992 to July 1994, she was employed at the Premier Rehabilitation Center of
Chicago, where she established a nursing and health education program and was
the sole nurse responsible for traumatic brain injury and spinal cord injury
clients. At this facility she also established a medication program and
13
<PAGE>
bowel/bladder programs, and taught inservices, training classes and health care
classes for clients and staff. From March 1994 to September 1996, Mrs. Boeldt-
Umbright was the Manager of Incontinence Control Services. In this position, she
handled all manager responsibilities, including supervising personnel, insurance
claims, marketing and physician interaction and referral, wrote articles for
publication and assisted in research. Since March, 1996, she has been a Director
and Vice President of Clinical Services of Medcare.
GREGORY WUJEK (36) Vice President of Managed Care. Mr. Wujek has over 10 years
of health care experience, primarily in sales and marketing to the managed care
market. Prior to joining MedCare in November 1997, Mr. Wujek held the position
of Vice President of Sales at SMG Marketing Group, a consulting firm to the
health care industry, and was a Director of Managed Care at Forest Laboratories,
an international marketer of ethical pharmaceuticals. Mr. Wujek is responsible
for the development and negotiation of unique reimbursement and marketing
strategies in managed care, long term care, integrated health networks,
hospitals, Medicare/Medicaid and fee for service.
KUNDAN S. RAYAT (69) Secretary, Treasurer and Director. Mr. Rayat has over 45
years of experience as an entrepreneur and owner of a diverse spectrum of
businesses, ranging from automotive to heavy construction, on three continents.
Since 1985, Mr. Rayat has been a principal of K.S Rayat & Company and has
primarily devoted his time to venture capital matters, investing in numerous
start up ventures, and providing seasoned management advice to emerging market
companies. He has been a Director and Secretary/Treasurer of MedCare
Technologies since August 1995.
ITEM 2: PROPERTIES
The Company's principal office is located at 1515 West 22nd Street, Suite 1210,
Oak Brook, Illinois, 60523. This office is 2,400 square feet and is subleased
for $4,800 per month, plus operating expenses of approximately $400 per month,
for one year, with an option to renew every year for 5 years. The Company also
leases 1,500 square feet of office space located at 1628 West 1st Avenue, Suite
216, Vancouver, British Columbia, V6J 1G1 for $2,000 per month, plus operating
expenses of approximately $200 per month. This space has been leased for a
period of one year, with an option to renew for a second year, and is owned by
one of the Company's directors and by the Chairman's wife.
ITEM 3: LEGAL PROCEEDINGS
(a) The Company is not a party to any legal proceedings.
(b) No material legal proceedings were terminated in the fourth quarter.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during the
year ended December 31, 1997.
14
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS.
(a) Market Information
The Company's common stock trades on the NASD Electronic Bulletin Board under
the symbol MCAR. The following table sets forth the high and low sale price
information as reported by America Online for the periods indicated:
High Low
January-March 1997 $8.25 $6.75
April-June 1997 $8.0625 $6.25
July-September 1997 $9.25 $6.875
October-December 1997 $8.125 $7.625
(b) Holders
As of February 17, 1998, there were approximately 255 stockholders of record of
the Company's Common Stock.
(c) Dividend Policy
The Company has never paid a dividend and does not anticipate paying any
dividends in the foreseeable future. It is the present policy of the Board of
Directors to retain the Company's earnings, if any, for the development of the
Company's business.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the five years ended December 31, 1997:
Consolidated Statements of Operations Data
Years Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues $ 91,802 $ 0 $ 0 $0 $0
Expenses
General and Admin 1,515,459 452,037 689,713 0 0
Operating Loss (1,423,657) (452,037) (689,713) 0 0
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Other Income
Interest Income 119,146 2,801 0 0 0
Interest Expense (70,521) 0 0 0 0
Loss from Discontinued Operations (4,489) 0 0 0 0
Gain from Sale of Subsidiary 15,770 0 0 0 0
Net Loss (1,363,751) (449,236) (689,713) 0 0
Net (Loss) Per Share ($0.23) ($0.08) ($0.35) - -
</TABLE>
Consolidated Balance Sheet Data
Years Ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Cash $3,440,791 $220,562 $44,443 $ 0 $ 0
Receivables & Prepaid 111,099 36,358 640 0 0
Other Assets 34,526 17,698 50 50 50
Total Assets 3,586,416 274,618 45,133 50 50
Total Current Liabilities 87,317 81,007 291 0 0
Accumulated Deficit (2,544,727) (1,185,465) (720,451) (42,027) (42,027)
Total Liabilities and
Stockholder's Equity 3,586,416 275,618 45,133 50 50
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 8 of this Form 10-K. Except for
the historical information contained herein, the discussion in this Annual
Report on Form 10-K contains certain forward-looking statements that involve
risk and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this document
should be read as being applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could differ
materially from those discussed here. Factors that could cause differences
include those discussed below in "Risk Factors", as well as discussed elsewhere
herein.
OVERVIEW
The Company has developed The MedCare Program, a non-surgical, non-drug,
non-invasive and cost effective treatment program for urinary incontinence, as
well as pelvic pain, chronic constipation, fecal incontinence, and disordered
defecation. The MedCare Program is a
16
<PAGE>
multi-modality program based primarily on behavioral techniques for treatment.
These techniques include biofeedback using electromyography (EMG), pelvic floor
muscle exercises, and bladder and bowel re-training. The program is designed to
activate and strengthen the various sensory-response mechanisms that maintain
bladder and bowel control. The therapy is provided through computerized
instrumental electromyography biofeedback and is based on operant conditioning
strategies whereby specific physiological responses are progressively shaped,
strengthened, and coordinated.
To date, MedCare has not received any significant revenues due to the early
stage nature of the Company's business and has incurred ongoing operating losses
due to costs related to research, business development, management and staff
recruitment, establishing training systems and providing ongoing training,
development of advertising and marketing programs, and other costs associated
with establishing corporate infrastructure necessary for expanding The MedCare
Program on a national basis. Although planned principal operations have
commenced, substantial revenues have yet to be realized.
RESULTS OF OPERATIONS
The Company had revenues of $91,802, $0 and $0 for the years ended December 31,
1997, 1996 and 1995. During 1997, the majority of the Company's revenues were
from three early stage MedCare Program sites, and while the revenues generated
were not significant, these first few sites provided much of the Company's
insight with regards to advertising, marketing, billing and business
development. The information gathered from these early stage developmental
centers is being used to establish additional MedCare sites, a few in late 1997,
but most of which are expected to open in 1998. To date, the Company has not
relied on any revenues for funding. During the next several years, the Company
expects to derive the majority of its potential revenues from the opening of
new MedCare Program centers in the United States, and possibly select foreign
markets.
During 1997, the Company incurred $1,515,459 in General and Administrative
expenses, an increase of 235% over 1996 expenses of $452,037, and resulted in
$.23 per share loss for the year ended December 31, 1997, versus a $.08 per
share loss for the year ended December 31, 1996. This increase is primarily
attributable to costs associated with the development of advertising and
marketing programs, public relations, hiring and training expenses of clinical
and managerial personnel, travel, legal and accounting, and ongoing general
operating expenses. Interest income was $119,146, $2,801 and $0 for the years
ended December 31, 1997, 1996 and 1995, respectively. Interest earned in the
future will be dependent on Company funding cycles and prevailing interest
rates. There was no interest expense incurred on notes payable of $1,000 and
$48,135 during the year ended December 31, 1997 and December 31, 1996. During
1997, the Company accrued a total interest payable of $70,521, compared to $0
and $0 during 1996 and 1995, respectively, on its 8% Series A Preferred Shares.
The Company has incurred start up costs from January 1, 1995 to September 30,
1995 amounting to $542,706. This total amount, along with additional operating
expenses, was charged to operations during the year ended December 31, 1995,
resulting in a total loss of $689,713 or $0.35 loss per share. Total expenses
decreased by 35% for the year ended December 31, 1996, resulting in a total
loss $449,236 or $0.08 per share. This decrease in expenses during 1996 compared
to 1995 was a
17
<PAGE>
result of few clinical openings during the year, limited managerial and
personnel hiring expenses and limited advertising and marketing charges.
As of December 31, 1997, the Company's accumulated deficit was approximately
$2,544,727, and as a result, there has been no provision for income taxes. The
Company has net operating losses that will expire beginning with the years 2002
through 2012, in the amount of $1,363,751, $449,236, $689,713 and $42,027 in
1997, 1996, 1995 and prior years, respectively, unless utilized by the Company.
LIQUIDITY AND CAPITAL RESOURCES
MedCare Technologies has financed its operations primarily through private
placements of Common Shares, Preferred Shares and the exercise of Stock Options
totaling $4,788,500, less offering expenses of $123,750, for the year ended
December 31, 1997, and $611,000 for the year ended December 31, 1996. At
December 31, 1997, the Company had a cash balance of $3,440,791, compared to a
cash balance of $220,562 at December 31, 1996.
The Company's future funding requirements will depend on numerous factors,
including the Company's ability to establish and operate profitability current
and future MedCare Program locations, recruiting and training qualified
management and clinical personnel, competing against any potential technological
advances in the treatment of urinary incontinence and other afflictions of the
pelvic floor area, and the Company's ability to compete against other better
capitalized corporations who offer alternative or similar treatment options for
urinary incontinence and other afflictions of the pelvic floor area.
During fiscal 1997, the Company issued three private placement memoranda. On
February 1, 1997, an offering was begun pursuant to Regulation D, Rule 506 for
176,000 shares of common stock at $6.25 per share for a total offering of
$1,100,000. This offering was completed on February 4, 1997. The proceeds were
used for working capital and expansion of the MedCare Program.
The Company offered for sale a Private Placement Memorandum pursuant to
Regulation D, Rule 506 on July 7, 1996 for 300,000 shares of common stock at
$6.00 per share, plus 300,000 warrants exercisable at $6.00 per warrant until
July 7, 2002 for a total offering of $1,800,000. This offering was completed on
July 30, 1997 and the proceeds used for working capital and expansion of the
MedCare Program.
On June 20, 1997, the Company began offering for sale a Regulation D offering
under Rule 506. This offering was for the Series A Preferred Stock of the
Company and was sold for $10,000 per share, in minimum subscription amounts of
at least ten shares ($100,000) and increments of five shares in excess thereof.
The total offering was for three hundred shares for a total of $3,000,000,
with a minimum offering of $1,650,000. The offering closed on July 8, 1997 with
the minimum offering placed. The Preferred Stock was accompanied by warrants to
purchase a number of shares of Common Stock of the Company equal to thirty-three
and one-third percent (33-1/3%) multiplied by the aggregate purchase price of
the Subscriber's Preferred Stock outstanding on each of nine, twelve and fifteen
months following the closing date of the offering, divided by the Fixed
18
<PAGE>
Conversion Price as defined in the Certificate of Designation. In conjunction
with this offering, an Escrow Agreement was entered into with Swartz Investments
LLC, a Georgia limited liability company, as Placement Agent and with First
Union National Bank of Georgia as Escrow Agent.
At that time, the Company also filed a Certificate of Designation with the State
of Delaware in conjunction with this offering. This Certificate was approved on
July 7, 1997 and designates 1,000 shares of the Company's one million shares of
authorized preferred stock to be Series A stock. This stock has been assigned
an issue price of $10,000 per share with an eight percent (8%) per annum
accretion rate. The rank of this stock has been assigned as being senior to all
Common Stock of the Company, junior to any other class or series of capital
stock of the Company hereafter created specifically ranking by its terms senior
to the Series A Preferred Stock, senior to any class or series of capital stock
of the Company hereafter created not specifically ranking by its terms senior to
or on par with any Series A Preferred Stock of whatever subdivision, and on
parity with any class or series of capital stock of the Company hereafter
created specifically ranking by its terms on parity with the Series A Preferred
Stock. No dividend rights have been granted to this stock.
The conversion terms outlined in the Certificate of Designation state that
holders of the Series A Preferred Stock can convert their stock on or after a
period of no less than four months from the closing date into Common Stock using
the formula per share of Series A Preferred Stock:
(.08)(N/365)(10,000) + 10,000
-----------------------------
Conversion Price
The Conversion Price is determined as the lesser of 115% of the average Closing
Bid Price for the five trading days ending on June 6, 1997, which is $7.346 or
X% of the average Closing Bid Price of the Company's Common Stock for the five
trading days immediately preceding the Date of Conversion, where X is determined
as follows:
# of months between Last Closing
and Date of Conversion "X"
--------------------------------
4-6 months 90%
6 months-1 year 87.5%
9 months, 1 day-12 months 85%
more than 12 months 80%
The Company also has the right to redeem the Series A Preferred Stock upon
receipt of Notice of Conversion at a rate of the Stated Value times 1.10 to 1.20
or may redeem the stock at its own election at 115% to 130%, depending on the
length of time.
Attached as exhibits are the Certificate of Designation and Placement
Memorandum.
THE PLACEMENT AGENT AND ITS EMPLOYEES AND AFFILIATES WERE GRANTED
A TOTAL OF 165
PREFERRED OPTIONS AND 86,214 9-MONTH COMMON STOCK
WARRANTS, 86,214 12-MONTH COMMON STOCK WARRANTS,
86,214 18-MONTH COMMON STOCK WARRANTS AND 33,692 SWARTZ
EMPLOYEE COMMON STOCK WARRANTS IN CONJUNCTION WITH THIS OFFERING.
19
<PAGE>
On July 8, 1997, Mr. Jeffrey Aronin joined the Company as its President and
Chief Operating Officer. He was also elected a Director of the Company. Mr.
Harmel S. Rayat, the previous President, remains with the Company in the
capacity of Chief Executive Officer and Chairman of the Board.
On September 17, 1997, Ms. Diane Nunziato resigned as a director of the Company
and Dr. Jake Jacobo joined the Company as a Director. Ms. Nunziato resigned for
personal reasons and did not have any disagreements with the Company.
On November 7, 1997, Mr. Greg Wujek joined the Company as its Vice President of
Managed Care.
ITEM 8: FINANCIAL STATEMENTS
The financial statements and financial statement schedules are incorporated by
reference in this report on pages F-1 through F-19.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
During the most recent two fiscal years, the Company's independent accountant
did not resign and was not dismissed, and there were no disagreements with such
accountant regarding accounting and financial disclosure matters of the type
require to be reported herein.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of that sets forth as of March 15, 1998 the names, ages and
positions within the Company of all of the Executive Officers of the Company and
the Directors of the Company. Each such director has been nominated for election
at the Company's 1997 Annual Meeting, which was held on June 17, 1997. All
Directors hold office until the next annual meeting of stockholders or until
their successors are elected. Officers serve at the discretion of the Board of
Directors.
HARMEL S. RAYAT (36) Chairman of the Board, Chief Executive Officer, Chief
Financial Officer and Director. Mr. Rayat is one of the co-developers of the
MedCare Program. Mr. Rayat has been in the venture capital industry since 1981
and since January 1993 has been the President of Hartford Capital Corporation, a
company specializing in providing early stage funding and investment banking
services to emerging growth corporations. From 1989 through December 1992, Mr.
Rayat was the President of K.S. Rayat & Company, an investment banking and
venture capital company, where he was responsible for research, due diligence
and investment strategy in early stage, start up venture capital investments.
Mr. Rayat has been a director of the MedCare Technologies since September 1995,
its president from June, 1996 to July 1997, and its Chairman and Chief Executive
Officer since July 1997 to present. Mr. Rayat also serves as a Director of
American Alliance Corporation, and Scottsdale Scientific, Inc., non-reporting
companies trading on the NASD OTC Bulletin Board.
20
<PAGE>
JEFFREY S. ARONIN (31) President, Chief Operating Officer, and Director. Mr.
Aronin has extensive experience in the health care industry, with particular
expertise in Corporate Development, Sales Management, Health Care Marketing and
Managed Health Care. Mr. Aronin joined Carter Wallace, a major pharmaceutical
firm, in May of 1989. At Carter Wallace, Mr. Aronin held many positions as he
advanced through management in sales marketing and managed care. In September
1995, Mr. Aronin left Carter Wallace to join American Health Products
Corporation, where he ran the Marketing division and focused on Marketing and
Business Development and made significant contributions toward the growth of
AHPC's business. Mr. Aronin joined MedCare Technologies as its President and
Chief Operating Officer on July 8, 1997, at which time he also became a member
of the Board of Directors of the Company. He holds a degree in marketing and
financing, as well as an MBA in management.
VALERIE BOELDT-UMBRIGHT (31) Vice President of Clinical Services, and Director.
Mrs. Boeldt-Umbright is registered nurse, with a Bachelors of Science degree in
community health education from Northern Illinois University. With over two
years of actual management experience in the day-to-day operation of the
Incontinence Clinic in Chicago, Mrs. Boeldt-Umbright has supervised personnel,
dealt with insurance and reimbursement matters, marketing and physician
interaction and referrals. She has instructed patients in biofeedback for their
pelvic floor muscles, established individualized neuromuscular re-education
programs, written new clinical protocols and articles for publication and has
worked as a member of a university team to provide excellent care and medical
treatment for patients. Mrs. Boeldt-Umbright was a nurse insurance examiner in
the PMI Division of Equifax Systems from October 1991 to September 1992. From
June 1992 to July 1994, she was employed at the Premier Rehabilitation Center of
Chicago, where she established a nursing and health education program and was
the sole nurse responsible for traumatic brain injury and spinal cord injury
clients. At this facility she also established a medication program and
bowel/bladder programs, and taught inservices, training classes and health care
classes for clients and staff. From March 1994 to September 1996, Mrs. Boeldt-
Umbright was the Manager of Incontinence Control Services. In this position, she
handled all manager responsibilities, including supervising personnel, insurance
claims, marketing and physician interaction and referral, wrote articles for
publication and assisted in research. Since March, 1996, she has been a Director
and Vice President of Clinical Services of Medcare.
KUNDAN S. RAYAT (69) Secretary, Treasurer and Director. Mr. Rayat has over 45
years of experience as an entrepreneur and owner of a diverse spectrum of
businesses, ranging from automotive to heavy construction, on three continents.
Since 1985, Mr. Rayat has been a principal of K.S Rayat & Company and has
primarily devoted his time to venture capital matters, investing in numerous
start up ventures, and providing seasoned management advice to emerging market
companies. He has been a Director and Secretary/Treasurer of MedCare
Technologies since August 1995.
MICHAEL M. BLUE, M.D. (53) Medical Director. Dr. Michael Blue is a member of the
American Medical Association, Oklahoma State Medical Association and the
American Urological Association. Dr. Blue is a board certified urologist who has
practiced general urology in private
21
<PAGE>
practice for twenty years. He joined the Board of Directors of Medcare in August
1996 and is responsible for supervising and continuing the development of all
medical aspects of the MedCare Program, as well as interacting and answering
questions from other doctors within the MedCare system.
JAKE JACOBO, M.D. (Age 53) Director. After completing his Residency in Urology
at the University of Iowa Hospitals and Clinics, Dr. Jacobo participated as a
Clinical Investigator with the National Prostatic Cancer Project and the
National Bladder Cancer Project during 1975 and 1976. In July of 1977, he
joined Northern Iowa Urology Associates in Waterloo, Iowa and remained in
private practice until 1989. During his tenure with Urology Associates, Dr.
Jacobo initiated the Urodynamic program for Covenant Medical Center and in 1986
introduced Prostate Ultrasonography for the diagnosis of prostate lesions, this
being the first Prostate Ultrasound Program for the state of Iowa and started a
new modality, together with PSA testing, for the early diagnosis of prostate
cancer. In April of 1989, Dr. Jacobo started Urology Consultants in the
Orlando, Florida area. Urology Consultants has since expanded to five clinics
and three urologists, and in 1997 Urology Consultants opened the first MedCare
Program site in the state of Florida. Dr. Jacobo joined the Board of Directors
on September 17, 1997.
ITEM 11: EXECUTIVE COMPENSATION
The following tables shows, for the three years period ended December 31, 1997,
the cash compensation paid by the Company, as well as certain other compensation
paid or accrued for such year, to the Company's Chief Executive Officer and the
Company's other executive officers.
Summary Compensation Table
</TABLE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and Securities Underlying
Principal Position Year Salary$ Bonus$ Stock Options Other
<S> <C> <C> <C> <C> <C> <C>
Harmel S. Rayat 1997 40,000 - 0 - - 0 - - 0 - - 0 -
Chairman, CEO 1996 - 0 - - 0 - - 0 - 160,000 - 0 -
& CFO 1995 2,500 - 0 - - 0 - 150,000 - 0 -
Jeff Aronin 1997 46,433 - 0 - - 0 - 500,000 3,000
President & COO 1996 - 0 - - 0 - - 0 - - 0 - - 0 -
1995 - 0 - - 0 - - 0 - - 0 - - 0 -
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Valerie Boeldt- 1997 49,833 - 0 - - 0 - 115,000 - 0 -
Umbright 1996 18,125 - 0 - - 0 - 40,000 - 0 -
Clinical Director 1995 - 0 - - 0 - - 0 - - 0 - - 0 -
Michael Blue 1997 - 0 - - 0 - 75,000 - 0 - - 0 -
Medical Director 1996 - 0 - - 0 - 40,000 - 0 - - 0
1995 - 0 - - 0 - - 0 - - 0 - - 0 -
Kundan S. Rayat 1997 - 0 - - 0 - - 0 - - 0 - - 0 -
Secretary,Treasurer 1996 - 0 - - 0 - - 0 - - 0 - - 0 -
Director 1995 - 0 - - 0 - - 0 - - 0 - - 0 -
Jake Jacobo 1997 - 0 - - 0 - 40,000 - 0 - - 0 -
Director 1996 - 0 - - 0 - - 0 - - 0 - - 0 -
1995 - 0 - - 0 - - 0 - - 0 - - 0 -
</TABLE>
STOCK OPTIONS
The Company has 500,000 shares reserved under its 1998 Stock Option Plan,
290,000 of which are for issuance at $6.50 per share until July 1st, 2005. The
1998 Stock Option Plan is subject to shareholder approval. None of these shares
have been exercised. These optionees are in the name of Mr. Jeff Aronin
(250,000) and Jake Jacobo (40,000).
OPTION HOLDINGS
<TABLE>
<CAPTION>
Value of unexercised options
Number of unexercised options in-the- money
at fiscal year end Options at fiscal year end(1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Harmel S. Rayat 310,000 -0- $1,077,500 -0-
Chairman, CEO
& CFO
Jeff Aronin 100,000 400,000 $75,000 $300,000
President & COO
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Valerie Boeldt- 155,000 -0- $396,250 -0-
Umbright
Clinical Director
Michael M. Blue 115,000 -0- $286,250 -0-
Medical Director
Jake Jacobo 40,000 -0- $30,000 -0-
Director
</TABLE>
(1) Represents the fair market value of the Company's Common Stock on December
31, 1997 ($7.25 per share on the closing on the NASD Electronic Bulletin Board)
minus the exercise price per share, of the in-the-money options, multiplied by
the number of shares subject to each option.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 15, 1998, the beneficial ownership
of the Company's Common Stock by each person known by the Company to
beneficially own more than 5% of the Company's Common Stock outstanding as of
such date and by the officers and directors of the Company as a group. Except
as otherwise indicated, all shares are owned directly.
<TABLE>
<CAPTION>
Person or Group Number of Shares Percent
<S> <C> <C>
Harmel S. Rayat 2,000,000 28.60%
5131 Highgate Street
Vancouver, B.C., V5R 3G9
Dr. Michael Blue 4,000 0.06
500 East Robinson, Suite 800
Norman, Oklahoma 73071
Dr. Jake Jacobo
ADDRESS
ADDRESS
All directors and executive
officers as a group (3 persons) 2,004,000 28.66%
</TABLE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company rents office space from one of the Directors and the Chairman's
wife. The premises are rented at below market value.
24
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements: Page
Report of Independent Public Accountants F-1
Balance Sheets as of December 31, 1997 and 1996 F-2
Statement of Income for the Years ended
December 31, 1997, 1996, 1995 F-4
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, 1994 F-6
Statement of Cash Flows for the years ended
December 31, 1997, 1996, 1995 F-16
Notes to Financial Statements F-18
(a) (2) Exhibits
The following exhibits are referenced or included in this report:
Articles of Incorporation
By-Laws
(b) Reports on 8-K
On November 14, 1997 the Registrant filed a report on Form 8-K to disclose
the employment contract of its new president, Jeffrey S. Aronin and a
Certificate of Disclosure and subsequent Series A Preferred Stock Offering.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDCARE TECHNOLOGIES, INC.
/s/ Harmel S. Rayat
--------------------------
By Harmel S. Rayat, Chairman &
Chief Executive Officer
26
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Signature Title Date
/s/ Harmel S. Rayat Chairman and CEO 3/25/98
<PAGE>
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet at December 31, 1997 and 1996. . . . . . F-2 F-3
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . F-4 F-5
Consolidated Statement of Stockholders' Equity (Common)
from Inception (January 17, 1986) Through December 31, 1997 . . . F-6 F-11
Consolidated Statement of Stockholders' Equity (Preferred)
from Inception (January 17, 1986) Through December 31, 1997 . . . F-12 F-15
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . F-16 F-17
Notes to the Consolidated Financial Statements . . . . . . . . . . . F-18 F-26
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MedCare Technologies, Inc. and
Subsidiaries
Oak Brook, Illinois 60521
We have audited the accompanying consolidated balance sheet of MedCare
Technologies, Inc. and Subsidiaries (A Development Stage Company), (the
Company), as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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 of the financial statements provides a reasonable
basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
March 2, 1998
F-1
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current Assets
Cash $ 3,440,791 $ 219,775
Accounts Receivable - Trade 47,286 7,351
Prepaid Expenses 63,813 29,117
--------- -------
Total Current Assets 3,551,890 256,243
Property and Equipment
Office Equipment 21,069 5,274
Medical Equipment 29,799 11,953
--------- -------
50,868 17,227
Less Accumulated Depreciation 17,342 7,796
--------- -------
Net Book Value 33,526 9,431
Other Assets
Intangible Assets - The MedCare Program (Note 3) 1,000 1,000
--------- -------
Total Other Assets 1,000 1,000
--------- -------
Total Assets $3,586,416 $ 266,674
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 15,796 $ 19,791
Notes Payable - Related Parties 1,000 25,000
Notes Payable - Officers 0 12,500
---------- ---------
Total Current Liabilities 16,796 57,291
Stockholders' Equity
Preferred Stock: $.25 Par Value, Authorized
1,000,000; Issued and Outstanding, 165
Convertible Series A Shares at December 31,
1997 and None at December 31, 1996 41 0
Common Stock: $0.001 Par Value, Authorized
100,000,000; Issued and Outstanding, 6,992,185
Shares at December 31, 1997 and 6,445,185 at
December 31, 1996 6,992 6,445
Additional Paid In Capital 6,107,314 1,372,631
Loss Accumulated During The Development Stage (2,544,727) (1,169,693)
----------- -----------
Total Stockholders' Equity 3,596,620 209,383
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,586,416 $ 266,674
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
Loss
Accumulated
During The
Year ended Year ended Year ended Development
December December December Stage
31, 1997 31, 1996 31, 1995 (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 91,802 $ 0 $ 0 $ 91,802
Expenses
General and Administrative 1,515,459 452,037 689,713 2,699,236
---------- --------- ---------- ------------
Operating Loss (1,423,657) (452,037) (689,713) (2,607,434)
Other Income (Expense)
Interest Income 119,146 2,801 0 121,947
Loss From Discontinued
Operations (4,489) 0 0 (4,489)
Gain on Sale of Subsidiary 15,770 0 15,770
---------- ------- ------- ----------
Total Other Income (Expense) 130,427 2,801 133,228
---------- ------- ------- ----------
Net Loss $(1,293,230) $(449,236) $(689,713) $(2,474,206)
============ ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995, AND
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
Loss
Accumulated
During The
Year ended Year ended Year ended Development
December December December Stage
31, 1997 31, 1996 31, 1995 (Unaudited)
<S> <C> <C> <C> <C>
Primary Loss Per Common
Share and Common Share
Equivalents
Loss from Continuing
Operations $ (0.19) $ (0.08) $ (0.35) $ (0.43)
Loss from Operations of
Business Segment Disposed
of 0.00 0.00
Gain on Disposal of Business
Segment
Net Loss $ (0.19) $ (0.08) $ (0.35) $ (0.35)
=========== ========== =========== ==========
Number of Weighted Shares
Outstanding - Primary 7,270,185 5,884,019 1,992,294 7,270,185
=========== ========== =========== ==========
Fully Diluted Loss Per
Common Share and Common
Share Equivalents
Loss from Continuing
Operations $ (0.19) $ (0.08) $ (0.35) $ (0.36)
=========== ========== =========== ===========
Loss from Operations of
Business Segment Disposed of 0.00 0.00
Gain on Disposal of Business
Segment 0.01 0.01
----------- ----------
Net Loss $ (0.18) $ (0.08) $ (0.35) $ (0.35)
=========== ========== =========== ===========
Number of Weighted Shares
Outstanding - Fully Diluted 7,024,350 5,884,019 1,992,294 7,024,350
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Balance, January
17, 1986 0 $ 0 $ $ $ 0
Issued to Officers
and Directors at
$.002 per share 2,500,000 2,500 2,500 5,000
Issued Pursuant to
Public Offering
at $.01 3,645,000 3,645 32,805 36,450
Cost of Offering (7,946) (7,946)
Net Loss from
Inception on
January 17, 1986
Through December
31, 1987 (316) (316)
---------- ------- ------- --------- -------
Balance,
December 31, 1987 6,145,000 6,145 27,359 (316) 33,188
Escrow Fee for
Public Offering (200) (200)
Net Loss Year Ended
December 31, 1988 (1,030) (1,030)
--------- ------- ------- --------- -------
Balance,
December 31, 1988 6,145,000 6,145 27,159 (1,346) 31,958
Net Loss Year Ended
December 31, 1989 (21,707) (21,707)
--------- ------- ------- --------- --------
Balance,
December 31, 1989 6,145,000 6,145 27,159 (23,053) 10,251
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Issuance of Stock
in Accordance
with Plan of
Merger with
Multi-Spectrum
Group, Inc.
February 28, 1990 $55,305,000 $ 55,305 $ (55,305) $ $ 0
Net Loss Year Ended
December 31, 1990
- Unaudited (10,201) (10,201)
------------ --------- ---------- --------- ----------
Balance,
December 31, 1990 61,450,000 61,450 (28,146) (33,254) 50
Net Loss Year Ended
December 31, 1991
- Unaudited 0 0
------------ --------- ---------- ---------- ---------
Balance,
December 31, 1991 61,450,000 61,450 (28,146) (33,254) 50
Issued to Group
Five, Inc.
November 13, 1992 8,772,800 8,773 0 8773
Net Loss Year Ended
December 31, 1992
- Unaudited (8,773) (8,773)
----------- ---------- --------- ---------- --------
Balance,
December 31, 1992 70,222,800 70,223 (28,146) (42,027) 50
Net Loss Year Ended
December 31, 1993 0 0
----------- ---------- --------- ---------- --------
Balance,
December 31, 1993 70,222,800 70,223 (28,146) (42,027) 50
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Net Loss Year Ended
December 31, 1994 $ $ $ 0 $ 0
----------- --------- ---------- ---------- ----------
Balance,
December 31, 1994 70,222,800 70,223 (28,146) (42,027) 50
Reverse Split 1200:1,
August 11, 1995 (70,164,281) (70,164) 70,164
Acquisition of
MedCare UI
System Assets
August 4, 1995 2,000,000 2,000 (1,000) 1,000
Issued Pursuant to
a Public Offering
at $.15 Per Share
September 20, 1995 4,200,000 4,200 625,800 630,000
Cost of Offering (30,000) (30,000)
Issued for Cash
at $3.00 Per
Share, December
31, 1995 16,666 17 49,983 50,000
Issued for Services
at $3.00 Per Share,
December 31, 1995 25,000 25 74,975 75,000
Net Loss Year Ended
December 31, 1995 (689,713) (689,713)
---------- -------- -------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 6,300,185 $ 6,301 $ 761,776 $ (731,740) $ 36,337
Issuance of
Common Stock
Under 1995 Stock
Option Plan at
$3.00 Per Share
During 1996 36,000 36 107,964 108,000
Issuance of Common
Stock Under 1996
Stock Option Plan
at $4.50 Per Share
During 1996 3,000 3 13,497 13,500
Issuance of Common
Stock Under Private
Placement at $4.75 Per
Share Dated
June 22, 1996 50,000 50 237,450 237,500
Issuance of Common
Stock Under Private
Placement at $4.50 Per
Share Dated
November 18, 1996 56,000 56 251,944 252,000
Write Off of Excess of
Liabilities over Assets
on Purchase of Manon
Consulting, Ltd. 11,283 11,283
Net Loss Year Ended
December 31, 1996 (449,236) (449,236)
----------- -------- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 6,445,185 $ 6,445 $ 1,372,631 $(1,169,693) $ 209,383
Recovery of Write
Off Of Excess of
Liabilities over
Assets on Sale of
Manon Consulting, Ltd. (11,283) (11,283)
Issuance of Common
Stock Under 1996
Stock Option Plan at
$4.50 Per Share through
December 31, 1997 17,000 17 76,483 76,500
Issuance of Common
Stock Under 1995
Stock Option Plan at
$3.00 Per Share Through
December 31, 1997 54,000 54 161,946 162,000
Issuance of Common
Stock Under a
Private Placement
Dated March 25, 1997 176,000 176 1,099,824 1,100,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Issuance of
Common Stock
Under a Private
Placement Dated
July 7, 1997 300,000 300 1,799,700 1,800,000
Net Loss Year Ended
December 31, 1997 (1,293,230) (1,392,320)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
PREFERRED STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Preferred Stock Paid In Development
Shares Amount Capital Stage Total
(Common and (Common and (Common and
Preferred) Preferred) Preferred)
<S> <C> <C> <C> <C> <C>
Balance, January
17, 1986 0 $ 0 $ $ $ 0
Net Loss from
Inception on
January 17, 1986
Through December
31, 1987 (316) (316)
---------- ------- ------- --------- -------
Balance,
December 31, 1987 0 0 27,359 (316) 33,188
Net Loss Year Ended
December 31, 1988 (1,030) (1,030)
--------- ------- ------- --------- -------
Balance,
December 31, 1988 0 0 27,159 (1,346) 31,958
Net Loss Year Ended
December 31, 1989 (21,707) (21,707)
--------- ------- ------- --------- --------
Balance,
December 31, 1989 0 0 27,159 (23,053) 10,251
Net Loss Year Ended
December 31, 1990
- Unaudited (10,201) (10,201)
--------- -------- --------- ---------- --------
Balance,
December 31, 1990 0 0 (28,146) (33,254) 50
Net Loss Year Ended
December 31, 1991
- Unaudited 0 0
---------- --------- --------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
PREFERRED STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Preferred Stock Paid In Development
Shares Amount Capital Stage Total
(Common and (Common and (Common and
Preferred) Preferred) Preferred)
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1991 0 $ 0 (28,146) (33,254) 50
Net Loss Year Ended
December 31, 1992
- Unaudited 0 0 (8,773) (8,773)
----------- -------- ---------- -------- ----------
Balance,
December 31, 1992 0 0 (28,146) (42,027) 50
Net Loss Year Ended
December 31, 1993 0 0
----------- -------- ---------- -------- ----------
Balance,
December 31, 1993 0 0 (28,146) (42,027) 50
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
PREFERRED STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Common Stock Paid In Development
Shares Amount Capital Stage Total
(Common and (Common and (Common and (Common and (Common and
Preferred) Preferred) Preferred) Preferred) Preferred)
<S> <C> <C> <C> <C> <C>
Net Loss Year Ended
December 31, 1994 $ $ $ 0 $ 0
---------- ---------- ---------- --------- ----------
Balance,
December 31, 1994 0 0 (28,146) (42,027) 50
Net Loss Year Ended
December 31, 1995 (689,713) (689,713)
---------- ---------- ---------- --------- -----------
Balance,
December 31, 1995 0 $ 0 $ 761,776 $ (731,740) $ 36,337
Write Off of Excess
of Liabilities over
Assets on Purchase
of Manon Consulting, Ltd. 11,283 11,283
Net Loss Year Ended
December 31, 1996 (449,236) (449,236)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 1996 0 $ 0 $1,372,631 $(1,169,693) $ 209,383
Recovery of Write
Off Of Excess of
Liabilities over
Assets on Sale of
Manon Consulting, Ltd. (11,283) (11,283)
Issuance of Preferred
Stock Under a
Private Placement
Dated July 8, 1997 165 41 1,649,959 1,650,000
Less cost of
Private Placement (123,750) (123,750)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
PREFERRED STOCK
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Preferred Stock Paid In Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Periodic Imputed
Cost of Preferred
Stock Issued on
July 8, 1997
through December
31, 1997 70,521 (70,521) 0
Net Loss Year Ended
December 31, 1997 (1,293,230) (1,392,320)
</TABLE>
TOTALS
<TABLE>
<CAPTION>
Loss
Accumulated
Additional During the
Preferred Stock Common Stock Paid In Development
Shares Amount Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1997 165 $41 6,992,185 $6,992 $6,107,314 $2,544,727 $3,569,620
=== ==== ========= ===== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
AND FROM (INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
From
Inception
Through
Year ended Year ended Year ended December
December December December 31, 1996
31, 1997 31, 1996 31, 1995 (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net Loss ($1,363,751) $(449,236) $ (689,713) $(2,544,727)
Adjustments to Reconcile
Net Loss to Net Cash
Provided by Operating
Activities
Depreciation and Amortization 9,546 7,733 63 17,342
Common Stock Issued for Services 0 0 75,000 83,773
Net Assets of Manon
Consulting, Ltd (11,281) 0 10,757 0
Changes in Assets and Liabilities
(Increase) Decrease in Accounts
Receivable (39,935) (6,711) (640) (47,286)
(Increase) Decrease in Prepaid
Expenses (34,696) (29,115) 0 (63,813)
(Increase) Decrease in
Organizational Costs 0 50 (57) 0
Increase (Decrease) in Accounts
Payable (3,995) 20,080 291 15,796
Total Adjustments (80,361) (7,963) 85,414 76,333
Net Cash Used by Operating
Activities (1,373,592) (457,199) (604,299) (2,468,394)
Cash Flows from Investing Activities
Purchase of Property and
Equipment (33,642) (15,969) (1,258) (50,869)
Net Cash Flows from Investing
Activities (33,642) (15,969) (1,258) (50,869)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
AND FROM (INCEPTION (JANUARY 17, 1986)
THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
From
Inception
Through
Year ended Year ended Year ended December
December December December 31, 1996
31, 1997 31, 1996 31, 1995 (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from Sale of
Common Stock 3,138,500 611,000 680,000 4,470,950
Proceeds from the Sale of
Preferred Stock 1,650,000 0 0 1,650,000
Offering Costs (123,750) 0 (30,000) (161,896)
Advances (Repayments) Notes
Payable (24,000) 25,000 0 1,000
Advances (Repayements) To
Officers (12,500) 12,500 0 0
Net Cash Provided by Financing
Activities 4,628,250 648,500 650,000 5,960,054
Increase (decrease) in Cash
and Cash Equivalents 3,221,016 175,332 44,443 3,440,791
Cash and Cash Equivalents at
Beginning of Period 219,775 44,443 0 0
Cash and Cash Equivalents at
End of Period $ 3,440,791 $ 219,775 $ 44,443 $ 3,440,791
Supplemental Information
Cash paid for:
Interest $ 0 $ 0 $ 0 $ 0
Income taxes $ 0 $ 0 $ 0 $ 0
Noncash financing
Intangible assets purchased
with Common Stock $ 0 $ 0 $ 1,000 $ 1,000
Common Stock issued
for Services $ 0 $ 0 $ 75,000 $ 83,773
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION
------------
MedCare Technologies, Inc. (The Company), formerly known as Multi-Spectrum
Group, Inc.,was ncorporated under the name Santa Lucia Funding, Inc., under the
laws of the State of Utah on January 17, 1986, with an authorized capital of
50,000,000 common shares with a par value of $.001. On February 8, 1990, the
Company adopted a plan of merger with Multi-Spectrum Group, Inc., a Delaware
Corporation, in which Multi-Spectrum Group, Inc., would be dissolved and the
name of Santa Lucia Funding, Inc., would be changed to Multi-Spectrum Group,
Inc. The Company authorized a reverse split of 1200:1 to be effective August
11, 1995. On August 29, 1995, the Company approved an increase in the
authorized capital to 101,000,000 of which 100,000,000 shares shall be Common
Stock with a par value of $.001 and 1,000,000 shares shall be Preferred Stock
with a par value of $.25 per share, and a name change to MedCare Technologies,
Inc. On August 1, 1996, an agreement and plan of merger was entered into between
the Company and MedCare Technologies, Inc. (A Delaware Corporation) whereby the
state of incorporation was changed to Delaware from the state of Utah. The
effective date of the agreement is August 27, 1996, the date accepted by the
state of Delaware. The Company was inactive during the year 1991, issued stock
for prior years services during 1992, and was inactive during 1993 and 1994.
The Company had no revenues nor incurred any operating expenses during these
inactive periods, other than the transaction during 1992.
On November 13, 1992, the Company issued 8,772,800 shares of common stock to
Group Five, Inc., in exchange for services rendered at $.001 per share or
$8,773.
On August 11, 1995, the Stockholders authorized a reverse split of 1200:1
reducing the outstanding common shares to 58,519.
On August 11, 1995, the Company purchased 100% of the outstanding shares of
Medcare Technologies, Corporation, a Nevada corporation that was incorporated on
April 26, 1995 for $1.00. Medcare Technologies, Corporation was inactive from
the date of incorporation through August 11, 1995, the date the Company
purchased it. Medcare Technologies, Corporation is a wholly owned subsidiary of
the company.
On August 14, 1995, the Company acquired the rights to The MedCare Program, a
urinary incontinence procedure in exchange for 2,000,000 shares of the Company's
common stock at $0.0005, for a total value of $1,000.
On September 20, 1995, the Company authorized in a 504D Disclosure Memorandum,
4,200,000 shares of its common stock at an offering price of $0.15. On
September 20, 1995, the offering was completed with all shares being issued for
a total value of $630,000, less offering costs of $30,000.
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
NOTE 1 - ORGANIZATION (CONTINUED)
------------------------
On October 1, 1995, the Company purchased 100% of the outstanding shares of
Manon Consulting, Ltd. Manon Consulting, Ltd., is a wholly owned subsidiary of
the Company. Manon Consulting, Ltd., operates a clinic in Calgary, Canada.
The following is a condensed balance sheet of Manon Consulting, Ltd. at October
31, 1995:
Total Assets $ 12,558
Total Liabilities 23,841
Total Capital
Common Stock 7
Retained Earnings-A Deficit (11,290)
--------
Total Liabilities and Capital $ 12,558
========
The Company paid $7 for the outstanding common stock and assumed liabilities in
excess of assets of $11,290. The excess was charged to operations during 1995.
On January 1, 1997, the Company sold Manon Consulting, Ltd. and recorded a gain
on the sale of $15,770. See Note 8 - Discontinued Operations.
On December 31, 1995, the Company issued 16,666 shares of its common stock at
$3.00 per share or $50,000 cash.
On December 31, 1995, the Company issued 25,000 shares of its common stock in
exchange for consulting services at $3.00 per share or $75,000.
During 1996, the Company issued 36,000 shares of its common stock at $3.00 per
share under its 1995 Stock Option Plan, or $108,000.
During 1996, the Company issued 3,000 shares of its common stock at $4.50 per
share under its 1996 Stock Option Plan, or $13,500.
On June 22, 1996, the Company issued 50,000 shares of its common stock at $4.75
per share in a 504D private place memorandum or $237,500.
On November 18, 1996, the Company issued 56,000 shares of its common stock at
$4.50 per share a 504D private placement memorandum or $252,000.
The accompanying notes are an integral part of these financial statements.
F-19
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION (CONTINUED)
------------------------
During 1997, the Company issued 17,000 shares of common stock at $4.50 per share
under the 1996 Stock Option Plan or $76,500.
During 1997, the Company issued 54,000 shares of common stock at $3.00 per share
under the 1995 Stock Option Plan or $162,000.
On February 4, 1997, the Company issued 176,000 shares of common stock at $6.25
per share under a private placement memorandum or $1,100,000.
On July 7, 1997, the Company issued 300,000 shares of common stock at $6.00 per
share under a private placement memorandum dated June 20, 1997 or $1,800,000.
On July 8, 1997, the Company issued 165 shares of Preferred Stock - Series A at
$10,000 per share or $1,650,000, less offering costs of $123,750. The Preferred
Stock has conversion features that allow for the conversion into 266,747 common
shares, at a discount range of 10% to 20% from June 20, 1997 through June 20,
1998. Additionally, the Company is recording the periodic imputed cost of the
Preferred Stock - Series A from the date of closing of the offering at 8% per
annum through December 31, 1997.
The Company is a development stage company, as defined in the Financial
Accounting Standards Board No. 7. The Company is devoting substantially all of
its present efforts in securing and establishing a new business, and although
planned principal operations have commenced, substantial revenues have yet to
be realized.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Method of Accounting
--------------------
The Company's financial statements are prepared using the accrual method of
accounting.
B. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash and cash equivalents.
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
C. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Medcare Technologies, Corporation.
Intercompany transactions have been eliminated in consolidation.
D. Purchase Method
---------------
Investments in companies have been included in the financial report using the
equity method of accounting. The Company's wholly owned subsidiary, MedCare
Technologies, Corporation is engaged in the business of medical consulting and
management in the United States.
E. Deferred Charges
----------------
The Company has incurred start up costs from January 1, 1995 through September
30, 1995 amounting to $542,706. The total amount was charged to operations
during the year ended December 31, 1995.
F. Property and Equipment
----------------------
Property and equipment, stated at cost, is depreciated under the straight-line
method over their estimated useful lives as follows:
Office Equipment 3 to 5 years
Medical Equipment 3 to 5 years
Depreciation charged to expense during 1997, 1996, and 1995 was $9,546, $7,733,
and $63 respectively.
G. Income Taxes
------------
There has been no provision for income taxes, because of the losses that the
Company has incurred to date. The Company has net operating losses that will
expire, beginning with the years 2002 through 2012, in the amount of $1,293,230,
$449,236, $689,713 and $42,027 in 1997, 1996, 1995 and prior years,
respectively, unless utilized by the Company.
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
H. Earnings or (Loss) Per Share
----------------------------
Earnings or loss per share is computed based on the weighted average number of
common shares and common share equivalents outstanding. Stock options are
included as common share equivalents using the treasury stock method. The number
of shares used in computing primary earnings (loss) per common share at
December 31, 1997, 1996, and 1995 was 7,270,185, 5,884,019, and 1,992,294,
respectively. The number of shares used in computing fully diluted earnings
(loss) per common share at December 31, 1997, 1996, and 1995 was 7,024,350,
5,884,019, and 1,992,294, respectively.
I. Leases
------
The Company's corporate offices are located at 608 South Washington, Suite 101,
Naperville, Ilinois 60523. These offices are leased for a one year period with
the option to renew for an additional year, at a monthly rate of $1,550 per
month. The Company currently has the use of a second office of approximately
1,500 square feet of office space, the use of one board room and all office
equipment, including a computer, a postage machine, filing cabinets, a
photocopier and telephone equipment. The office space is owned by one of the
Company's directors and the Chairman's wife. The offices are located at Suite
216 - 1628 West 1st Avenue, Vancouver, British Columbia, Canada. The monthly
rent is $2,000 per month. There is an option to renew for an additional year.
J. Medcare Program Sites
---------------------
Program sites are located in Norman, Oklahoma, Winter Park, Florida; Denver,
Colorado; Raleigh, North Carolina and Kankakee, Illinois. New locations to be
opened since December 31, 1997, include Kingwood, Texas; Toledo, Ohio; Lake
Worth, Florida; Coral Springs, Florida; Phoenix, Arizona; Freemont, California;
New York, New York; New Rochelle, New York; Roswell, Georgia; Baltimore,
Maryland; Stanford, Connecticut; West Orange, New Jersey and Clackamas, Oregon.
K. Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
K. Use of Estimates (Continued)
----------------------------
contingent assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were assumed in preparing the
financial statements.
L. Presentation
------------
Certain accounts from prior years have been reclassified to conform with the
current year's presentation.
M. Pending Accounting Pronouncements
---------------------------------
It is anticipated that current pending accounting pronouncements will not have
an adverse impact on the financial statements of the Company.
NOTE 3 - LONG-LIVED ASSETS - THE MEDCARE PROGRAM
---------------------------------------
On August 14, 1995, the Company acquired the rights to The MedCare Program, a
urinary incontinence procedure in exchange for 2,000,000 shares of its common
stock. The transaction was accounted for in accordance with the process for
valuation of intangible assets as described in Statement No. 17 of the
Accounting Principles Board. The Company has continued to further enhance The
MedCare Program for the treatment of urinary incontinence that significantly
reduces or completely eliminates the majority of UI cases using a nondrug,
nonsurgical protocol that takes into account the clinical, cognitive,
functional, and residential status of the patient. The Company intends to
amortize the cost of the system over 15 years, based on Management's estimated
useful life of the protocol, beginning with the first year in which commercial
sales occur. Management reassesses annually the estimated useful life. Such
amortization will result in charges against earnings of $66 per year for each of
the years.
NOTE 4 - NOTES PAYABLE-OFFICERS (RELATED PARTIES TRANSACTIONS)
------------------------------------------------------
An Officer of the Company loaned the Company $1,000, which is due on demand and
with no interest rate currently applicable.
NOTE 5 - STOCK OPTIONS
-------------
The Company has issued stock options to various directors, officers and
employees. The option prices are based on the fair market value of the stock at
the date of the grant. The Company makes no charge to operations in relation to
option grants, unless the options
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - STOCK OPTIONS (CONTINUED)
-------------------------
granted are less than fair market, then a charge to operations would be made
over the vesting period. The Company's stock option transactions for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Number of Option
Shares Price
--------- ------
<S> <C> <C>
Options outstanding and exercisable at
December 31, 1995 500,000 $3.00
Options granted in 1996 300,000 4.50
Options exercised during 1996 under
the 1995 Stock Option Plan (36,000) 3.00
Options exercised during 1996 under
the 1996 Stock Option Plan (3,000) 4.50
-------
Options outstanding and exercisable
at December 31, 1996 761,000
Options granted in 1997 200,000 4.50
Options granted in 1997 300,000 6.50
Options exercised during 1997 under
the 1995 Stock Option Plan (54,000) 3.00
Options exercised during 1997 under
the 1996 Stock Option Plan (17,000) 4.50
--------
Options outstanding and exercisable
at December 31, 1997 1,190,000 $3.00-$6.50
=========
</TABLE>
The Company has authorized the 1998 Stock Option Plan and reserved 500,000
shares of its common stock, of which 290,000 shares will be offered at $6.50 and
the balance of 210,000 shares at a price to be determined, for issuance
thereunder subject to stockholder approval at the next annual meeting.
NOTE 6 - STOCK WARRANTS
--------------
In July, 1997, the Company offered 300,000 shares of common stock at $6.00 each,
along with an additional 300,000 share purchase warrants at $6.00 each, good
until July 7, 2002.
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7 - PREFERRED STOCK - SERIES A
--------------------------
On June 20, 1997, the Company began offering for sale a Regulation D offering
under Rule 506. This offering was for the Series A Preferred Stock of the
Company and was sold for $10,000 per share, in minimum subscription amounts of
at lease ten shares ($100,000) and in increments of five shares in excess
thereof. The total offering was for $3,000,000, with a minimum of $1,650,000.
The offering closed on July 8, 1997 with the minimum offering placed. The
preferred stock was accompanied by warrants to purchase a number of shares of
common stock of the Company equal to 33 1/3% multiplied by the aggregate
purchase price of the Subscriber's preferred stock outstanding on each of nine,
twelve and fifteen months following the closing date of the offering, divided by
the Fixed Conversion Price as herein defined. The Series A Preferred Shareholder
shall be entitled to convert, subject to the Company's right of redemption, if
the conversion price is less than the Fixed Conversion Price at the time of
receipt of a notice of conversion. The conversion price is equal to the lesser
of 115% of the average Closing Bid Price for five trading days ending on June 6,
1997, which is $7.346 (The Fixed Conversion Price) or a discount, ranging from
10% to 20% over a 12 months period beginning July 8, 1997, of the average
Closing Bid Price for five trading days immediately preceding the Date of
Conversion divided into the original purchase price of the preferred stock, plus
an 8% per annum accretion rate equal to the period that has passed since the
closing date. Assuming that all the of the warrants would be exercised, an
additional 266,747 shares of common would be issued.
NOTE 8 - DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT
---------------------------------------------
On January 1, 1997, the Company sold Manon Consulting, LTD at book value. No
revenues or expenses are included in the consolidated financial statements for
the year ended December 31, 1997 and 1996. The statement of operations for the
years ended December 31, 1996 and 1995 have been restated to remove the net
losses of $3,169 and $1,320, respectively. Gross revenues for the years ended
December 31, 1996 and 1995 were $8,118 and $1,729. The Company reported a gain
on the transaction of $15,770.
The following is a condensed balance sheet and statement of operations of Manon
Consulting, LTD, as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Condensed Balance Sheet
Current Assets $ 787 $ 533
Equipment, Net 7,203 11,132
Other Assets 64 138
--------- --------
$ 8,054 $ 11,803
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
NOTE 8 - DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT (CONTINUED)
---------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current Liabilities $ 23,825 $ 24,405
Common Stock 7 7
Deficit (15,778) (12,609)
---------- -----------
$ 8,054 $ 11,803
========== ===========
Revenues $ 8,118 $ 1,729
Expenses 11,287 3,049
---------- -----------
Net Loss $ (3,169) $ (1,320)
========== ===========
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------
On January 5, 1998, 3 shares of preferred stock were converted to 4,851 shares
of common stock at $6.45131 per share.
On January 6, 1998, 3 shares of preferred stock were converted to 4,803 shares
of common stock at $6.51875 per share.
On February 16, 1998, 200,000 warrants to purchase common stock were exercised
at $6 per share, or $1,200,000.
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,440,791
<SECURITIES> 0
<RECEIVABLES> 47,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,551,890
<PP&E> 50,868
<DEPRECIATION> 17,342
<TOTAL-ASSETS> 3,586,416
<CURRENT-LIABILITIES> 16,796
<BONDS> 0
0
41
<COMMON> 6,992
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,586,416
<SALES> 0
<TOTAL-REVENUES> 91,802
<CGS> 0
<TOTAL-COSTS> 1,515,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,423,657)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,293,230)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
