<PAGE>
As filed with the Securities and Exchange Commission on May 7, 1999
Registration No. 333-41611
--------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------
MEDCARE TECHNOLOGIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 87-0429962B 8093
- -------- ----------- ----
(State or other (IRS Employer (Primary Standard Industrial
jurisdiction of Identification Number) Classification Code Number)
incorporation or
organization)
1515 West 22nd Street, Suite 1210
Oak Brook, Illinois 60523
(630) 472-5300
(Address, including zip code, and telephone number,
including area code, registrant's
principal executive offices)
--------------------------
Corporate Creation Enterprises, Inc.
686 North DuPont Boulevard, Suite 302
Milford, Delaware 19963
(302) 424-4866
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
Michael J. Legamaro
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Approximate date of commencement of proposed public offering: This is for the
resale of securities previously sold.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed
class of Amount Maximum Proposed Amount of
Securities to to be Offering Price Maximum Registration
be registered Registered Per Share(1) Offering Price(1) Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 1,500,000 $9.6875 $14,531,250.00 $ 4,541.02
Par Value $0.001, estimate
of shares underlying
conversion of securities issued
in Regulation D offering
in June 1997. Includes
conversion warrants and
placement agent warrants
Common Stock, Par Value 500,000 $9.6875 $ 4,843,750.00 $ 1,513.67
$0.001, underlying
1995 Stock Option Plan
Common Stock, Par Value 300,000 $9.6875 $ 2,906,250.00 $ 908.20
$0.001, underlying
1996 Stock Option Plan
Common Stock, Par Value 500,000 $9.6875 $ 4,843,750.00 $ 1,513.67
$0.001, underlying
1997 Stock Option Plan
Common Stock, Par Value 176,000 $9.6875 $ 1,705,000.00 $ 532.81
$0.001, issued pursuant to
Regulation D on
February 4, 1997
Common Stock, Par Value 600,000 $9.6875 $ 5,812,500.00 $ 1,816.41
$0.001, underlying Warrants
(300,000), and Common Stock
sold in reliance on
Regulation D, July 7, 1997
TOTALS: $34,642,500.00 $10,825.78
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for calculation of the amount of the registration
fee calculated pursuant to Rule 457(c).
2
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Item No. Sections in Prospectus
<S> <C>
1 Front of the Registration Statement and Outside
Front Cover of Prospectus......................................................Cover Page
2 Inside Front and Outside Back Cover Pages of Prospectus........................Front Cover Pages; Table of Contents
3 Summary Information and Risk Factors...........................................Prospectus Summary
4 Use of Proceeds................................................................Use of Proceeds
5 Determination of Offering Price................................................Determination of Offering Price
6 Dilution.......................................................................Dilution
7 Selling Security Holders.......................................................Selling Security Holders
8 Plan of Distribution...........................................................Plan of Distribution
9 LegaL Proceedings..............................................................Legal Proceedings
10 Directors, Executive Officers, Promoters and Control Persons...................Management
11 Security Ownership of Certain Beneficial Owners................................Principal Shareholders
12 Description of Securities......................................................Description of Securities
13 Interest of Named Experts and Counsel..........................................Interest of Named Experts and Counsel
14 Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.....................................................Statement as to Indemnification
15 Organization within Last Five Years............................................Organization
16 Description of Business........................................................Description of Business
17 Management's Discussion and Analysis or Plan of Operations.....................Management's Discussion and Analysis of
Financial Condition and Results of Operations
18 Description of Property........................................................Description of Property
19 Certain Relationships and Related Transactions.................................Certain Transactions
20 Market for Common Equity and Related Stockholder Matters.......................Market for Common Equity and Related
Stockholder Matters
21 Executive Compensation.........................................................Executive Compensation
22 Financial Statements...........................................................Financial Statements
23 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................................Changes In and Disagreements With Accountants
24 Indemnification of Directors and Officers......................................Indemnification of Directors and Officers
25 Other Expenses of Issuance and Distribution....................................Other Expenses of Issuance and Distribution
26 Recent Sales of Unregistered Securities........................................Recent Sales of Unregistered Securities
27 Exhibits.......................................................................Exhibits
28 Undertakings...................................................................Undertakings
</TABLE>
3
<PAGE>
MEDCARE TECHNOLOGIES, INC.
RESALE OF SECURITIES
This offering is being made solely by certain of the shareholders of
Medcare Technologies, Inc. (together with its subsidiaries MedCare Technologies,
Corp. and Medcareonline.com, Inc., the "Company") as listed under the heading
"SELLING SECURITY HOLDERS" for the resale of the following shares of the
Company's common stock, par value $0.001 per share (the "Common Stock"): (i) up
to 1,500,000 shares of Common Stock (the "Conversion Securities") issued or
issuable pursuant to the terms of a sale of securities in June 1997 (the "June
Placement"), which Common Stock has been or will be issued upon various
conversions and warrant exercises, (ii) 1,300,000 shares of Common Stock (the
"Option Securities") issued or issuable pursuant to Stock Option Plans for 1995,
1996 and 1997 (the "Option Plans"), (iii) 176,000 shares of Common Stock issued
in a private placement in February 1997 (the "February Placement"), and (iv)
600,000 shares of Common Stock issued or issuable pursuant to a private
placement of Common Stock and warrants (the "July Warrants") exercisable for
Common Stock in July 1997 (the "July Placement" and, together with the June
Placement and the February Placement, the "Private Placements").
The Conversion Securities are comprised of Common Stock issued or issuable
upon conversion of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock"), Common Stock underlying the conversion warrants described
herein ("Conversion Warrants"), and Common Stock underlying the placement agent
warrants described herein ("Placement Warrants"). The conversions and exercises
must happen prior to shares of Common Stock being issued. The Company is
required by the Registration Rights Agreement signed by the Company in
connection with the June Placement to register 1,500,000 shares of Common Stock
for resale by the holders of Common Stock issued or issuable upon conversion of
the Preferred Stock and exercise of the Conversion Warrants and Placement
Warrants. The number of shares that will actually be issued may be more or less
than the 1,500,000 shares being offered pursuant to this Prospectus, because the
conversion of the Preferred Stock into Common Stock is based on a formula that
is dependent upon the Company's share price. See "PROSPECTUS SUMMARY--THE
OFFERING--SECURITIES TO BE OFFERED" and "SELLING SECURITY HOLDERS."
The Preferred Stock, Conversion Warrants, Placement Warrants, Option
Securities, February Common and July Common and Warrants (collectively, the
"Securities") were each offered separately and are separately transferable (upon
certain conditions, including compliance with applicable federal and state
securities laws) at any time from the dates of the agreements through which they
were issued. The Securities have been previously issued and sold in reliance on
certain exemptions from registration. The registration statement to which this
Prospectus relates covers the resale of the Common Stock issued or issuable
pursuant to the Option Plans and the Private Placements. All Selling Security
Holders may sell their stock at the then-market price or at a price greater or
less than market price, which may affect the market for the Company's Common
Stock. The Selling Security Holders and brokers involved in the resales may be
deemed to be underwriters under the Securities Act of 1933, as amended. The
Company will receive payments upon exercise of warrants and options and has
received payments for the Common Stock and other securities sold in the Private
Placements, but will not receive any additional proceeds from the resale of
Common Stock by the Selling Security Holders or for any warrants converted into
Common Stock via cashless exercise. See "RISK FACTORS," "DETERMINATION OF
OFFERING PRICE" and "DESCRIPTION OF SECURITIES."
Since July 20, 1998, the Company's Common Stock has been listed on The
Nasdaq SmallCap Market under the symbol MCAR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Price to Public Proceeds to Company
Total N/A N/A
The securities offered hereby are offered for resale only by the Selling
Security Holders. The Company will not receive any proceeds from the sale of
the securities being offered hereby.
The date of this Prospectus is May 7, 1999
4
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH ANY OFFER
CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OR AN OFFER OF THE SHARES IN ANY JURISDICTION WHERE SUCH OFFER WOULD
BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy statements and other information filed by the
Company with the Commission can be inspected at Room 1024 of the office of the
Commission, 450 Fifth Street N.W., Washington, D.C. 20549, or at its Regional
Offices located at Suite 1300, 7 World Trade Center, New York, New York 10048,
and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material can be obtained at prescribed rates
by writing to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Electronic filing made through the
Electronic Data Gathering Analysis and Retrieval System are also publicly
available through the Commission's Web site (http://www.sec.gov).
Investors are cautioned that this prospectus contains certain trend
analysis and other forward-looking statements that involve risks and
uncertainties. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward looking statements. These
statements are based on current expectations and projections about the
healthcare industry and assumptions made by management and are not guarantees of
future performance. Therefore, actual events and results may differ materially
from those expressed or forecasted in the forward looking statements due to
factors such as the effect of changing economic conditions, material changes in
currency exchange rates, conditions in the overall healthcare market, risks
associated with product demand and market acceptance risks, the impact of
competitive products and pricing, delays in new product development and
technological risks and other risk factors identified in the Company's filings
with the Commission, including the Company's Form 10-KSB Report.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
The Company
The Company manages urinary incontinence clinics throughout the United
States utilizing a proprietary biofeedback-based protocol known as the MedCare
Program. The Company's executive offices are located at 1515 West 22nd Avenue,
Suite 1210, Oak Brook, Illinois, 60521. Its telephone number is (630) 472-5300.
The Offering
Securities to be Offered
This offering is being made solely by the Selling Security Holders for the
resale of the following shares of the Common Stock: (i) up to 1,500,000 shares
of Common Stock issued or issuable pursuant to the terms of the June Placement,
which Common Stock has been or will be issued upon various conversions and
warrant exercises, (ii) 1,300,000 shares of Common Stock issued or issuable
pursuant to the Option Plans, (iii) 176,000 shares of Common Stock issued in the
February Placement, and (iv) 600,000 shares of Common Stock issued or issuable
pursuant to the July Placement.
The Conversion Securities are comprised of Common Stock issued or issuable
upon conversion of the Preferred Stock, Common Stock underlying the Conversion
Warrants, and Common Stock underlying the Placement Warrants. The conversions
and exercises must happen prior to shares of Common Stock being issued. The
Company is required by the Registration Rights Agreement signed by the Company
in connection with the June Placement to register 1,500,000 shares of Common
Stock for resale by the holders of Common Stock issued or issuable upon
conversion of the Preferred Stock and exercise of the Conversion Warrants and
Placement Warrants. The number of shares that will actually be issued may be
more or less than the 1,500,000 shares being offered pursuant to this
Prospectus, because the conversion of the Preferred Stock into Common Stock is
based on a formula that is dependent upon the Company's share price. See
"SELLING SECURITY HOLDERS" and "DESCRIPTION OF SECURITIES."
The Conversion Warrants and Placement Warrants have a fixed exercise price
of $7.346. As of April 30, 1999, there were 187,855 Conversion Warrants and
9,052 Placement Warrants outstanding (see "SELLING SECURITY HOLDERS"). The
outstanding shares of Preferred Stock are the only securities relating to this
offering that have a conversion price that is based on a formula dependent upon
the Company's Common Stock price at the date of conversion. As of April 30,
1999, there were 50 shares of Preferred Stock outstanding. If all 50 shares were
converted based on the maximum conversion price of $7.346 per share, it would
result in 68,064 shares of Common Stock being issued (see "SELLING SECURITY
HOLDERS", and "EFFECT OF MARKET PRICE ON SHARES ISSUED FROM PREFERRED STOCK
CONVERSIONS"). If the Company's Common Stock price decreases, the number of
shares of Common Stock that would be required to be issued upon conversion of
the shares of Preferred Stock would increase. The number of Conversion Shares
covered by this Prospectus was determined in order to provide adequate reserve
to cover any realistic increase in the number of shares required.
Offering Price
All shares of Common Stock offered hereby were originally issued or are
issuable under the terms of their individual offerings. This Prospectus relates
only to the resale of those shares of Common Stock, and the offering price will
be determined on an individual basis by the Selling Security Holders. See
"DETERMINATION OF OFFERING PRICE" and "PLAN OF DISTRIBUTION."
Shares of Common Stock Outstanding
As of April 30, 1999, there were 7,831,105 outstanding shares of Common
Stock. The outstanding shares includes the 176,000 shares of Common Stock issued
in the February Placement, 300,000 shares of Common Stock issued in the July
Placement and 200,000 shares of Common Stock issued upon the exercise of
warrants issued in the July Placement. This registration will result in up to
2,455,364 additional shares of the Company's Common Stock being introduced to
the market as detailed below:
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
June Placement shares to be registered 1,500,000
1995 employee stock option plan 500,000
1996 employee stock option plan 300,000
1997 employee stock option plan 500,000
Warrants exercisable pursuant to February Placement 300,000
Less: options/warrants converted as of April 30, 1999 (644,636)
---------
Total 2,455,364
</TABLE>
If all options, warrants and other instruments are exercised as detailed in this
Prospectus, there will be 10,286,469 shares of Common Stock outstanding. See
"SELLING SECURITY HOLDERS" and "DESCRIPTION OF SECURITIES."
In addition to the above, there are securities, options and warrants
outstanding that are not subject to this registration statement that would
result in an additional 1,222,344 shares of the Company's Common Stock being
brought to the market as detailed below :
<TABLE>
<CAPTION>
<S> <C>
Additional Employee Options 911,000
Concordia Partners L.P. new preferred stock warrants 11,344
Lyons Capital private placement dated 11/6/98 300,000
---------
Total 1,222,344
</TABLE>
In total, if all the securities, options, warrants and employee stock options,
including those not subject to the registration statement of which this
Prospectus forms a part, were to be exercised, it would result in 11,508,813
shares outstanding. See "DESCRIPTION OF SECURITIES."
Use of Proceeds
The Company will not receive any proceeds from the resale by the Selling
Security Holders of the Common Stock being offered hereby.
Risk Factors
Investment in the Company involves certain general business risks and risks
specifically inherent in the medical industry and to the Company. As detailed
elsewhere, this is a company subject to federal and state regulation. Conversion
of preferred stock and exercise of related warrants may obligate the Company to
issue more shares than the number to be registered. In theory, there is no limit
to the number that would be required, should the share price fall substantially
below historical levels; this may have a negative effect on the market price of
the shares of Common Stock. This Prospectus relates to the resale of up to
3,576,000 shares of Common Stock of the Company. Past investors received the
protection of regulations regarding restricted securities and the inability of
the holder to freely trade those securities. These shares of Common Stock now
will be freely tradable, which may cause a negative impact on the market for the
Common Stock See "RISK FACTORS."
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth the summary financial information and other
equity information of the Company. The summary financial information in the
tables is derived from the financial statements of the Company and should be
read in conjunction with the financial statements, related notes and other
financial information included herein. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "FINANCIAL STATEMENTS."
Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
------------ ------------ ----------
<S> <C> <C> <C>
Revenues $ 786,586 $ 91,802 $ 0
General and Administrative Expenses 4,689,400 1,515,459 452,037
------------ ------------ ----------
Operating Loss (3,902,814) (1,423,657) (452,037)
Other Income (Expense)
Interest Income 162,109 119,146 2,801
Loss From Discontinued Operations 0 (4,489) 0
Gain on Sale of Subsidiary 0 15,770 0
------------ ------------ ----------
Total Other Income (Expense) 162,109 130,427 2,801
------------ ------------ ----------
Net Loss (3,740,705) (1,293,230) (449,236)
Less: Preferred Deemed Dividends (29,248) (247,712) 0
------------ ------------ ----------
New Loss Available to Common Stockholders ($3,769,953) ($1,540,942) ($449,236)
Earnings Per Common Share & Common Share Equivalents ($0.52) ($0.21) ($0.08)
Weighted Number of Common Shares Outstanding 7,302,387 7,270,185 5,884,019
</TABLE>
8
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------------- -----------------
Current Assets
- --------------
<S> <C> <C>
Cash $ 2,826,086 $ 3,440,791
Accounts Receivable, net of Allowance for Doubtful Accounts of
$45,165 and $0 271,240 67,530
Prepaid Expenses 0 43,569
----------------- -----------------
Total Current Assets 3,097,326 3,551,890
Property and Equipment, Net (Note 3) 283,630 33,526
Intangible Assets-the MedCare Program, net of
Accumulated Amortization of $68 and $0 932 1,000
----------------- -----------------
Total Assets $ 3,381,888 $ 3,586,416
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Accounts Payable and Other Accrued Liabilities $ 469,743 $ 15,796
Notes Payable - Related Parties 0 1,000
----------------- -----------------
Total Current Liabilities 469,743 16,796
Stockholders' Equity
- --------------------
Preferred Stock $.25 Par Value, Authorized 1,000,000; Issued
and outstanding, 50 and 165 Convertible Series A
at December 31, 1998 and 1997 12 41
Common Stock - $0.001 Par Value Authorized 100,000,000; Issued
and Outstanding, 7,825,105 and 6,992,185 Shares at
December 31, 1998 and 1997 7,825 6,992
Additional Paid in Capital 9,396,179 6,284,505
Retained Earnings (6,491,871) (2,721,918)
----------------- -----------------
Total Stockholders' Equity 2,912,145 3,569,620
----------------- -----------------
Total Liabilities and Equity $ 3,381,888 $ 3,586,416
================= =================
</TABLE>
9
<PAGE>
RISK FACTORS
The securities being offered hereby are speculative and involve a high
degree of risk of loss of part or all of the investment. Exercise of the
options, warrants and other conversions of the Securities could result in
variations in the market price for the Common Stock of the Company. This
variation in the market price of the Common Stock may have negative effects on
all holders of Common Stock. Resale of the Common Stock offered hereby may cause
market volatility that the Company cannot predict.
No Market Studies
In formulating its business plan, the Company has relied on the judgment of
its officers, directors and consultants. No formal independent market studies
concerning the demand for the Company's proposed services have been conducted,
nor are any planned. The effect of the resale of the Common Stock offered hereby
has not been analyzed for its effect on the operations of the Company, the
ability of the Company to obtain funds or financing or the variations in share
price due to additional shares being available for resale.
Lack of Operating History
Although the Company was organized in 1986, it did not become active until
1995 and has been continually developing its MedCare Program since that time.
Since the Company has not proven the essential elements of profitable
operations, investors bear the risk of complete loss of their investment in the
event the Company's business plan is unsuccessful. In addition, the business
model for Medcareonline.com is evolving and relies substantially upon the sale
of products and advertising on the internet, which is a developing industry. The
Company has only limited experience in managing the clinics and internet
business and is expanding its operations, which may or may not provide profits
to the Company. The Company had no revenues in 1995 or 1996 and $91,802 in 1997.
In 1998, the Company had revenues of $786,586. The Company has also not been
profitable, having an accumulated loss of $2,721,918 in 1997, which increased to
an accumulated loss of $6,491,871 in 1998. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "FINANCIAL
STATEMENTS."
The Company's business must be considered in light of the risks, expenses
and problems frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets. The
Company may not be able to succeed in addressing such risks.
Resale of Securities May Negatively Affect Funding Attempts
The resale of the Common Stock offered hereby may cause difficulty in the
Company obtaining funding, which may impede the operations in a negative way. In
addition, there are securities, options and warrants outstanding that are not
offered pursuant to this Prospectus. See "SHARES OF COMMON STOCK OUTSTANDING"
for a summary of all stock outstanding. In total, if all the securities,
options, warrants and employee stock options, including those not subject to
this Prospectus were to be exercised, it would result in 11,508,813 shares
outstanding. This will have the effect of causing a dilution of the price of the
Common Stock. The shares being offered may cause the Company to receive funds as
a result of the exercise of the options and warrants at a price less than the
current market price of the Common Stock. This will result in downward pressure
on the price of the Common Stock. If the price of the Common Stock is reduced,
some potential financiers will either wait to see what effect the shares will
have on the market or offer funding at rates unacceptable to the Company. See
"DESCRIPTION OF SECURITIES--SHARES ELIGIBLE FOR FUTURE SALE."
Continued Control by Existing Management
The Company's management currently owns a substantial stake in the
Company's outstanding Common Stock. Many of the shares of Common Stock will be
issued as a result of the exercise of the Options, Warrants and other
instruments and will provide that management will obtain additional shares of
the Common Stock of the Company. Accordingly, new shareholders will lack an
effective vote with respect to the election of directors and other corporate
matters. See "PRINCIPAL SHAREHOLDERS."
10
<PAGE>
Dividends
The Company's Board of Directors presently intends to cause the Company to
follow a policy of retaining earnings, if any, for the purpose of increasing the
net worth and reserves of the Company. Therefore, there can be no assurance that
any holder of Common Stock will receive any cash, stock or other dividends on
his shares of Common Stock. Future dividends on Common Stock, if any, will
depend on future earnings, financing requirements and other factors. Since the
time of inception the Company has paid no dividends to shareholders.
Dependence on Executive Officers
The Company is highly dependent on the services of its officers. Attracting
and retaining qualified personnel is critical to the Company's business plan. No
assurances can be given that the Company will be able to retain or attract such
qualified personnel or agents, or to implement its business plan successfully.
Should the Company be unable to attract and retain the qualified personnel
necessary, the ability of the Company to implement its business plan
successfully would be limited.
Dilution to Shareholders
The securities currently held by investors will be subject to dilution in
market value as more securities are available for trading. As detailed elsewhere
in this Prospectus (see "DILUTION"), if all of the securities, options, warrants
and employee stock options, including those not subject to this Prospectus, were
to be exercised, it would result in 11,508,813 shares of Common Stock
outstanding, as opposed to a total of 7,831,105 shares of Common Stock
outstanding as of [April 30], 1999. Even though not all of these shares will be
free trading, all of them may cause the market price of the shares of Common
Stock of the Company to decrease.
Nasdaq Eligibility and Maintenance
Under the current rules for initial Nasdaq SmallCap Market listing, a
company must have at least $4,000,000 in total assets, at least $2,000,000 in
stockholders' equity, and a minimum bid price of $3.00 per share. For continued
listing, a company must maintain at least $2,000,000 in total assets, at least
$1,000,000 in stockholders' equity and a minimum bid price of $1.00 per share.
The Company's Nasdaq SmallCap Market application was accepted on July 15, 1998
and the Company's Common Stock became listed on that market on July 20, 1998. If
the Company should experience losses from operations, it may be unable to
maintain the standards for continued listing and the listed securities could be
subject to delisting from Nasdaq Small Cap Market trading. Trading in the
Company's Common Stock would thereafter be conducted in the over-the-counter
market on an electronic bulletin board established for securities that do not
meet the listing requirements or in what are commonly referred to as the "pink
sheets." As a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, the Company's Common Stock.
Risk of Low Priced Stocks
If the Company's Common Stock were delisted from the Nasdaq SmallCap Market
and no other exclusion from the definition of a "penny stock" under applicable
Commission regulations were available, the Common Stock would be subject to the
penny stock rules that impose additional sales practice requirements on broker-
dealers who sell such securities to persons other than established customers and
accredited investors (generally defined as investors with net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase and must have received the
purchaser's written consent to the transaction prior to sale.
Adverse Effect of Shares Eligible for Future Sale
Substantially all of the outstanding shares of Common Stock of the Company
are freely tradable, without restriction or registration under the Securities
Act (other than the sale volume restrictions of Rule 144 applicable to shares
held beneficially by persons who may be deemed to be affiliates of the Company).
The Company's directors, officers and family members of the officers and
directors are under no lockup letters or other form of restriction on the sale
of their securities. As a result of this offering an additional 2,455,364 shares
will be available for sale by the affiliates and other persons. This is an
estimate of the probable number of shares to be resold. Any sale of these
securities could have a
11
<PAGE>
detrimental effect on existing shareholders. See "DESCRIPTION OF SECURITIES--
SHARES ELIGIBLE FOR FUTURE SALE."
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. 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
proprietary aspects of the Company'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 its high quality clinical outcomes and
service, continued business development and marketing skills. See "DESCRIPTION
OF BUSINESS--INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS."
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
parties, 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 many third party payers, there can be
no assurances that such coverage will remain in effect in the future.
Regulation by Federal and State Government
The business of the Company is heavily regulated at a federal and state
level. Legislation relating to the manner in which patients receive treatment is
being enacted on a continuous basis. This legislation may have a negative effect
on the way the Company does business in ways that cannot be predicted by the
Company. This poses a serious risk to the viability of the programs of the
Company and whether or not the Company can do business in the future. Should
legislation be enacted negative to the programs of the Company it could cause
the business of the Company to terminate. See "DESCRIPTION OF BUSINESS--
GOVERNMENT REGULATION ISSUES CONCERNING THE PROGRAM MANAGEMENT AGREEMENT."
Potential Fluctuations in Quarterly Results
The Company's operating results have varied on a quarterly basis during its
limited operating history, and the Company expects to experience significant
fluctuation in future quarterly operating results. Such fluctuations have been
and may in the future be caused by numerous factors, many of which are outside
of the Company's control. The Company believes that period to period comparisons
of its results of operations will not necessarily be meaningful and should not
be relied upon as an indication of future performance. Also, it is likely that
in some future quarter or quarters, the Company's operating results will be
below the expectations of public market analysts and investors. In such an
event, the price of the Company's Common Stock would be materially and adversely
affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "FINANCIAL STATEMENTS."
Medcareonline.com
Medcareonline.com will operate in a new and rapidly evolving market.
Medcareonline.com's business may be adversely affected if usage of the internet
or other online services does not continue to grow. The internet as an
advertising medium has not been available for a sufficient period of time to
gauge its effectiveness as compared with traditional advertising media.
Therefore, the internet is an unproven medium for advertising-supported
services. Accordingly, Medcareonline.com's future operating results will depend
substantially upon the increased use of the internet for information,
publication, distribution and commerce and the emergence of the internet as an
12
<PAGE>
effective advertising medium. Medcareonline.com's ability to generate
significant advertising revenues will also depend on, among other things, the
development of a large base of users of Medcareonline.com's services possessing
demographic characteristics attractive to advertisers, the ability of
Medcareonline.com to accurately measure its user base and the ability of
Medcareonline.com to develop or acquire effective advertising delivery and
measurement systems. Many of Medcareonline.com's potential advertisers have only
limited experience with the internet as an advertising medium, have not yet
devoted a significant portion of their advertising expenditures to internet
based advertising, and may not find advertising to be effective for promoting
their products and services relative to traditional print and broadcast media.
The adoption of internet advertising, particularly by those entities that have
historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business and exchanging information.
Entities that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. The market for internet advertising may not
continue to emerge or become sustainable. If the market fails to develop or
develops more slowly than expected, Medcareonline.com's business may be
materially and adversely affected. No standards have been widely accepted for
the measurement of the effectiveness of internet based advertising and there can
be no assurance that such standards will develop sufficiently to support the
internet as an effective advertising medium. In addition, there is intense
competition in the sale of advertising on the internet, resulting in a wide
range of rates quoted and a variety of pricing models. This makes it difficult
to project future levels of revenues and rates. As a result of these risks,
Medcareonline.com may not succeed in generating significant future advertising
revenues from internet based advertising. The failure to do so may have a
material adverse affect on the Company's business.
In addition, Medcareonline.com will be dependent on its ability to generate
a high volume of traffic to its website. Accordingly, the performance of the
website is critical to MedCare's reputation, its ability to attract advertisers,
and to achieve market acceptance of Medcareonline.com. Any system failure that
causes interruptions in the availability or that increases response time of
Medcareonline.com's services could reduce user satisfaction and traffic to the
website, and if sustained or repeated, would reduce the attractiveness of
Medcareonline.com to advertisers and consumers. See "DESCRIPTION OF BUSINESS--
MEDCAREONLINE.COM."
EFFECT OF MARKET PRICE ON SHARES ISSUED FROM PREFERRED STOCK CONVERSIONS
Under the conversion formula, a varying number of shares of Common Stock
could be issued upon conversion of the Preferred Stock, depending upon the price
of the Common Stock at the time of the conversion. As of April 30, 1999, there
were 50 shares of Preferred Stock outstanding that are subject to this
conversion formula. The formula ([(.08)(N/365)(10,000)+10,000] / Conversion
Price, where N is the number of days from the closing date, July 8, 1997)
provides that the number of shares of Common Stock issuable for one share of
Preferred Stock varies and is dependent upon the Conversion Price (as defined).
The formula for the Conversion Price provides it will be the lesser of $7.346,
which is 115 percent of the average closing bid price for the five trading days
ending June 6, 1997, or 80 to 90% of the average bid price for the five trading
days preceding the conversion. See "SELLING SECURITY HOLDERS" and "DESCRIPTION
OF SECURITIES--PREFERRED STOCK."
The following table indicates various amounts of Common Stock that would be
issued assuming 80 to 90% of the average bid price for the five days preceding
the conversion. The first column is a listing of the possible share price of the
Common Stock. In the second column, X% is to indicate the percentage, highest
and lowest, that could be applied to the conversion price as indicated in the
equation. The number of shares of Common Stock resulting from the application
of the formula ((.08) (N/365) (10,000) + 10,000)/Conversion Price) is detailed
in the third column. The fourth column assumes all warrants and options are
exercised and 50 shares of Preferred Stock are converted, resulting in a
calculation based upon the following formula: [third column x 50].
13
<PAGE>
<TABLE>
<CAPTION>
Avg Bid No of Shares Total Common
Price X% of Common Assume all exercised
- ------- -- ------------ --------------------
<S> <C> <C> <C>
1 80 13,500 675,000
1 90 12,000 600,000
3 80 4,500 225,000
3 90 4,000 200,000
3.75 80 3,600 180,000
3.75 90 3,200 160,000
5 80 2,700 135,000
5 90 2,400 120,000
6 80 2,317 115,850
6 90 2,060 103,000
7 80 1,929 96,450
7 90 1,714 85,700
</TABLE>
As of April 30, 1999, 190 shares of Preferred Stock had been issued and,
of that number, 140 shares had been converted into Common Stock. The 140 shares
were converted into common stock using the above formula at the time of their
conversion and resulted in the issuance of 272,646 shares of Common Stock. The
remaining 50 shares of Preferred Stock outstanding are owned by Concordia
Partners. See "SELLING SECURITY HOLDERS."
The Common Stock of the Company has a price range as indicated below under
"Price Range of Common Stock." The price has not been below $3.75 since 1995.
The risk is that, if the share price is below $7.346, additional shares may be
required under the terms of the conversion, as indicated in the table. In
theory, there is no limit to the number of shares that would have to be issued
should the price fall substantially below historical levels; moreover, if the
selling security holders sell their shares at below-market price, this may
result in a decline in the market price of the Company's Common Stock.
Management believes, however, that the registration of 1,500,000 shares provides
enough overallotment shares in the event of falling share price. As indicated in
the table, the share price would have to go below $1.00 before the number of
shares registered would have to be increased beyond that number. The lowest
price of the Common Stock during the most recent quarter (Q1 1998) was $5.25.
Should the price decline, management has the ability to redeem these shares, and
it is anticipated that management would exercise that right should the share
price fall so precipitously. See "SELLING SECURITY HOLDERS" and "DESCRIPTION OF
SECURITIES--PREFERRED STOCK."
Price Range of Common Stock
The following table sets forth for the periods indicated the high and low
closing prices for the Common Stock of the Company in transactions on the OTC
Bulletin Board and Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
First Quarter 1996 $ 4.785 $4.25
Second Quarter 1996 $ 5.625 $4.75
Third Quarter 1996 $ 5.625 $4.75
Fourth Quarter 1996 $ 5.125 $4.375
First Quarter 1997 $ 8.25 $6.75
Second Quarter 1997 $ 8.0625 $6.25
Third Quarter 1997 $ 9.25 $6.875
Fourth Quarter 1997 $ 8.125 $7.625
First Quarter 1998 $ 9.375 $7.375
Second Quarter 1998 $11.25 $9.00
</TABLE>
14
<PAGE>
Third Quarter 1998 $ 9.31 $ 6.00
Fourth Quarter 1998 $7.4375 $4.875
First Quarter 1999 $ 8.25 $ 5.25
CAPITALIZATION
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Current Liabilities
- -------------------
Accounts Payable and Other Accrued Liabilities $ 469,743 $ 15,796
Notes Payable - Related Parties 0 1,000
--------------- ---------------
Total Current Liabilities 469,743 16,796
Stockholders' Equity
- --------------------
Preferred Stock $.25 Par Value, Authorized 1,000,000; Issued
and outstanding, 50 and 165 Convertible Series A
at December 31, 1998 and 1997 12 41
Common Stock - $0.001 Par Value Authorized 100,000,000; Issued
and Outstanding, 7,825,105 and 6,992,185 Shares at
December 31, 1998 and 1997 7,825 6,992
Additional Paid in Capital 9,396,179 6,284,505
Retained Earnings (6,491,871) (2,721,918)
--------------- ---------------
Total Stockholders' Equity 2,912,145 3,569,620
--------------- ---------------
Total Liabilities and Equity $ 3,381,888 $ 3,586,416
=============== ===============
</TABLE>
USE OF PROCEEDS
This Prospectus relates to the resale of issued shares of Common Stock
only. The Company will not receive any proceeds from the sale of the Selling
Security Holders' Common Stock. The uses of proceeds obtained from the
offerings of the securities to which these shares of Common Stock relate are
disclosed in "DESCRIPTION OF BUSINESS." The Company will receive proceeds from
the exercise of warrants and stock options as discussed elsewhere in this
Prospectus. The use of those proceeds has been detailed in each of their
offering memoranda.
DETERMINATION OF OFFERING PRICE
Because this Prospectus relates to resale of issued shares of Common Stock
only, there was no determination of offering price. The manner in which the
offering prices for the offerings, warrants and options to which these shares of
Common Stock relate have been previously disclosed under the terms of each of
the offerings, warrants and options.
DILUTION
This Prospectus relates to the resale of certain shares of Common Stock.
As of April 30, 1999, there were 7,831,105 outstanding shares of Common Stock.
If all options, warrants and other instruments are exercised as detailed in this
Prospectus, there will be 10,286,469 shares of Common Stock outstanding. In
addition, there are securities, options
15
<PAGE>
and warrants outstanding that are not covered by this Prospectus that would
result in an additional 1,222,344 shares of the Company's Common Stock being
brought to the market. In total, if all the securities, options, warrants and
employee stock options, including those not covered by this Prospectus, were to
be exercised, it would result in 11,508,813 shares of Common Stock outstanding.
See "SHARES OF COMMON STOCK OUTSTANDING" for the detail regarding the
outstanding stock, warrants and options. The introduction of additional shares
to the market could have a detrimental effect on the price of the shares.
SELLING SECURITY HOLDERS
The June Placement
In connection with the June Placement, 165 shares of Preferred Stock were
sold, and, as detailed below, an additional 25 shares were sold in 1998 pursuant
to Preferred Warrants issued in connection with the June Placement. The formula
for the conversion of Preferred Stock provides a method for determining the
number of shares of Common Stock to be issued upon conversion of shares of
Preferred Stock. The formula is (.08), multiplied by the number of days since
the closing, divided by 365, multiplied by 10,000, plus 10,000 divided by the
conversion price equals the number of shares of common stock provided for each
preferred share purchased. The conversion price is the lower of $7.346 or a
price based on the number of months between the last closing and the date of
conversion multiplied by the closing bid price of the Company's Common Stock for
five days preceding the conversion, reduced 10% to 20%, depending on the number
of months between the last closing and the date of conversion. The 12 month
range for the closing bid price of the Common Stock from January 6, 1998 to
December 31, 1998 was $4.875 to $9.375. For most of this period, the price was
in excess of the minimum price of $7.346, therefore the minimum price is used in
the calculations. Of the total of 165 shares of Preferred Stock sold in the June
1997 offering, 140 shares (as of April 30, 1999) have been converted into Common
Stock using the above formula, resulting in the issuance of 272,646 shares of
Common Stock.
In addition to the issuance of the shares of Preferred Stock described
above, in connection with the June Placement, the Company issued nine, twelve
and fifteen month warrants that could be exercised for an additional 224,610
shares of Common Stock at a fixed price of $7.346 per share. Of the original
224,610 warrants issued, 36,755 were forfeited upon the early conversion of
Preferred Stock, and all of the other warrants have not been exercised and
remain outstanding. In addition, pursuant to a Placement Agent Agreement between
the Company and Swartz Investments, LLC, a Georgia limited liability company, as
placement agent (the "Placement Agent"), the Company issued to the Placement
Agent and certain of its affiliates Placement Warrants to purchase 33,692 shares
of Common Stock. As of April 30, 1999, all but 6,500 had been exercised. The
Placement Warrants were exercised using a cashless exercise option and resulted
in the issuance of 8,990 shares of Common Stock. In addition to the Placement
Warrants issued in connection with the June Placement, in November 1998 the
Placement Agent and its affiliates received an additional 2,552 warrants to
purchase Common Stock at an exercise price of $7.346 per share, which warrants
were issued in connection with the purchase by Concordia Partners of an
additional 25 shares of Preferred Stock, as described below. None of the
additional 2,552 warrants have exercised, and all such warrants expire on
December 11, 2003.
Finally, the investors in the June Placement received preferred stock
warrants (the "Preferred Warrants") that allowed the investors in the Preferred
Stock to purchase the same number of shares of Preferred Stock (that is 165
shares) one year after the original transaction. If the Preferred Warrants were
exercised, the investors would receive all of the same conversion warrants and
rights that were associated with the original issuance. Essentially, the
Preferred Warrants gave the investors the option of forcing the Company to
complete the same deal one year after the original deal. There are currently no
Preferred Warrants outstanding as they were all exercised in July 1998 (as
described below).
The Registration Rights Agreement entered into by the Company at the time
of the private placement provides that 1,500,000 shares of Common Stock are to
be registered for resale. This amount is in excess of the 546,607 calculated
above, but is required as part of the Registration Rights Agreement and to
provide excess shares in the event of change in the underlying assumptions due
to revisions to the warrant agreements (even though no such revisions are
planned or expected by the Company), or in the event of changes in the share
price. In addition, the additional shares are for overage allowance in the event
the share price drops below $7.346 on the date of conversion of the Preferred
Stock.
In July 1998, the investors exercised their Preferred Warrants described
above and were issued another 165 shares of Preferred Stock ("New Preferred
Stock") in exchange for $1,650,000. The Company, however, did not have the
registration statement effective as of that date so an escrow agreement was
entered into between the Company and the
16
<PAGE>
investors. The escrow agreement placed the $1,650,000 as well as the New
Preferred Stock into escrow pending the effectiveness of the registration
statement. The escrow agreement required the registration statement to be
effective by November 20,1998. Additionally, Queensway Financial Holdings
Limited was given $180,000 by the Company under the terms of its original
Agreement with the Company, due to the late filing of the registration
statement. Since the Registration Statement did not become effective as of
November 20, 1998, Queensway, Lakeshore, and Matthew Fund withdrew their
proceeds ($1,400,000) and forfeited their New Preferred Stock (140 shares) and
related warrants. Concordia Partners is the only investor of the original four
investors who agreed to release its investment ($250,000) to the Company.
Concordia Partners received 25 shares of New Preferred Stock and 11,344 warrants
exercisable three months after their issuance date at an exercise price of
$7.346 per share. The 11,344 warrants (and the Common Stock underlying such
warrants) are unregistered and are not included in this offering.
The following table is a summary of the activity described in the preceding
paragraphs:
<TABLE>
<CAPTION>
Preferred Placement Total
Shareholder Agent Common Common
Preferred Conversion Conversion Stock Stock
Stock Warrants Warrants Issued Equivalent
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Securities Issued 190 224,610 36,244 N/A
Preferred Stock Converted
into Common Stock (140) 272,646
Conversion Warrants
Forfeited Due to Early
Conversion by Preferred
Shareholders (36,755) N/A
Placement Agent Exercise
of Placement Agent
Warrants (27,192) 8,990
-------------- -------------- -------------- --------------
Securities Outstanding 50 187,855 9,052 281,636
============== ============== ============== ==============
Common Stock Equivalent (1) 68,064 187,855 9,052 281,636 546,607
============== ============== ============== ============== ==============
</TABLE>
(1) The Preferred Stock is convertible into Common Stock based on the formula
described in the paragraphs above. For purposes of this table, it assumed
that the market price at the date of conversion is equal to $7.346. The
Conversion Warrants and Placement Warrants are exercisable at a fixed price
of $7.346.
17
<PAGE>
The following table lists the purchasers of the Preferred Stock and an
estimate of the Common Stock offered for resale:
<TABLE>
<CAPTION>
Common
Common Shares Offered Common
Preferred Shares Common Hereby and Shares Percentage
Shares Owned Prior Shares Issuable Owned Owned
Owned Prior to Offering Offered Based on After After
Name to Offering (1)(2) Hereby a Formula (3) Offering Offering
- ---- ----------- ----------- ------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lakeshore
International 0 91,060 91,060 0 0 0
Queensway
Financial
Holdings Limited 0 299,524 299,524 0 0 0
Concordia
Partners L.P. 50 102,096 102,096 68,064 0 0
The Matthew
Fund N.V. 0 35,885 35,885 0 0 0
Placement
Agent Shares (4) 0 18,042 18,042 0 0 0
---------------------------------------------------------------------------------
Totals 50 546,607 546,607 68,064 0 0
</TABLE>
(1) These totals reflect the issuances of Common Stock which have already
occurred upon the conversion of the Preferred Stock and exercise of the
Conversion Warrants. The shares of Preferred Stock were issued based upon
the formula described in the preceding paragraphs and resulted in the
issuance of 272,646 shares of Common Stock. The Conversion Warrants and
Placement Warrants are exercisable at a fixed price of $7.346 per share. As
of April 30, 1999, none of the Conversion Warrants had been exercised,
36,755 Conversion Warrants had been forfeited and the rest of the
Conversion Warrants remained outstanding and exercisable.
(2) The percentage of shares owned by each such holder prior to this offering
is equal to less than one percent of the shares outstanding prior to this
offering.
(3) This total reflects the Common Stock issuable upon conversion of the
outstanding shares of Preferred Stock, assuming a Conversion Price of
$7.346 per share, and rounded to the nearest share.
(4) See table below for details regarding the issuance of shares to the
placement agent and its affiliates.
Pursuant to the Placement Agent Agreement, the Placement Agent agreed to
find subscribers for the Company's Preferred Stock offering in exchange for a
placement fee of 5-1/2% of the aggregate gross subscription proceeds of the
offering, a non-accountable expense allowance of 2% of the aggregate gross
subscription proceeds, and, if a subscriber exercised a Preferred Warrant, a fee
consisting of 7-1/2% of the aggregate exercise price, as defined in the
Preferred Warrant. The Placement Agent Agreement also grants to the Placement
Agent three sets of warrants: (i) warrants to purchase Common Stock equal to
7-1/2% times the aggregate gross subscription proceeds divided by the Fixed
Conversion Price (as defined in the Certificate of Designation), (ii) warrants
to purchase stock equal to 7-1/2% of the number of Conversion Warrants placed in
the offering (as defined in the Subscription Agreement) and (iii) upon the
exercise of a Preferred Warrant by a stockholder, warrants to purchase stock
equal to 7-1/2% of the gross proceeds received by the Company upon the exercise
of the Preferred Warrant divided by the Exercise Price (as defined in the
Preferred Warrant). All three of these warrants are for a period of five years
at a fixed conversion price of $7.346 per share. The Placement Agent Agreement
also contains cashless exercise and reset provisions. The Common Stock
underlying these warrants is included in the offering hereunder.
18
<PAGE>
The following table details indicate the number of shares of Common Stock
that have been issued to the Placement Agent and its affiliate upon exercise of
the Placement Warrants outlined above:
<TABLE>
<CAPTION>
Shares Owned Shares Shares Percentage Exercise
Prior to Offered Owned After Owned After Price of
Name Registration(1) Hereby Registration Registration Warrants Expiration
<S> <C> <C> <C> <C> <C> <C>
Swartz Family
Partnership LP 4,205 4,205 0 0 $7.346 June 20, 2002
Kendrick Family
Partnership LP 4,205 4,205 0 0 $7.346 June 20, 2002
Carlton M.
Johnson, Jr. 711 711 0 0 $7.346 June 20, 2002
Davis C. Holden 407 407 0 0 $7.346 June 20, 2002
Dwight B. Bronnum 806 806 0 0 $7.346 June 20, 2002
Glenn R. Archer 2,151 2,151 0 0 $7.346 June 20, 2002
Michael E. Stough 3,227 3,227 0 0 $7.346 June 20, 2002
P. Bradford
Hathorn 710 710 0 0 $7.346 June 20, 2002
Robert L. Hopkins 807 807 0 0 $7.346 June 20, 2002
Glenn A. Adams 813 813 0 0 $7.346 June 20, 2002
Placement Agent ------ ------ - -
and affiliates Total 18,042 18,042 0 0
</TABLE>
(1) Of the original 33,692 Placement Warrants, 27,192 have been exercised
using the cashless exercise option, resulting in the issuance of 8,990
shares of Common Stock and 6,500 warrants remained unexercised as of
April 30, 1999. In addition, 2,552 warrants were issued to the
Placement Agent and its affiliates in connection with the issuance of the
25 shares of New Preferred Stock to Concordia Partners. None of these
additional warrants has been exercised, and all such warrants expire on
December 11, 2003.
The Option Plans
This Prospectus also relates to the offering of shares of Common Stock
issued or issuable upon exercise of options granted or to be granted under the
Options Plans. The following table indicates the shares of Common Stock being
offered pursuant to the exercise of such options granted pursuant to the Option
Plans:
<TABLE>
<CAPTION>
Shares Held Shares Shares Held Percentage
Prior to Offered After Held After
Name Offering Hereby Offering Offering(1)
- ---- ----------- ------- ----------- -------------
<S> <C> <C> <C> <C>
Michael M. Blue(2) 119,000 115,000 4,000 *
Valerie Boeldt-
Umbright 155,000 155,000 -0- 0
Jeff Aronin(3) 251,000 250,000 1,000 *
Bhupinder Mann 100,000 100,000 -0- 0
Ranjit Bhogal 310,000 310,000 -0- 0
Herdev S. Rayat 100,000 100,000 -0- 0
Frank Mueller 10,000 10,000 -0- 0
Sarbjit Thouli 10,000 10,000 -0- 0
Grant Mackney 10,000 10,000 -0- 0
Todd Weaver 10,000 10,000 -0- 0
Dave Gamache 10,000 10,000 -0- 0
Terry Johnson 200,000 200,000 -0- 0
</TABLE>
19
<PAGE>
* Less than one percent.
(1) Based upon 7,831,105 outstanding shares of Common Stock as of [March 26],
1999.
(2) Dr. Blue is a director of the Company.
(3) Mr. Aronin is President, CEO and a director of the Company.
February Placement and July Placement
In addition to the above, this Prospectus relates to the resale of 176,000
shares of Common Stock issued pursuant to the February Placement, 300,000 shares
of Common Stock issued pursuant to the July Placement and 300,000 shares of
Common Stock issued or issuable upon exercise of warrants issued pursuant to the
July Placement. The exercise price of the July Warrants is a fixed $6.00 per
share, and 200,000 were exercised in March 1998, leaving 100,000 July Warrants
outstanding as of April 30, 1999.
The shares of Common Stock issued and issuable in connection with the
February Placement and the July Placement are held by the following entities:
<TABLE>
<CAPTION>
Amount and
Shares Held Shares Shares Held Percentage
Prior to Offered After Held After
Name Offering Hereby Offering Offering
- ---- ----------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Greystone
Management Ltd. 176,000 176,000 -0- 0
Matrix Capital
Corporation 600,000(2) 600,000 -0- 0
</TABLE>
(1) The 600,000 shares listed for Matrix Capital Corporation consists of
300,000 shares of Common Stock initially issued in the July Placement,
200,000 shares issued upon exercise of certain of the July Warrants, and
100,000 shares issuable upon exercise of the remaining July Warrants. The
exercise price of the July Warrants is fixed at $6.00.
PLAN OF DISTRIBUTION
The Selling Security Holders are not restricted as to the prices at which
they may sell their shares, and sales of such shares at less than the market
price may depress the market price of the Company's Common Stock. Further, the
Selling Security Holders are not restricted as to the number of shares which may
be sold at any one time, and it is possible that a significant number of shares
could be sold at the same time, which may also have a depressive effect on the
market price of the Company's Common Stock. However, it is anticipated that the
sale of the Common Stock being offered hereby will be made through customary
brokerage channels either through broker-dealers acting as agents or brokers
for the seller, or through broker-dealers acting as principals, who may then
resell the shares in the over-the-counter market, or a private sale in the over-
the-counter market or otherwise, at negotiated prices related to prevailing
market prices and customary brokerage commissions at the time of the sales, or
by a combination of such methods. The period for sale of such shares by the
Selling Security Holders may occur over an extended period of time.
There are no contractual arrangements between or among any of the Selling
Security Holders and the Company with regard to the sale of the shares and no
professional underwriter in its capacity as such will be acting for the Selling
Security Holders. There are no current or future plans, proposals, agreements,
arrangements or understandings of the Selling Security Holders with respect
to resale transactions, other than those presently disclosed. Application
has been made to the Company to remove the restrictions on the cashless
exercised shares of Common Stock held by the Placement Agent and its affiliates
in reliance on Rule 144.
1995 Stock Option Plan. The 1995 Stock Option Plan has 500,000 shares
reserved for issuance at $3.00 per share until December 31, 2001 and have no
vesting period. The options have been authorized by the Company to be issued to
employees of the Company at the discretion of the board of directors. The
following table summarizes the options that have been granted and the current
number that have been exercised. Note that this table reflects a transfer of
options from Harmel S. Rayat to Terry Johnston and Ranjit Bhogal, pursuant to
the resolution of the Board of Directors dated September 18, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
Name of Optionee Total Reserved Number Exercised Year Exercised
- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Bhupinder Mann 100,000 13,000 1996
17,000 1997
11,000 1998
2,000 1999
Ranjit Bhogal 150,000 11,000 1996
17,000 1997
13,000 1998
2,000 1999
Herdev S. Rayat 100,000 13,000 1996
18,500 1997
7,000 1998
Frank Mueller 10,000 None N/A
Sarbjit Thouli 10,000 1,500 1997
Grant Mackney 10,000 None N/A
Todd Weaver 10,000 None N/A
Dave Gamache 10,000 None N/A
Terry Johnson 100,000 2,000 1999
</TABLE>
1996 Stock Option Plan. The 1996 Stock Option Plan has 300,000 shares
reserved for issuance at $4.50 per share until June 20, 2001 and have no vesting
period. The options have been authorized by the Company to be issued to
employees of the Company at the discretion of the board of directors. The
following table summarizes the options that have been granted and the current
number that have been exercised. Note that this table reflects a transfer of all
1996 options from Harmel S. Rayat to Ranjit Bhogal, pursuant to the resolution
of the Board of Directors dated September 18, 1998.
<TABLE>
<CAPTION>
Name of Optionee Total Reserved Number Exercised Year Exercised
- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Valerie Boeldt-Umbright 40,000 None N/A
Terry Johnson 60,000 3,000 1996
17,000 1997
6,000 1998
Ranjit Bhogal 160,000 None N/A
Michael M. Blue 40,000 None N/A
</TABLE>
1997 Stock Option Plan. The 1997 Stock Option Plan has 500,000 shares
reserved for issuance. 200,000 options are exercisable at $4.50 per share until
November 18, 2001 and 300,000 options are exercisable at $6.50 per share until
July 1, 2005. The options have been authorized by the Company to be issued to
employees of the Company at the discretion of the board of directors. The
following table summarizes the options that have been granted and the current
number that have been exercised:
<TABLE>
<CAPTION>
Name of Optionee Total Reserved Exercise Price Number Exercised Year Exercised
- ---------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Valerie Boeldt-Umbright 100,000 $4.50 None N/A
15,000 $6.50 None N/A
Terry Johnson* 40,000 $4.50 3,000 1997
$4.50 6,000 1998
20,000 $6.50 None N/A
Michael M. Blue 60,000 $4.50 None N/A
15,000 $6.50 None N/A
Jeff Aronin 250,000 $6.50 None N/A
</TABLE>
* Twenty thousand (20,000) shares were transferred from Nicole Alagich and
Charles Grahn to Mr. Johnson and approved by the board of directors on March 16,
1998.
Under the terms of the February Placement, 176,000 shares of Common Stock
were sold to Greystone Management, Ltd. in reliance on Regulation D, Rule 506.
The offering was closed on February 28, 1997 and resulted in
21
<PAGE>
receipt by the Company of $1,100,000. Greystone Management was an accredited
investor and is located in Belize City, Belize.
July Placement
Under the terms of the July Placement, 300,000 shares of Common Stock and
300,000 warrants to purchase shares of Common Stock (200,000 of which had been
exercised as of April 30, 1999 were sold to Matrix Capital Corp. in reliance on
Regulation D, Rule 506. The offering was closed on July 7, 1997 and resulted in
receipt by the Company of $1,800,000. Matrix Capital Corp. was an accredited
investor and is a corporation existing under the laws of the British West
Indies. The February Placement and the July Placement were within 6 months of
each other and therefore subject to the integration provisions of Rule 502.
Fewer than 35 unaccredited investors acquired the shares offered in the February
Placement and the July Placement and the requirements of Rule 506 were met with
both offerings considered separately or together.
Private Placement November 6, 1998
Under the terms of a private placement done by the Company in reliance on
Regulation D, Rule 506, 300,000 shares of common stock in the Company at $5.00
per share with a warrant effective until October 14, 2004 to purchase an
additional 300,000 shares at $5.00 per share were sold to Lyons Capital Corp., a
Bermuda corporation and an accredited investor. The offering was closed on
November 6, 1998 and resulted in receipt by the Company of $1,500,000. The
offering made hereby does not relate to these shares.
LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries has any legal proceedings
against it.
MANAGEMENT
Directors and Executive Officers
Name/Age Title
- -------- -----
Harmel S. Rayat Chairman of the Board, Director
Jeffrey S. Aronin President, Chief Executive Officer, Director
Alan P. Jagiello Chief Financial Officer, Secretary,
Treasurer, Director
Greg Wujek Vice President of Managed Care, Director
Michael M. Blue, Bsc, M.D. Director
Mr. Harmel Rayat was elected to the board of directors in 1995. Dr. Blue
was elected a director in 1996. Dr. Jacobo and Mr. Aronin were elected to the
board in 1997. Mr. Wujek and Mr. Jagiello were elected in 1998.
HARMEL S. RAYAT (Age 37) Chairman of the Board. 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 which specializes in providing early stage
funding and investment banking services to emerging growth corporations. From
January 1989 through December 1992 Mr. Rayat was the President and CEO 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
Company since September 1995, President from June 1996 until June 1997 and is
currently Chairman. Mr. Rayat is also a director of American Alliance
Corporation and Scottsdale Scientific, Inc.
JEFFREY S. ARONIN (Age 31) President and Chief Executive Officer, 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 the Company as its President and Chief
Operating Officer on July 8, 1997,
22
<PAGE>
at which time he also became a member of the Board of Directors of the Company.
He holds a degree in marketing and finance, as well as an MBA in management.
ALAN P. JAGIELLO (Age 33) Chief Financial Officer. Mr. Jagiello is a certified
public accountant with over 10 years of experience in public accounting at
Arthur Andersen LLP. Prior to joining Medcare in December 1998, Mr. Jagiello
worked in Arthur Andersen's U.S. Professional Standards Group, where he
consulted with clients and audit engagement teams on technical matters of
accounting and SEC reporting. The Professional Standards Group sets, monitors
and disseminates policies on accounting and auditing standards for Arthur
Andersen worldwide and represents the firm before FASB, SEC, AICPA and IASC.
Before joining this group, Mr. Jagiello assisted numerous clients ranging from
large, multinational corporations to closely held businesses, and has provided
due diligence services on acquisitions, performed benchmarking projects and
prepared internal control recommendations. Mr. Jagiello attended Northern
Illinois University, has authored a number of publications regarding technical
accounting issues and is a member of the American Institute of Certified Public
Accountants.
GREGORY WUJEK (Age 37) Vice President of Managed Care, Director. Mr. Wujek
joined the Company in November 1997 and brought with him over 10 years of
sales/marketing and management experience to the healthcare industry. Over the
course of seven years, Mr. Wujek worked at Forest Laboratories, an international
pharmaceutical concern, holding positions in sales/marketing and management and
his last two years as Director of the Managed Care Department. In his role, Mr.
Wujek directed and assisted in all industry related areas such as sales,
marketing, contract negotiation, pricing, product launches, Military and
Government contracting, and management. Prior to joining the Company, Mr. Wujek
held the position of Vice President Sales at SMG Marketing Group, a consulting
firm to the healthcare industry. Mr. Wujek consulted for several International
Pharmaceutical companies on the dynamics of marketing to the Managed Care
marketplace. Mr. Wujek is responsible for directing and assisting with the day
to day operations of both the sales and clinical departments, IS functions, and
marketing the Medcare Program to all areas of Managed Care.
MICHAEL M. BLUE, M.D. Director. Dr. Blue is a Board-certified urologist who has
practiced general urology for twenty years. He is a member of the American
Medical Association, Oklahoma State Medical Association, South Central
Urological Association and the American Urological Association. Dr. Blue has
been a sole practitioner in private practice for the past twenty years. Dr. Blue
joined the Board of Directors of the Company on August 15, 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 utilizing the MedCare Program.
23
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of April 30, 1999, the beneficial
ownership of the Company's Common Stock by each officer and director of the
Company, 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. [Note--these numbers do not match those in the 10-K.]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Name and Address of Amount and Nature Percent of
Title of Class Beneficial Owner of Beneficial Ownership(1) Class(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock Harmel S. Rayat 2,000,000 25.5%
216-1628 West First Avenue
Vancouver, B.C. V6J 1G1
Canada
Common stock Michael Blue 119,000 1.4%
500 East Robinson, Suite 800
Norman, Oklahoma 73071
Common stock Mr. Greg Wujek 67,500 0.8%
1515 West 22nd Street
Oak Brook, Illinois 60523
Common stock Mr. Alan Jagiello -0- N/A
1515 West 22nd Street
Oak Brook, Illinois 60523
Common stock Jeff Aronin 401,000 4.9%
1515 West 22nd Street
Oak Brook, Illinois 60523
Common stock Lyons Capital Corporation 600,000 7.4%
24 Reid Street
Hamilton, HM11 Bermuda
Brenda C. Pratt
President and sole shareholder
Common stock Matrix Capital Corp. 600,000 7.4%
Eric Smith, President
and sole shareholder
P.O. Box 69, Front Street
Grand Turk, Turks &
Caicos Islands
Common stock Directors and Officers 2,587,500 30.7%
as a group (5 persons)
</TABLE>
(1) Assuming conversion of all vested options.
DESCRIPTION OF SECURITIES
Common Stock
Holders of the Common Stock are entitled to one vote for each share held by
them of record on the books of the Company in all matters to be voted on by the
stockholders. Holders of Common Stock are entitled to receive such dividends as
may be declared from time to time by the Board of Directors out of funds legally
available, and in the event of
24
<PAGE>
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. Declaration of dividends on
Common Stock is subject to the discretion of the Board of Directors and will
depend upon a number of factors, including the future earnings, capital
requirements and financial condition of the Company. The Company has not
declared dividends on its Common Stock in the past and the management currently
anticipates that retained earnings, if any, in the future will be applied to the
expansion and development of the Company rather than the payment of dividends.
The holders of Common Stock have no preemptive or conversion rights and are
not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The Common
Stock currently outstanding is, and the Common Stock offered hereby will be when
issued, validly issued, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue up to one million (1,000,000) shares of
preferred stock, par value $0.25 per share. Pursuant to a Certificate of
Designation filed with the State of Delaware on July 7, 1997, one thousand of
those shares have been designated as Series A Preferred Stock, par value $0.25
per share and with a purchase price of $10,000 per share plus an 8% per annum
interest rate. This stock ranks senior to all Common Stock of the Company,
senior to any series or class of stock so designated in the future, junior to
any series or class of stock designated as such in the future, and in parity
with any series or class of stock so designated in the future. There are no
dividends or dividend rights provided for this stock. The holders of the
Preferred Stock also have no voting rights, but must receive notice of all
shareholders' meetings.
The liquidation ranking of the Preferred Stock is after any senior
securities, prior to any junior securities and on a par with any parity
securities. Upon liquidation, holders of Preferred Stock shall receive an amount
per share equal to the original Issue Price per outstanding share plus an amount
equal to eight percent of the original Series A Issue Price per annum for the
period that has passed since that date in connection with the consummation of
the purchase by the holder of shares of Preferred Stock from the Company. If the
Company does not possess sufficient funds, assets and other holdings to provide
for the complete liquidation price, holders of Series A Preferred Stock shall
receive funds based upon the ranking of the stock.
Holders of Preferred Stock may convert their shares into shares of Common
Stock via the following formula:
(.08)(N/365)(10,000) + 10,000
-----------------------------
Conversion Price
where N is equal to the number of days between the date full payment was
received by the Escrow Agent or the Company for the shares in question and the
Date of Conversion and where "Conversion Price" is equal to 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, as defined below:
# of months between Last Closing
and Date of Conversion "X"
- ---------------------- ---
4-6 months 90%
6 months, 1 day-9 months 87.5%
9 months, 1 day-12 months 85%
more than 12 months 80%
"Last Closing Date" means the date of the last closing of a purchase and
sale of the Preferred Stock that occurs pursuant to the offering of the
Preferred Stock by the Company.
To convert shares, the shareholder must send via facsimile a copy of the
Notice of Conversion to both the Company and the Transfer Agent by 11:59 p.m.
New York City time on the date of conversion. No fractional shares will be
issued.
25
<PAGE>
Three years after the Last Closing Date, or the first business day
thereafter, all Preferred Stock will be automatically converted into Common
Stock, or will be redeemed for cash in an amount equal to the Stated Value, at
the Company's discretion, where the Stated Value is equal to the Original Series
A Issue Price plus the accreted but unpaid Premium. The Redemption price is
calculated as follows:
<TABLE>
<CAPTION>
Date of Notice of Redemption at Company's Election % of Stated Value
-------------------------------------------------- -----------------
<S> <C>
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
24 months and 1 day to 30 months following Last Closing Date 120%
30 months and 1 day to 36 months following Last Closing Date 115%.
</TABLE>
Under the conversion formula a varying number of shares of Common Stock
could be issued, depending upon the price of the Common Stock at the time of the
conversion of the Preferred Stock. The formula [(.08)(N/365)(10,000)+10,000] /
Conversion Price, where N is the number of days from the Closing Date, July 8,
1997] provides that the number of shares of Common Stock issuable for one share
of Preferred Stock is variable and is dependent upon the Conversion Price (as
defined). The formula for the Conversion Price provides it will be the lesser of
$7.346, which is 115 percent of the average closing bid price for the Common
Stock for the five trading days ending June 6, 1997, or 80 to 90% of the average
bid price for the Common Stock for the five trading days preceding the
conversion. The following table indicates various numbers of shares of Common
Stock that would be issued assuming 80 to 90% of the average bid price for the
five days preceding the conversion.
<TABLE>
<CAPTION>
Ave Bid X% No of Shares of Total Common
Price Common Assume all exercised
<S> <C> <C> <C>
1 80 13,500 675,000
1 90 12,000 600,000
3 80 4,500 225,000
3 90 4,000 200,000
3.75 80 3,600 180,000
3.75 90 3,200 160,000
5 80 2,700 135,000
5 90 2,400 120,000
6 80 2,317 115,850
6 90 2,060 103,000
7 80 1,929 96,450
7 90 1,714 85,700
</TABLE>
The first column is a listing of the possible share price of the Common
Stock. In the second column, X% is to indicate the percentage, highest and
lowest, that could be applied to the conversion price as indicated in the
equation. The number of shares of Common Stock is the result of the application
of the formula [((.08) (N/365) (10,000) + 10,000)/Conversion Price is detailed
in the third column. The fourth column assumes all warrants and options are
exercised and 50 preferred shares are converted, resulting in a calculation
based upon the following formula: [third column x 50].
As of April 30, 1999, 190 shares of Preferred Stock had been issued and, of
that number, 140 shares had been converted into Common Stock. The 140 shares
were converted into Common Stock using the above formula at the time of their
conversion and resulted in the issuance of 272,646 shares of Common Stock. The
remaining 50 shares of Preferred Stock outstanding are owned by Concordia
Partners. See "SELLING SECURITY HOLDERS."
The Common Stock of the Company has a price range as indicated under "PRICE
RANGE OF COMMON STOCK." The risk is that, if the share price is below $7.346,
additional shares of Common stock may be required to be issued under the terms
of the conversion of the Preferred Stock, as indicated in the table. In theory,
there is no limit to the number of shares that would have to be issued should
the price fall substantially below historical levels. The lowest price of the
Common Stock during the most recent quarter (Q1 1999) was $5.25. Should the
price decline, management has the ability to redeem these shares, and it is
anticipated that management would exercise that right should the share price
fall so precipitously. See "SELLING SECURITY HOLDERS."
26
<PAGE>
Conversion Warrants and Placement Warrants
Each purchaser of Preferred Stock pursuant to the June Placement also
received certain Conversion Warrants for the purchase of shares of Common Stock.
The Conversion Warrants issued include: (i) a warrant or warrants (the "Nine
Month 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 the
date which is nine (9) months following the closing divided by the Fixed
Conversion Price, as defined in the Certificate of Designation; (ii) a warrant
or warrants (the "Twelve Month 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 the date which is twelve (12) months following the closing
divided by the Fixed Conversion Price, as defined in the Certificate of
Designation; and (iii) a warrant or warrants (the "Fifteen Month 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 the date which is fifteen (15)
months following the closing divided by the Fixed Conversion Price, as defined
in the Certificate of Designation. The terms of the Nine Month Warrants,
including the terms on which the Nine Month Warrants may be exercised for Common
Stock, are set forth in the form of the Nine Month Warrants filed as an exhibit
to the registration statement of which this Prospectus forms a part. The terms
of the Twelve Month Warrants, including the terms on which the Twelve Month
Warrants may be exercised for Common Stock, are set forth in the form of the
Twelve Month Warrants filed as an exhibit to the registration statement of which
this Prospectus forms a part. The terms of the Fifteen Month Warrants, including
the terms on which the Fifteen Month Warrants may be exercised for Common Stock,
are set forth in the form of the Fifteen Month Warrants filed as an exhibit to
the registration statement of which this Prospectus forms a part.
In addition, the Placement Agent and certain of its affiliates received the
Placement Warrants as part of the June Placement.
The Company has issued the following warrants in connection with the June
Placement:
<TABLE>
<CAPTION>
Number of Price per Expiration
Warrantee Type of Stock Shares Share Date(1)
- --------- ------------- ------ ----- -------
<S> <C> <C> <C> <C>
Swartz Investments, L.L.P.(2) Common Stock 33,692 $7.346 June 20, 2002
Lakeshore International Common-9 months 11,344 $7.346 June 20, 2002
The Matthew Fund N.V. Common-9 months 6,806 $7.346 June 20, 2002
Concordia Partners L.P. Common-9 months 11,344 $7.346 June 20, 2002
Queensway Financial Holdings Common-9 months 45,376 $7.346 June 20, 2002
Lakeshore International Common-12 months 11,344 $7.346 June 20, 2002
The Matthew Fund N.V. Common-12 months 6,806 $7.346 June 20, 2002
Concordia Partners L.P. Common-12 months 11,344 $7.346 June 20, 2002
Queensway Financial Holdings Common-12 months 45,376 $7.346 June 20, 2002
Lakeshore International Common-15 months 11,344 $7.346 June 20, 2002
The Matthew Fund N.V. Common-15 months 6,806 $7.346 June 20, 2002
Concordia Partners L.P. Common-15 months 11,344 $7.346 June 20, 2002
Queensway Financial Holdings Common-15 months 45,376 $7.346 June 20, 2002
Total: 258,302 Common Stock Warrants(3)
</TABLE>
(1) Last date on which the options may be exercised
(2) In addition to the 33,692 Placement Warrants issued to Swartz Investments
and certain of its affiliates in connection with the June Placement, 2,552
additional warrants, at an exercise price of $7.346, were issued to Swartz
Investments and its affiliates in connection with the issuance of 25 shares of
New Preferred Stock to Concordia Partners in November 1998. None of the 2,552
additional warrants has been exercised, and all such warrants have an expiration
date of December 11, 2003.
(3) Of the original 258,302 Conversion Warrants and Placement Warrants that were
issued, 36,755 shares were forfeited due to the early conversion of Preferred
Stock. In addition, Swartz Investments and its affiliates have exercised all but
6,500 of their Placement Warrants utilizing the cashless exercise option,
resulting in 8,990 shares of Common Stock being issued. The remaining Conversion
Warrants are still outstanding. See "SELLING SECURITY HOLDERS."
27
<PAGE>
The Company has also issued warrants for 300,000 shares of Common Stock
pursuant to the July Placement. These warrants are exercisable at $6.00 per
share until July 7, 2002, and as of April 30, 1998 200,000 of these warrants had
been exercised, with the remaining 100,000 warrants still outstanding. See
"SELLING SECURITY HOLDERS."
When exercised, all warrants will be converted into Common Stock and
holders thereof will have all of the rights and prerogatives of all holders of
Common Stock of the Company (see "Common Stock" above).
The Placement Warrants may be converted into Common Stock at an Exercise
Price of $7.346 per share and by either or both of two payment methods: cash
exercise and cashless exercise. Cash exercise is the payment of the Exercise
Price via cash, certified or cashier's check or wire transfer. Cashless exercise
involves the surrender of the warrant to the Company's principal office with a
notice of cashless election. In this event the Company issues the holder a
number of shares of Common Stock computed using the following formula, as
defined in the Placement Warrant:
"X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to holder.
Y = the number of shares of Common Stock for which the warrant is being
exercised.
A = the Market Price of one (l) share of Common Stock ("Market Price"
is defined as the average closing price of the Common Stock for the five (5)
trading days prior to the Date of Exercise of the Warrant (the "Average Closing
Price"), as reported by the National Association of Securities Dealers Automated
Quotation System, or if the Common Stock is not traded on the Nasdaq SmallCap
Market, the Average Closing Price in the over-the-counter market; provided,
however, that if the Common Stock is listed on a stock exchange, the Market
Price shall be the Average Closing Price on such exchange. If the Common Stock
is/was not traded during the five) trading days prior to the Date of Exercise,
then the closing price for the last publicly traded day shall be deemed to be
the closing price for any and all (if applicable) days during such five (5)
trading day period.)
B = the Exercise Price."
For example, if a Placement Warrant holder wants to exercise 100 of his
Placement Warrants (Y) and the current market price (A) is $8.50 per share. this
results in an equation of X = 100(8.5-7.346)/8.5 which equals 13.576. (The
exercise price (B) will always be $7.346). Rounding up, the Placement Warrant
holder would receive 14 shares of Common Stock upon exercise of his 100
Placement Warrants.
Shares issued via a cashless exercise are deemed to be issued on the date
the warrant was issued and are subject to Rule 144.
Reserved Common Stock
The Reserved Common Stock shall be issued in exchange for shares of Series
A Preferred Stock upon Notice of Conversion by the Shareholder or at the
Company's discretion on a date three years after the Last Closing Date. The
Reserved Common Stock shall have all of the rights and privileges of the Common
Stock of the Company (see "Common Stock" above).
Transfer Agent
The transfer agent and registrar for the Company's Common Stock is Holladay
Stock Transfer, Inc., 2939 North 67th Place, Scottsdale, Arizona, 85251. Its
telephone number is (602) 481-3941.
Shares Eligible for Future Sale
28
<PAGE>
As of April 30, 1999, the Company had 7,831,105 shares of Common Stock
and 50 shares of Preferred Stock outstanding. Of the 7,831,105 shares of Common
Stock outstanding, 2,005,000 shares of Common Stock are beneficially held by
"affiliates" of the Company. In addition, options and warrants to purchase
3,677,708 shares of Common Stock were outstanding. All shares of Common Stock
offered hereby will be freely transferable without restriction or registration
under the Securities Act, except to the extent purchased or owned by
"affiliates" of the Company as defined for purposes of the Securities Act.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned "restricted" securities for at least one year, including
persons who may be deemed to be "affiliates" of the Company, may sell publicly
without registration under the Securities Act, within any three-month period,
assuming compliance with other provisions of the Rule, a number of shares that
does not exceed the greater of (i) one percent of the Common Stock then
outstanding or, (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. A person who is not deemed
an "affiliate" of the Company and who has beneficially owned shares for at least
two years would be entitled to sell such shares under Rule 144 without regard to
the volume and other limitations described above.
The Common Stock currently is listed on the Nasdaq Small Cap Market under
the symbol "MCAR." No prediction can be made of the effect, if any, of future
public sales of "restricted" shares or the availability of "restricted" shares
for sale in the public market at the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Company's "restricted" shares
in any public market that may develop could adversely affect prevailing market
prices.
INTEREST OF NAMED EXPERTS AND COUNSEL
Not applicable.
STATEMENT AS TO INDEMNIFICATION
The Company has indemnified all officers, directors and controlling persons
of the Company against all liabilities from the sale of securities which might
arise under the Securities Act of 1933 other than as stated under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to such persons pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable.
THE COMPANY AND BACKGROUND
MedCare Technologies, Corporation is the operating subsidiary that is
wholly owned by Medcare Technologies, Inc. Medcare Technologies, Inc. (together
with its subsidiaries, "MedCare" or the "Company") believes it is the leading
source of conservative incontinence treatment support services in the country.
The Company believes it has achieved this leadership position based on its
relationships with over 300 physicians currently utilizing the MedCare Program
(as defined below). The Company was originally incorporated in the state of Utah
in 1986. In 1996, a migratory merger was completed changing the Company's
domicile to Delaware. In 1995, the Company acquired the MedCare Program and
began offering the program to doctors in 1996. The Company did not generate any
revenues until 1997 and launched the program nationally in 1998.
DESCRIPTION OF BUSINESS
During 1998, the Company engaged in only one type of business, the offering
of the MedCare Program, as described below. On January 21, 1999, the Company
formed a new, wholly owned subsidiary of the Company, Medcareonline.com, Inc. In
January 1999, the Company, through Medcareonline.com, Inc., announced its
intention to offer a comprehensive healthcare portal offering adult gender
specific health information.
The Medcare Program
The "MedCare Program" is a discrete package of equipment, software and
services developed by MedCare to assist physicians in providing non-
pharmaceutical, non-invasive treatment to patients suffering from urinary
incontinence
29
<PAGE>
("UI") and other pelvic disorders, including pelvic pain, chronic constipation,
fecal incontinence and disordered defecation. The MedCare Program is used by
physicians to support a treatment plan based primarily on behavioral
modification techniques such as electromyography ("EMG") biofeedback, pelvic
floor muscle exercise, and bladder and bowel retraining. Utilizing the MedCare
Program, physicians help patients activate and strengthen the various sensory
response mechanisms that maintain bladder and bowel control. 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.
UI 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 (1). And as society
ages, the physical, emotional and financial costs to those suffering and their
caregivers, as well as the health care system, is expected to increase
dramatically.
Despite the prevalence of incontinence, the Company believes 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 (2), (3).
Instead, the Company believes a large number of people prematurely turn to the
use of absorbent materials and supportive aids without having their condition
properly diagnosed and treated.
In March 1996, the U.S. Department of Health and Human Services published a
Clinical Practice Guideline which estimated that UI affects approximately 13
million Americans (of which 85% are women) at an annual cost of $16 billion.
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.
Effectiveness of EMG Biofeedback
- --------------------------------
Over the years, the value and effectiveness of neuromuscular reeducation
therapy and behavioral techniques in conjunction with developments in technology
has resulted in increased awareness of the benefits of such a program.
In the December 16, 1998 issue of the Journal of the American Medical
Association, a study entitled "Behavioral vs. Drug Treatment for Urge Urinary
Incontinence in Older Women" was published. This study concluded that behavioral
therapy was more effective than drugs in treating UI. A group of scientists
studied 197 women between the ages of 55 to 92 over an eight week period.
Patients undergoing behavioral therapy reported an 81% reduction in incontinence
episodes, compared to a 69% decrease for those taking drug therapy (oxybutynin),
and a 39% decline for those on a placebo. Further, 76% of patients assigned to
both drug and placebo therapy wanted to change to another treatment, versus only
14% of the patients receiving behavioral therapy.
1 Urinary Incontinence Guideline Panel. "Urinary Incontinence in Adults:
Clinical Practice Guidelines. AHCPR Pub-9-9-0038. Rockville, MD: Agency for
Health Care Policy & Research; PHS, HHS: March 1992.
2 Legace, EA, et al. "Prevalence and severity of urinary incontinence in
ambulatory adults: an UPRNet study"> J Fram Pract 35,610-4: 1993 June.
3 Wallace, K . "Female pelvic floor functions, dysfunctions, and behavioral
approaches to treatment." Clinics in Urinary Incontinence.
30
<PAGE>
Utilization of the MedCare Program
- ----------------------------------
The MedCare Program is used by physicians in private office, clinic or
hospital settings. The Company believes it can continue to grow by contracting
with more physician practices in the future.
As of March 18, 1999, the Company had 78 contracted MedCare Program sites.
These sites are located in the following cities: Norman, OK (Dr. Michael M.
Blue), Anderson, SC (Dr. Bill Hinnat), Athens, GA (Dr. Mark Ellsion), Augusta,
GA (2) (Dr. Goldsmith and Dr. Harry Oldman), Birmingham, AL (Dr. William
Johnson), Roswell, GA (Dr. Omar Eubanks), Warner Robins, GA (Dr. F. Marshall
Parker), Savannah, GA (Dr. David Ostman), Glen Cove, NY (Dr. Eric Hochberg),
Greensburg, PA (Dr. James Mayo), Jersey City, NJ (Dr. Anthony Mangia), Mine
Hill, NJ (Dr. Marc Colton), Natick, MA (Dr. Emmanuel Friedman), New York, NY
(Dr. Robert Gluck), Stamford, CT (Dr. Jonathan Waxberg), Yonkers, NY (Dr.
Stanley Boczko), Alexandria, VA (Dr. Roger Weiderhorn), Baltimore, MD (2) (Dr.
Marcella Ronneburg), Fayetteville, NC (Dr. Garrett Franzoni), Owings Mills, MD
(2), Dr. Sanford Siegel), Shelby, NC (Dr. Shem Blackley), Newport News, VA (Dr.
Peter Han), Jacksonville, NC (Dr. Robert Kell), Wilmington, NC (Dr. John
Cashman), Fremont, CA (Dr. Scott Kramer), Kirkland, WA (Dr. John Paul Isabell),
Los Gatos, CA (2) (Dr. Anthony Damore and Dr. Robert Panvini), Reno, Nevada (Dr.
Angelo Kanellos), San Mateo, CA (Dr. Hessell), Concord, CA (Dr. Nigro), Walnut
Creek, CA (Dr. Nigro), San Francisco, CA (Dr. David A. Ronk), Beverly Hills, CA
(Dr. Sherman Bruckner), Fullerton, CA (Dr. Nicholas Thanos), Los Angeles, CA
(Dr. William Barba), Mission Viejo, CA (Dr. Marc Winter), Laguna Hills, CA (Dr.
Marc Winter), Orange, CA (Dr. Arthur Goldstein), Newport Beach, CA (Dr. Arthur
Goldstein), Rancho Mirage, CA (Dr. Sheldon Barroff), Oceanside, CA (Dr. Bradley
Frasier), Downey, CA (Dr. Msihal), Tarzana, CA (Dr. Richard Leff), Palm Beach,
CA (Dr. E. Jacome), San Rapeal, CA (Dr. John Hessell), Dallas, TX (Dr. Brian
Feagins), Fort Worth, TX (Dr. A.E. Thurman), Kingwood, TX (Dr. Robert Rosen),
Scottsdale, AZ (Dr. Mary Ellen Shannon), San Anthonio, TX (2) (Dr. Tristan
Castaneda and Dr. Robert Schorlemer), Oklahoma City, OK (Dr. Sam Little),
Elyria, OH (Dr. J. Patrick Spirank), Findlay, OH (Dr. Prem Agrawal), Fridley, MN
(Dr. J. Randolph Beahrs), Huntington, WV (Dr. Larry Caserta), Indianapolis, IN
(Dr. Sally Bradley), Maplewood, MN (Dr. Ingrid Wilbrand-Cowley), Terre Haute, IN
(Dr. Douglas Claybrook), Toledo, OH (Drs. Haselhuhn and Seal), Dayton, OH (Dr.
Daniel Miller), St. Paul, MN (Dr. Siegel), Batavia, IL (Dr. John Zito, Jr.),
Bloomington, IL (Dr. Vicken Chalian), Buffalo Grove, IL (Dr. Randall Kahan),
Chicago, IL (Dr. Maura Brennan), Elgin, IL (Dr. James I. Pinto), Galesburg, IL
(Dr. Jeffrey Koszczuk), Joliet, IL (Dr. Gregory Lewis), Lake Forest, IL (Dr.
David Schewitz), Kirkwood, MO (Dr. N. Saha), Wentzville, MO (Dr. Stan Hanks),
Cordova, TN (Dr. Yari Walzer), Castro Valley, CA (Dr. N.V. Bulusa)
Marketing of the MedCare Program
- --------------------------------
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 consists of a combination
of brochures, print ads, direct mail, radio, TV, doctor referrals, seminars and
general public relations within a defined area.
The Program Management Agreement
- --------------------------------
Each physician or practice (a "Practice") that contracts with MedCare to
utilize the MedCare Program signs a Program Management Agreement which defines
the terms and conditions of the relationship. The Practice has exclusive
authority and responsibility for professional supervision and judgments required
in the diagnosis of patients and in the selection and performance of procedures
for the benefit of the Practice's patients. MedCare provides various support and
administrative services and assistance in operating the Program, but is not a
provider or supplier of medical or professional services. MedCare leases the
equipment and supports personnel to the Practice and trains the support
personnel to assist the Practice, operate the equipment and educate all the
patients. The Practice has the right to approve or disapprove the support
personnel provided by MedCare and must supervise all activities of the support
personnel. The Practice agrees to engage MedCare on an exclusive basis as
manager of the Practice's programs for the treatment of the patient conditions
using behavioral and biofeedback techniques. The Practice is required to
provide, at its own expense, an area of sufficient space for the performance of
the MedCare Program.
Governmental Regulation Issues Concerning the Program Management Agreement
- --------------------------------------------------------------------------
Under the Company's Program Management Agreement, MedCare is not a provider
of health care services. MedCare merely supplies personnel, equipment and
proprietary techniques to providers of health care. The physicians or
31
<PAGE>
medical groups that contract with MedCare are the providers of services to their
own patients. MedCare simply manages the incontinence treatment programs in the
physicians' offices. The Company is subject to the Federal Anti-Kickback Statute
but does not believe that an applicable government authority would find the
parties' performance of their duties and obligations under the Program
Management Agreement to violate this statute.
Competitive Treatment Options for Incontinence
- ----------------------------------------------
To the best of the Company's knowledge, the only direct competitors to the
MedCare Program 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 it is believed that most of these
clinics have limited financial strength for adequate marketing and advertising,
the Company expects better financed and more sophisticated competition to emerge
in the future.
Some currently available alternatives for the treatment of urinary
incontinence include absorbent products and diapers, surgery, indwelling
catheters, implanting devices, injectable materials, electrical stimulation,
mechanical devices, and drugs.
Environmental Matters
- ---------------------
The Company believes it conducts its business in compliance with all
environmental laws presently applicable to its facilities. To date, there have
been no expenses incurred by the Company related to environmental issues.
Intellectual Property and Other Proprietary Rights
- --------------------------------------------------
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 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 protocols. 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 information in the
event of any unauthorized use or disclosure of such trade secrets, know-how or
other proprietary information. While certain proprietary 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
its high quality clinical outcomes and service, continued business development
and marketing skills.
Employees
- ---------
At December 31, 1998, the Company employed 52 full time and no part-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. The Company considers its relationship with its employees to
be excellent.
Medcareonline.com
- -----------------
Medcareonline.com will offer wide ranging direct-to-consumer health
information, such as health travel advisory, health news, symposiums, medical
journals and publications, and extensive research and web based services for
physicians. Part of the Company's strategy is to increase site content, features
and services, including adding an online health magazine and advertising on
traditional and non-traditional media. In addition, the Company plans to add
e-commerce, which will eventually include a wide range of health related
products and services.
Medcareonline.com also plans to offer free web hosting and home page
services for physicians, specifically targeting male and female health
specialties. In addition to information on the location of their office, hours
of operation, profiles of doctors and services offered, Medcareonline.com will
also allow physicians to easily customize content on their
32
<PAGE>
websites, send and retrieve e-mail, conduct e-commerce and allow patients to
interact on various health topics in "disease and condition" specific chat
rooms.
As of December 31, 1998, the Company had not generated any revenues nor
incurred any expenses related to Medcareonline.com.
Competitive Business Conditions for Medcareonline.com
- -----------------------------------------------------
The market for internet services and internet advertising is intensely
competitive. There are no substantial barriers to entry in these markets and
Medcareonline.com expects competition to intensify. The Company believes that
the number of companies relying on fees from internet based advertising has
increased substantially during the past year. The Company believes the main
competitive factors in this market are brand recognition, user base,
performance, ease of use, variety of value-added services, features and quality
of support.
Many of Medcareonline.com's existing competitors, as well as a number of
potential new competitors, have longer operating histories in the internet
market, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources than Medcareonline.com.
Such competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential employees, distribution partners, advertisers and content providers.
Further, these competitors may develop internet search and retrieval services or
other online services that are equal or superior to those of Medcareonline.com
or that achieve greater market acceptance than Medcareonline.com.
Medcareonline.com will also compete with traditional advertising media,
such as print, radio and television, for a share of advertisers' total
advertising budgets. If advertisers do not perceive internet advertising to be
as effective as traditional media, Medcareonline.com's business may be adversely
affected.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The "MedCare Program" is a discrete package of equipment, software and
services developed by MedCare to assist physicians in providing non-
pharmaceutical, non-invasive treatment to patients suffering from UI and other
pelvic disorders, including pelvic pain, chronic constipation, fecal
incontinence and disordered defecation. The MedCare Program is used by
physicians to support a treatment plan based primarily on behavioral
modification techniques such as EMG biofeedback, pelvic floor muscle exercise,
and bladder and bowel retaining. Utilizing the MedCare Program, physicians help
patients activate and strengthen the various sensory response mechanisms that
maintain bladder and bowel control. 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.
To date, MedCare has not received 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 contracting with
additional physicians for utilization of the MedCare Program on a national
basis. Although planned principal operations have commenced, substantial
revenues have yet to be realized.
RESULTS OF OPERATIONS
Revenues. The Company had revenues of $786,586, $91,802 and $0 for the
years ended December 31, 1998, 1997 and 1996 respectively. During 1998, the
Company changed the profile of the type of physician practices it would contract
with from single physician practice offices to multi physician practice offices.
Existing offices that were not profitable and no longer met the profile were
closed. As of December 31, 1998, the Company operated at 25 sites and is
expecting to begin operating at its remaining contracted sites during the first
half of 1999. 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 commencement of operations of the MedCare Program at
additional sites in the United States,
33
<PAGE>
and possibly select foreign markets. In addition, during 1999, the Company
expects to begin generating revenue from the sale of advertising from its new
wholly-owned subsidiary, Medcareonline.com. As of December 31, 1998, there have
been no revenues or expenses related to Medcareonline.com.
General and Administrative Expenses. During 1998, the Company incurred
$4,689,400 in general and administrative expenses, an increase of 209% over 1997
expenses of $1,515,459. During 1996, the Company incurred expenses of $452,037.
The Company experienced a $.52 per share loss for the year ended December 31,
1998, versus a $.21 per share loss for the year ended December 31, 1997 and 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. Interest income was $162,109, $119,146 and $2,801 for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest earned in
the future will be dependent on Company funding cycles and prevailing interest
rates.
Provision for Income Taxes. As of December 31, 1998, the Company's
accumulated deficit was $6,491,871, and as a result, there has been no provision
for income taxes to date. The Company has net operating losses that will expire
beginning with the year 2002 in the amount of $5,050,407 unless utilized by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a cash balance of $2,826,086,
compared to a cash balance of $3,440,791 at December 31, 1997 and $219,775 at
December 31, 1996.
During 1998, the Company used $3,381,600 of net cash from operating
activities as compared to $1,373,592 of net cash used in 1997. The increase in
the net cash used in operating activities was due mainly to the increase in the
general and administrative expenses explained above.
Net cash used in investing activities was $315,335 for 1998, compared to
net cash used of $33,642 in 1997. The increase in the net cash used in investing
activities was due to the purchase of additional computer and medical equipment
to support the expansion of operations during 1998.
Net cash provided by financing activities was $3,082,230 for 1998, compared
to net cash provided of $4,628,250 in 1997. The Company has financed its
operations primarily through private placements of Common Stock, Preferred Stock
and the exercise of stock options and warrants as described below.
During fiscal 1998, 200,000 warrants to purchase Common Stock were
exercised at $6 per share, or $1,200,000. In addition, on November 6, 1998, the
Company issued 300,000 shares of Common Stock at $5.00 per share to Lyons
Capital Corporation, a Bermuda corporation, with a warrant to purchase an
additional 300,000 shares at $5.00 per share pursuant to an offering made under
Rule 506 promulgated under the Securities of 1933, as amended ("Rule 506"). The
warrant is exercisable until October 14, 2004. The proceeds were used for
working capital and expansion of operations.
On February 1, 1997, 176,000 shares of Common Stock were offered at a price
of $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 operations.
On July 7, 1997, 300,000 shares of Common Stock were offered 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, pursuant to Rule 506, the Company began offering for sale
Preferred Stock 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
offering closed on July 8, 1997 with the minimum offering of $1,650,000 placed.
The proceeds were used for working capital and expansion of operations.
34
<PAGE>
The Preferred Stock was accompanied by warrants to purchase a total of
258,302 shares of Common Stock of the Company at an exercise price of $7.346 per
share. In addition, the purchasers of the Preferred Stock also received
Preferred Stock Warrants to purchase an equal amount of Preferred Stock under
the same terms as the original offering. In conjunction with that 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 that designated 1,000 shares of the Company's one million
shares of authorized preferred stock to be Preferred Stock. This stock has an
eight percent (8%) per annum accretion rate. No dividend rights have been
granted to this stock.
The conversion terms outlined in the Certificate of Designation state that
holders of the Preferred Stock can convert their stock using the following
formula per share of Preferred Stock:
(.08)(N/365)(10,000) + 10,000
-----------------------------
Conversion Price
At [December 31, 1998], the Conversion Price is determined as the lesser of
$7.346 or 80% of the average closing bid price of the Company's Common Stock for
the five trading days immediately preceding the date of conversion.
The Company also has the right to redeem the Preferred Stock upon receipt
of notice of conversion at various rates, depending on the length of time since
issuance.
Of the original 258,302 Conversion Warrants that were issued, 36,755 shares
were forfeited due to the early conversion of Preferred Stock. In addition, the
Placement Agent and its affiliates exercised all but 6,500 of its original
Placement Warrants utilizing the cashless exercise option resulting in 8,990
shares of Common Stock being issued. The remaining Conversion Warrants and
Placement Warrants are still outstanding.
In June of 1998, the Preferred Stock investors exercised 165 Preferred
Stock Warrants and were issued 165 shares of New Preferred Stock. Upon
conversion of the Preferred Stock Warrants, the investors and the Company
deposited into an escrow account the proceeds of $1,650,000 and the related New
Preferred Stock pending final approval of the Company's registration statement.
In addition, the Company and the investors entered into an agreement which
provided for the investors to receive three month warrants at an exercise price
of $7.346 per share and to forfeit any rights to additional preferred warrants,
nine month warrants, 12 month warrants and 15 month warrants. Of the original
four investors who participated in the escrow agreement, three withdrew their
proceeds of $1,400,000 and forfeited the related New Preferred Stock and
warrants. The forfeited New Preferred Stock and related warrants were canceled.
The remaining investor, Concordia Partners, released its investment of $250,000
to the Company and received 25 shares of New Preferred Stock and 11,344 warrants
exercisable three months after their issuance date at an exercise price of
$7.346 per share. In total, as of [December 31, 1998], there were 50 shares of
Preferred Stock outstanding, all of which are owned by Concordia Partners.
The Company's future funding requirements will depend on numerous factors,
including the Company's ability to establish and operate profitably current and
future MedCare Program locations, recruiting and training qualified management
and clinical personnel, competing against any potential technological advances
in the treatment of UI and other afflictions of the pelvic floor area, and the
Company's ability to compete against better capitalized corporations who offer
alternative or similar treatment options for urinary incontinence and other
afflictions of the pelvic floor area.
YEAR 2000
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with 20 instead of 19. If not
corrected, many computer applications could fail or create erroneous results.
Management has initiated a comprehensive program to prepare the company's
systems for the Year 2000. The Company is actively engaged in testing and fixing
applications to ensure they are Year 2000 ready. The Company does not separately
track the internal costs incurred for the Year 2000 project but such costs are
principally the related payroll costs
35
<PAGE>
for certain corporate staff. The Company currently does not expect remediation
costs to be material nor does it expect any significant interruption to its
operations because of Year 2000 problems.
The Company is in the process of contacting all third parties with which it
has significant relationships, to determine the extent to which the Company
could be vulnerable to failure by any of them to obtain Year 2000 compliance.
Some of the Company's major suppliers and financial institutions have confirmed
that they anticipate being Year 2000 compliant on or before December 31, 1999,
although many have only indicated that they have Year 2000 readiness programs.
To date, the Company is not aware of any significant third parties with a Year
2000 issue that could materially impact the Company's operations, liquidity or
capital resources. However, the Company has no means of ensuring that third
parties will be Year 2000 ready and the potential effect of third-party non-
compliance is currently not determinable.
The Company has devoted and will continue to devote the resources necessary
to ensure that all Year 2000 issues are properly addressed. However, there can
be no assurance that all Year 2000 problems are detected. Further, there can be
no assurance that the Company's assessment of its third party relationships will
be accurate. Some of the potential scenarios that could occur include (1)
corruption of data in the Company's internal systems and (2) failure of
government and insurance companies' reimbursement programs. If any of these
situations were to occur, the Company's operations could be temporarily
interrupted. The Company intends to develop Year 2000 contingency plans for
continuing operations in the event such problems arise.
DESCRIPTION OF PROPERTY
The Company's principal office is located at 1515 West 22nd Street, Suite
1210, Oak Brook, Illinois, 60521. This office is 2400 square feet and is
subleased for $5,100 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 in Vancouver,
British Columbia 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.
The Company does not purchase or lease property on behalf of its MedCare
Program participants. Instead, the Company typically enters into a "Practice
Management Agreement" ("PMA") with a physician in order to manage the
incontinence portion of their practice. The PMA calls for the Company to provide
trained support personnel, electromyography equipment and a comprehensive policy
and procedures manual. The physician is required to provide a dedicated
examining room, typically 10' x 10' or larger in size, at no charge and for the
duration of the agreement, usually for a five year term.
CERTAIN TRANSACTIONS
On October 1, 1995, the Company acquired 100% of Manon Consulting Ltd. for
nominal value. Diane Nunziato, a director of the Company until September 17,
1997, was a director and minority shareholder of Manon Consulting at the time of
the transaction, which was approved by both boards after disclosure. The Company
operated its Calgary clinic through Manon Consulting until the closure of this
clinic on December 31, 1996. Since Manon Consulting has no historical
profitability and is partially responsible for the development of the MedCare
program through Manon Consulting's clinical activities, the Company acquired
Manon Consulting for nominal value.
On July 7, 1997, 300,000 shares of Common Stock of the Company and 300,000
warrants to purchase shares of Common Stock of the Company were sold to Matrix
Capital Corp., which is the beneficial owner of more than five percent of the
Common Stock of the Company. See "SELLING SECURITY HOLDERS."
In June 1998, Queensway Financial Holdings Ltd., which is the beneficial
owner of more than five percent of the Common Stock of the Company, entered into
an agreement with the Company to become a Preferred Stock Selling Security
Holder, involving the purchase of additional shares and warrants. See "SELLING
SECURITY HOLDERS."
On November 6, 1998, the Company issued 300,000 shares of its Common Stock
at $5.00 per share to Lyons Capital Corporation, a Bermuda corporation, with a
warrant to purchase an additional 300,000 shares at $5.00 per share as an
offering pursuant to Regulation D, Rule 506. The warrant is effective until
October 14, 2004. These shares are unregistered and are not being offered
hereby.
36
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The following table sets forth for the periods indicated the high and low
closing prices for the Common Stock of the Company in transactions on the OTC
Bulletin Board and Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
First Quarter 1997 $ 8.25 $ 6.75
Second Quarter 1997 $8.0625 $ 6.25
Third Quarter 1997 $ 9.25 $6.875
Fourth Quarter 1997 $ 8.125 $7.625
First Quarter 1998 $ 9.375 $7.375
Second Quarter 1998 $ 11.25 $ 9.00
Third Quarter 1998 $ 9.31 $ 6.00
Fourth Quarter 1998 $7.4375 $4.875
First Quarter 1999 $ 8.25 $ 5.25
</TABLE>
Holders
As of April 30, 1999, there were approximately 350 stockholders of record
of the Company's Common Stock.
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.
EXECUTIVE COMPENSATION
Remuneration and Executive Compensation
The following table shows, for the three-year period ended December 31,
1998, 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 most highly compensated executive officers.
Except as set forth on the following table no executive officer of the Company
had a total annual salary and bonus for fiscal 1998 that exceeded $100,000.
37
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Securities
Underlying
Name and Options All Other
Principal Position Year Salary Bonus Other Granted Compensation
- ------------------ ---- ------ ----- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harmel S. Rayat 1998 $ 25,000 $ 0 $0 0 $ 0
Chairman, (CEO 1997 $ 40,000 $ 0 $0 0 $ 0
until August, 1998) 1996 $ 0 $ 0 $0 160,000 $ 0
Jeff Aronin 1998 $118,750 $51,000 $0 100,000 $12,000
President, (CEO 1997 $ 46,433 $ 0 $0 500,000 $ 3,000
since August, 1998) 1996 $ 0 $ 0 $0 0 $ 0
Greg Wujek 1998 $ 95,000 $27,500 $0 155,000 $ 3,600
VP of Managed Care 1997 $ 12,050 $ 0 $0 0 $ 0
1996 $ 0 $ 0 $0 0 $ 0
</TABLE>
STOCK OPTION GRANTS IN 1998
Shown below is further information regarding employee stock options awarded
during 1998 to the officers and directors;
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to Exercise Expiration
Name Options Employees Price Date
- ---- --------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Harmel S. Rayat 0 0% N/A N/A
Jeff Aronin 100,000 24% $6.00 2009
Greg Wujek 155,000 38% $7.00 2005
</TABLE>
AGGREGATED OPTION EXERCISES DURING 1998 AND YEAR-END OPTION VALUES
The following table shows certain information about unexercised options at
year-end with respect to the named officers and directors:
<PAGE>
<TABLE>
<CAPTION>
Common Shares
Underlying Value of Unexercised
Unexercised Options In-The-Money Options
on 12/31/98 on 12/31/98
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harmel S. Rayat 0 0 0 0
Jeff Aronin 400,000 200,000 $15,625 $0
Greg Wujek 105,000 50,000 $0 $0
</TABLE>
There were no options exercised by any of the officers listed above in
1998.
The value of the options is calculated using the fair market value of the
Company's Common Stock on December 31, 1998 ($6.16 per share) minus the exercise
price per share, of the in-the-money options, multiplied by the number of shares
subject to each option.
Employment Contracts
On December 15, 1998, the Company entered into an employment agreement with
Jeff Aronin, CEO and President. The employment agreement is for two years from
December 9, 1998 and automatically extended for successive one-year periods
unless the Company or Mr. Aronin delivers to the other party written notice
specifying such party's intent not to extend or re-extend the term for an
additional one-year period. The employment agreement entitles Mr. Aronin to
receive an annual base salary of not less than $150,000; provided, however,
that, effective January 1, 1999, Mr. Aronin will receive an annual base salary
of not less than $200,000. In addition to the base salary, Mr. Aronin will be
eligible for an annual bonus for each fiscal year during the term based on such
performance standards as the Board or compensation committee designated by the
Board may establish. The Company also entered into a stock option agreement with
Mr. Aronin, which grants him an option to purchase 500,000 shares at $6.50 per
share (300,000 of which options are already vested) and an additional option to
purchase 100,000 shares at $6.00 (all of which options are vested). Upon any
change in control, all of the aforementioned options vest immediately.
Directors' Compensation
The Company's employees receive no extra pay for serving as directors. Non-
employee directors are reimbursed for any out of pocket meeting expenses and are
compensated with stock options. In 1998, Dr. Michael Blue received 20,000 stock
options that have an exercise price of $9.00 a share and vest equally over four
years.
EXPERTS AND LEGAL MATTERS
Legal matters will be passed upon for the Company by Barack Ferrazzano
Kirschbaum, Perlman & Nagelberg, 333 W. Wacker Drive, Suite 2700, Chicago,
Illinois 60606.
The financial statements of the Company for the years ended December 31,
1998 and 1997 appearing in this Prospectus have been audited by Clancy & Co.,
P.L.L.C., independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Clancy and Co., P.L.L.C. were dismissed by the Company after the audit for
the fiscal year ending December 31, 1998. The dismissal was approved by the
Board of Directors. Clancy and Co., P.L.L.C. issued an unqualified audit opinion
on the 1998 year-end financial statements and modified their audit opinion on
the 1997 year-end financial statements to reflect the development stage status
of the Company at that time. During the course of their work, the Company and
Clancy and Co., P.L.L.C. have not had any disagreements on any matter of
accounting principles or
39
<PAGE>
practices, financial statement disclosure, or auditing scope or procedure which
were not resolved to the satisfaction of the auditor.
The Board of Directors has appointed Arthur Andersen LLP as independent
auditors for the Company for the fiscal year ending December 31, 1999.
Shareholders will be asked to ratify this selection at the 1999 Annual Meeting
of Shareholders of the Company.
40
<PAGE>
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
MedCare Technologies, Inc. and
Subsidiaries
Oak Brook, Illinois 60521
We have audited the consolidated balance sheet of MedCare Technologies, Inc. and
Subsidiaries, (the Company), as of December 31, 1998 and 1997, and the related
consolidated 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997, and the consolidated results of their operations and
their consolidated 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, 1999
41
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
Current Assets
- --------------
<S> <C> <C>
Cash $ 2,826,086 $ 3,440,791
Accounts Receivable, net of Allowance for
Doubtful Accounts of $45,165 and $0 271,240 67,530
Prepaid Expenses 0 43,569
----------- -----------
Total Current Assets 3,097,326 3,551,890
Property and Equipment, Net (Note 3) 283,630 33,526
Intangible Assets-the MedCare Program, net of
Accumulated Amortization of $68 and $0 932 1,000
----------- -----------
Total Assets $ 3,381,888 $ 3,586,416
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Accounts Payable and Other Accrued Liabilities $ 469,743 $ 15,796
Notes Payable - Related Parties 0 1,000
----------- -----------
Total Current Liabilities 469,743 16,796
Stockholders' Equity
- --------------------
Preferred Stock $.25 Par Value, Authorized 1,000,000; Issued
and outstanding, 50 and 165 Convertible Series A
at December 31, 1998 and 1997 12 41
Common Stock - $0.001 Par Value Authorized 100,000,000;
Issued and outstanding, 7,825,105 and 6,992,185 Shares at
December 31, 1998 and 1997 7,825 6,992
Additional Paid in Capital 9,396,179 6,284,505
Retain Earnings (Deficit) (6,491,871) (2,721,918)
----------- -----------
Total Stockholders' Equity 2,912,145 3,569,620
----------- -----------
Total Liabilities and Equity $ 3,381,888 $ 3,586,416
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
MEDCARE TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/98 12/31/97
----------- -----------
<S> <C> <C>
Revenues $ 786,586 $ 91,802
General and Administrative Expenses 4,689,400 1,515,459
----------- -----------
Operating Loss (3,902,814) (1,423,657)
Other Income (Expense)
Interest Income 162,109 119,146
Loss From Discontinued Operations 0 (4,489)
Gain on Sale of Subsidiary 0 15,770
----------- -----------
Total Other Income (Expense) 162,109 130,427
----------- -----------
Net Loss (3,740,705) (1,293,230)
Less: Preferred Deemed Dividends (29,248) (247,712)
----------- -----------
Net Loss Available to Common Stockholders $(3,769,953) $(1,540,942)
Earnings Per Common Share & Common
Share Equivalents $( 0.52) $( 0.21)
Weighted Number of Common Shares Outstanding 7,302,387 7,270,185
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
--------- -------- --------- ------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 0 0 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, at
$6.25 Per Share 176,000 176 1,099,824 1,100,000
</TABLE>
The accompanying notes are an integral part of these financial statements
44
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Preferred Stock
Under a Private Placement
Dated July 8, 1997, at $10,000
Per Share 165 41 1,649,959 1,650,000
Less cost of Private Placement (123,750) (123,750)
Periodic Imputed Cost of
Preferred Stock Issued on July
8, 1997 247,712 247,712
Issuance of Common Stock
Under a Private Placement
Dated July 7, 1997, at $6.00
Per Share 300,000 300 1,799,700 1,800,000
Net Loss Available to Common
Stockholders for the Year
Ended December 31, 1997 (1,540,942) (1,540,942)
------ ------ ------ ------ ---------- ----------- -----------
Balance, December 31, 1997 165 41 6,992,185 6,992 6,284,505 (2,721,918) 3,569,620
Issuance of Common Stock For
Prior Year Consulting
Agreement 6,000 6 (6) 0
</TABLE>
45
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock For
Prior Period Error 1,194 1 (1) 0
Issuance of Common Stock
For Warrants Exercised on
March 31, 1998, at $6.00 Per
Share 200,000 200 1,199,800 1,200,000
Issuance of Common Stock at
$7.346 in an Exercise of
Cashless Warrants 8,990 9 (9) 0
Placement of Preferred Stock in
Escrow at $10,000 Per Share
Per Offering Dated June 1998 165 41 1,649,959 1,650,000
Withdrawal of Funds In Escrow
Per Offering Dated June, 1998,
at $10,000 Per Share (140) (35) (1,399,965) (1,400,000)
Offering Costs Associated With
Three Month Warrant to
Purchase 25 Shares of
Preferred Stock (13,770) (13,770)
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------- ------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
Under a 506D Offering on
November 6, 1998 at $5.00
Per Share 300,000 300 1,499,700 1,500,000
Issuance of Common Stock for
Conversion of Preferred Stock
at Various Prices Per Share (140) (35) 272,736 273 (238)
Issuance of Common Stock
Under 1995 Stock Option
Plan at $3.00 Per Share 0 0 34,000 34 101,966 102,000
Issuance of Common Stock
Under 1996 Stock Option
Plan at $4.50 Per Share 0 0 10,000 10 44,990 45,000
Preferred Deemed Dividend 29,248 29,248
</TABLE>
The accompanying notes are an integral part of these financial statements
47
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Retained
Preferred Stock Common Stock Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loss Available to Common
Stockholders for the Year
Ended December 31, 1998 (3,769,953) (3,769,953)
------ ------ --------- ------- ---------- ----------- -----------
Balance, December 31, 1998 50 $ 12 7,825,105 $ 7,825 $9,396,179 $(6,491,871) $ 2,912,145
====== ====== ========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(3,769,953) $(1,540,942)
Adjustments to Reconcile Net Loss to Net
Cash Used In Operating Activities
Preferred Deemed Dividends 29,248 247,712
Depreciation and Amortization 65,300 9,546
Net Assets of Manon Consulting, Ltd 0 (11,281)
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable (203,710) (39,935)
(Increase) Decrease in Prepaid Expenses 43,569 (34,697)
Increase (Decrease) in Accounts Payable and
Other Accrued Liabilities 453,946 (3,995)
----------- -----------
Total Adjustments 388,353 167,350
----------- -----------
Net Cash Used In Operating Activities (3,381,600) (1,373,592)
Cash Flows From Investing Activities
Purchase of Property and Equipment (315,335) (33,642)
----------- -----------
Net Cash Used In Investing Activities (315,335) (33,642)
Cash Flows From Financing Activities
Proceeds From Sale of Common Stock 2,847,000 3,138,500
Proceeds From the Sale of Preferred Stock 250,000 1,650,000
Offering Costs (13,770) (123,750)
Advances (Repayments) Notes Payable (1,000) (24,000)
Advances (Repayments) To Officers 0 (12,500)
----------- -----------
Net Cash Provided By Financing Activities 3,082,230 4,628,250
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (614,705) 3,221,016
Cash and Cash Equivalents, Beginning of Year 3,440,791 219,775
----------- -----------
Cash and Cash Equivalents, End of Year $ 2,826,086 $ 3,440,791
=========== ===========
Supplemental Information:
- -------------------------
Cash paid for:
Interest $ 0 $ 0
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION
------------
MedCare Technologies, Inc. (the Company), a Delaware Corporation, has an
authorized capital of 101,000,000 shares of which 100,000,000 shares are
common stock with a par value of $.001 and 1,000,000 shares are preferred
stock with a par value of $.25 per share.
The Company has developed The Medcare Program, a nonsurgical, nondrug,
noninvasive and cost-effective treatment program for urinary and rectal
incontinence, and other pelvic disorders, utilizing behavioral and
biofeedback techniques such as electromyography, designed to activate and
strengthen the various sensory response mechanisms that maintain bladder
and bowel control.
The Company engages in a Program Management Agreement with each Practice,
which is defined as a physician or group of physicians, involved on a
regular basis in the diagnosis, evaluation and treatment of urinary and
rectal incontinence, as well as other pelvic dysfunction. The agreements
have various expiration dates, typically run for a period of three (3) to
five (5) years, and may be terminated upon the occurrence of certain
conditions as set forth in the agreement. Each Practice also agrees to
sign a Confidentiality and Noncompetition Agreement as a condition
precedent to the performance by the Company of its obligations.
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.
C. Concentration of Credit Risk
----------------------------
The Company maintains cash balances in excess of $100,000 at a local bank.
The balance is insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company also maintains U.S. Dollar cash balances in Canadian
banks, that are not insured.
D. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Medcare Technologies, Corporation. All
material intercompany transactions have been eliminated in consolidation.
50
<PAGE>
E. Property and Equipment
----------------------
Property and equipment, stated at cost, is depreciated under the straight-
line method over their estimated useful lives ranging from three to seven
years.
F. Revenue Recognition
-------------------
Revenues are recognized at time of performance of services. The Company
agrees to provide on an exclusive basis equipment, personnel and
administrative services to the Practice in connection with the Practice's
establishment and operation of the Program. Each Practice agrees to pay the
Company a management fee for each patient visit to the Practice during
which a patient receives services under the Program. The Company invoices
the Practice for the management fee each calendar month, which is due in
full, within forty-five (45) to sixty (60) days of the date of such
invoice.
G. 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 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.
H. Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes."
Under SFAS 109, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. See Note 10.
I. Per Share of Common Stock
-------------------------
Basic earnings or loss per share has been computed based on the weighted
average number of common shares and common share equivalents outstanding.
All earnings or loss per share amounts in the financial statements are
basic earnings or loss per share, as defined by SFAS No. 128, "Earnings Per
Share." Diluted earnings or loss per share does not differ materially from
basic earnings or loss per share for all periods presented. The number of
shares used in computing earnings (loss) per common share at December 31,
1998 and 1997 was 7,302,387 and 7,270,185, respectively.
J. Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
51
<PAGE>
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. The Company has
elected to remain on its current method of accounting as described above,
and has adopted the disclosure requirements of SFAS No. 123, effective
January 1997. See Note 6.
K. Business Segment Information
----------------------------
The Company implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," on January 1, 1998. The Company
operates in one industry segment, that being the treatment of urinary and
rectal incontinence, and all of the activity flows through the Company's
subsidiary. There were no material amounts of sales or transfers among
geographic areas or major customers within the United States.
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 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Office Equipment $ 11,930 $ 9,541
Computer Equipment 164,931 11,528
Medical Equipment 127,315 29,799
Computer Software 48,832 0
Building Improvements 11,695 0
Furniture 1,500 0
-------- --------
Total 366,203 50,868
Less Accumulated Depreciation (82,573) (17,342)
-------- --------
Net Book Value $283,630 $ 33,526
======== ========
</TABLE>
Depreciation charged to expense during the years ended December 31, 1998
and 1997 was $65,231 and $9,546, respectively.
52
<PAGE>
NOTE 4 - 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 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 $68 per year for
each of the years. Amortization expense charged to operations during the
years ended December 31, 1998, was $68.
NOTE 5 - NOTES PAYABLE - RELATED PARTY
-----------------------------
During the year ended December 31, 1997, an Officer of the Company advanced
the Company $1,000, which was due on demand and with no interest rate
currently applicable. The Company repaid this loan in March 1998.
NOTE 6 - STOCK OPTIONS
-------------
The Company has five stock option plans that provide for the granting of
stock options to officers and key employees. The objectives of these plans
include attracting and retaining the best personnel, providing for
additional performance incentives, and promoting the success of the Company
by providing employees the opportunity to acquire common stock. Options
outstanding under the Company's five stock option plans have been granted
at prices which are either equal to or above the market value of the stock
on the date of grant and expire at various dates after the grant date.
The status of the Company's stock option plans is summarized below as of
December 31:
<TABLE>
<CAPTION>
Number of Option
Shares Price
--------- -----------
<S> <C> <C>
Outstanding at December 31, 1995 500,000 $3.00
Granted Under the 1996 Stock Option Plan 300,000 4.50
Exercised Under the 1995 Stock Option Plan (36,000) 3.00
Exercised Under the 1996 Stock (3,000) 4.50
--------------------------------------------------------------------------
Options Outstanding at December 31, 1996 761,000 3.00-4.50
Granted Under the 1997 Stock Option Plan 200,000 4.50
Granted Under the 1997 Stock Option Plan 300,000 6.50
Exercised Under the 1995 Stock Option Plan (54,000) 3.00
Exercised Under the 1996 Stock Option Plan (17,000) 4.50
--------------------------------------------------------------------------
Options Outstanding at December 31, 1997 1,190,000 3.00-6.50
Exercised Under the 1995 Stock Option Plan (34,000) 3.00
Exercised Under the 1996 Stock Option Plan (10,000) 4.50
Granted Under the 1998 Stock Option Plan 500,000 6.50-9.25
Granted Under the 1999 Stock Option Plan 200,000 6.00-9.25
--------------------------------------------------------------------------
Options Outstanding at December 31, 1998 1,846,000 $3.00-$9.25
=========
</TABLE>
53
<PAGE>
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
cost for stock options is recognized for stock options awards granted at or
above fair market value. Had compensation expense for the Company's stock-
based compensation plans been determined under SFAS No. 123, based on the
fair market value at the grant dates, the Company's pro forma net loss and
pro forma net loss per share would have been reflected as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net Loss
As reported $3,769,953 $1,540,942
Pro forma $5,145,919 $2,728,965
Net Loss Per Share
As reported $ (0.52) $ (0.21)
Pro forma $ (0.70) $ (0.38)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumption used for those options granted in 1998 and 1997, respectively:
dividend yield of 0%, expected volatility of 58% and 47%, risk-free
interest rates of 5% and 5%, and expected lives of 8 and 8 years.
NOTE 7 - STOCK WARRANTS
---------------
In July, 1997, the Company offered 300,000 shares of common stock at $6.00
each, along with an additional 300,000 common stock purchase warrants at
$6.00 each, exercisable until July 7, 2002. In March 1998, 200,000
warrants to purchase shares of common stock were exercised at $6.00 per
share, or $1,200,000.
In November 1998, the Company issued through a Rule 506 Regulation D
Private Placement, 300,000 shares of restricted common stock at $5.00 per
share, or $1,500,000, and granted 300,000 common stock purchase warrants
exercisable at $5.00 until October 14, 2004.
NOTE 8 - 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.
54
<PAGE>
The Series A Preferred Shareholder is 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.
During the year ended December 31, 1998, 140 shares of preferred stock were
converted to 272,736 shares of common stock at various prices per share.
In addition, 25 shares of preferred stock were issued to an investor at
$10,000 per share in accordance with the terms of the original offering.
NOTE 9 - 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. The Company reported a
gain on the transaction of $15,770.
NOTE 10 - INCOME TAXES
------------
There is no current or deferred tax expense for the years ended December
31, 1998 and 1997, due to the Company's loss position. The benefits of
timing differences have not been previously recorded.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, as
appropriate. Realization of the future tax benefits related to the deferred
tax assets is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the valuation allowance for financial reporting purposes. The income tax
effect of temporary differences comprising the deferred tax assets and
deferred tax liabilities on the accompanying consolidated balance sheet is
a result of the following:
<TABLE>
<CAPTION>
Deferred Taxes 1998 1997
----------------------- ----------- -----------
<S> <C> <C>
NOL Carryforwards $ 1,767,643 $ 628,462
Organization Costs 195,563 198,974
Accrued Expenses 93,163 0
Depreciation (3,519) 1,156
----------- -----------
Total $ 2,052,850 $ 828,592
Valuation Allowance (2,052,850) (828,592)
Net Deferred Tax Assets $ 0 $ 0
=========== ===========
</TABLE>
A reconciliation between the statutory federal income tax rate (35%) and
the effective rate of income tax expense for each of the years during the
period ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Statutory Federal Income Tax Rate (35.0%) (35.0%)
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
Accretion of Preferred Stock Dividend 0.3% 5.6%
Other 0.1% 0.5%
Increase in Valuation Allowance 34.6% 28.9%
----- -----
Effective Income Tax Rate 0.0% 0.0%
</TABLE>
The Company has available net operating loss carryforwards of $5,050,407
for tax purposes to offset future taxable income. The net operating loss
carryforwards expire as follows:
<TABLE>
<CAPTION>
<S> <C>
2002 $ 316
2003 1,030
2004 21,707
2005 10,201
2011 447,758
2012 1,314,593
2013 3,254,802
----------
$5,050,407
==========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
-----------------------------
Operating Leases - The company leases office space and office equipment
under various noncancelable operating lease agreements which expire through
2003. The Company has a second office located in Vancouver, Canada, which
is owned by one of the Company's directors, and is leased to the Company
for $2,000 per month. There is an option to renew for an additional year.
Rental expense charged to operations during the years ended December 31,
1998 and 1997 was approximately $90,000 and $24,000, respectively.
Future minimum payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $66,082
2000 $67,544
2001 $66,486
2002 $67,107
2003 $ 5,602
</TABLE>
Employment Agreements - The Company has employment and stock option
agreements with its President and Chief Executive Officer. The employment
agreement provides for the officer to earn a minimum of $150,000 annually.
Effective January 1, 1999, the officer shall earn a minimum of $200,000
annually through January 1, 2000. The officer is also eligible for an
annual bonus for each fiscal year of the Company during the term based on
performance standards as the Board or compensation committee designates.
The officer shall also receive monthly an automobile allowance of five
hundred ($500) per month. The stock option agreement grants the officer (a)
an option to acquire five hundred thousand (500,000) shares at an exercise
price per share of $6.50, 300,000 of which have vested, and (b) an option
to acquire one hundred thousand (100,000) shares at an exercise price per
share of $6.00, which have vested. The options granted shall terminate on
July 1, 2005.
NOTE 12 - MEDCARE PROGRAM SITES
---------------------
56
<PAGE>
The following program site locations were operating as of December 31,
1998:
Norman, Oklahoma; Buffalo Grove, Illinois; Raleigh, North Carolina;
Stamford, Connecticut; Kankakee, Illinois; Shelby, North Carolina;
Kingwood, Texas; Mine Hill, New Jersey; Toledo, Ohio; Natick,
Massachusetts; Fremont, California; Findlay, Ohio; Roswell, Georgia;
Newport News, Virginia; Dallas, Texas; Owings Mills, Maryland; New York,
New York; Baltimore, Maryland; Fayetteville, North Carolina; San Antonio,
Texas; Alexandria, Virginia; Augusta, Georgia; Wentzville, Maryland;
Amherst, Ohio; and Scottsdale, Arizona.
57
<PAGE>
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The officers and directors of the Company are indemnified as provided under
the Delaware General Corporation Law. No additional indemnification has been
authorized.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the Registration Statement are as follows:
<TABLE>
<CAPTION>
<S> <C>
Escrow Agent: $ 4,060.00
Transfer Agent: $ 841.00
Legal and Accounting: $49,369.75
TOTAL $54,270.75
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
58
<PAGE>
The Company offered for sale a Private Placement Memorandum pursuant to
Regulation D, Rule 504 which was begun on June 22, 1996 and completed on August
15, 1996. This offering was for 50,000 shares of common stock at $4.75 per share
for a total offering of $237,500. The proceeds from this offering were used for
equipment purchase and working capital. The purchasers were as follows:
<TABLE>
<CAPTION>
Shareholder Shares Purchased
----------- ----------------
<S> <C>
Polygon Investments SA 21,053
P.O. Box 108, Front Street
Grand Turk, Turks & Caicos Isl
Perato Fund LP 13,158
1400-400 Burrard Street
Vancouver, BC V6C 3G2 Canada
Herdev S. Rayat* 15,789
1025 Augusta Avenue
Burnaby, BC V5A 1K3 Canada
</TABLE>
*Mr. Rayat is an accredited investor and the brother of Harmel Rayat, Chairman
of the Board.
The Company offered for sale a Private Placement Memorandum pursuant to
Regulation D, Rule 504 which was begun on November 18, 1996 and completed on
December 24, 1996. This offering was for 56,000 shares of common stock at $4.50
per share for a total offering of $252,000. The proceeds from this offering were
used for advertising and marketing and working capital. All shares of stock of
this offering were sold to Daimler Enterprises, Inc., 7 Prince Street, Belize
City, Belize.
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 28, 1997. The proceeds were
used for working capital and expansion of the MedCare Program. All shares of
stock of this offering were purchased by Greystone Management Ltd., c/o P.O. Box
392, Bowater House, 68 Knightsbridge, London, SW1X 7NT, England. The purchaser
was a foreign entity with sufficient financial sophistication developed through
its business dealings to properly assess this investment and complete access to
registration information.
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. All shares and warrants were purchased by Matrix Capital Corp.,
P.O. Box 170 Front Street, Grand Turk, Turks & Caicos Isl. The purchaser was a
foreign entity with sufficient financial sophistication developed through its
business dealings to properly assess this investment and complete access to
registration information.
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 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.
The Company and Swartz Investments, LLC entered into a Placement Agent
Agreement to define the terms of their relationship for this offering. According
to this agreement, the Placement Agent agreed to find subscribers for the
Company's Preferred Stock Series A offering in exchange for a placement fee of
5-1/2% of the aggregate gross subscription proceeds of the offering, a non-
accountable expense allowance of 2% of the aggregate gross subscription
proceeds, and, if a subscriber exercises a preferred warrant, a fee consisting
of 7-1/2% of the aggregate exercise price, as defined in the Preferred Warrant.
The Placement Agent Agreement also grants to the Placement Agent three sets of
warrants (i) warrants to purchase stock equal to 7-1/2% times the aggregate
gross subscription proceeds divided by the
59
<PAGE>
Fixed Conversion Price (as defined in the Certificate of Disclosure), (ii)
warrants to purchase stock equal to 7-1/2% of the number of Conversion Warrants
placed in the offering (as defined in the Subscription Agreement) and (iii) upon
the exercise of a Preferred Warrant by a Stockholder, warrants to purchase stock
equal to 7-1/2% of the gross proceeds received by the Company upon the exercise
of the Preferred Warrant divided by the Exercise Price (as defined in the
Preferred Warrant). All three of these warrants are for a period of five years
at a fixed conversion price of $7.346 per share, as defined in the Certificate
of Disclosure. The Placement Agent Agreement also contains cashless exercise and
reset provisions. The offering was sold to a total of five off-shore entities,
not including the shares given to the Placement Agent. The purchasers were
foreign entities with sufficient financial sophistication developed through
their business dealings to properly assess this investment and complete access
to registration information.
Integration Discussion
- ----------------------
1. Rule 504, offered 8/31/95, closed 9/30/95, amount sold $630,000;
2. Rule 504, offered 6/22/96, closed 8/15/96, amount sold $237,500;
3. Rule 504, offered 11/18/96, closed 12/24/96, amount sold $252,000;
4. Rule 506, offered 2/1/97, closed 2/28/97, amount sold $1,100,000; and
5. Rule 506, offered 7/7/97, closed 7/30/97, amount sold $1,800,000.
Offering 1 and offering 2 occurred more than 6 months from each other and
under the general provisions of Rule 502, integration does not apply. Offerings
1 and 2 were done while Medcare was non reporting, was not an investment company
and had a specific business plan. The aggregate offering price cannot exceed
$1,000,000 within the twelve months before and during the offering. This
aggregate offering from July 15, 1995 through July 15, 1996 was $867,500, less
than the maximum amount.
Offering 2 and offering 3 occurred more than 6 months from each other and
the general provisions of Rule 502, integration do apply. The offerings were not
a part of a single plan of financing, were made at different times as the
opportunities came available and were not made for the same general purpose.
Offerings 2 and 3 were done while Medcare was non reporting, was not an
investment company and had a specific business plan. The aggregate offering
price cannot exceed $1,000,000 within the twelve months before and during the
offering. This aggregate offering from November 18, 1995 through December 24,
1996 was $489,500, less than the maximum amount. Since the integration
provisions apply the amounts will be aggregated and examination under the
exemption will still be available because less than $1,000,000 was offered.
Offerings 3 and 4 were in reliance on Rule 504 and 506 respectively. The
offerings were done within 6 months of each other and will be integrated as
provided under Rule 502. The offerings should not be integrated when examined
under the five factors test. Medcare has approached financing on an individual
basis as opportunities have come forth from various interested investors. The
offerings have not come as a result of any single plan of financing. As detailed
in the offering memoranda, additional capital was needed at each stage of the
funding with no plan as to the terms or the amount of funding required. Since
the sales were made within six months of each other, the safe harbor is not
available. The securities are common stock of the Company, but have been sold
for different prices. The sales have not been made for the same purpose. The 504
offering was done essentially to provide working capital to the business and the
506 offering was to provide capital funding to develop various sites and the
program. Considering the above comments, the integration provisions should not
apply.
Offerings 4 and 5 are both in reliance on Rule 506 and have been made within
6 months of each other. Even if these offerings are integrated, the exemption is
available. The aggregate offerings have been sold to less than 35 unaccredited
investors and all other provisions of Rule 506 have been met. The money received
in these successive offerings was not part of a single plan of financing and was
structured as presented to the Company. The timing of the sales was within six
months, but only as made available to the purchase. Two of the offerings were
common stock and the third preferred. The consideration varies among the three
instruments. Each of the offerings were done and the proceeds applied in a
different manner. The integration provisions should not apply.
The Company also offered preferred stock for sale to four accredited
investors in reliance on Rule 506 of Regulation D. The offering was sold to the
following individuals and for the following amounts:
<TABLE>
<CAPTION>
Number of Price per
Warrantee Shares Share Exercise Date
<S> <C> <C> <C>
Lakeshore International 50 $10,000 June 20, 1998
Queensway Financial
</TABLE>
60
<PAGE>
Holdings Limited 200 $10,000 June 20, 1998
Concordia Partners L.P. 50 $10,000 June 20, 1998
The Matthew Fund N.V. 30 $10,000 June 20, 1998
Total: 330 Preferred Share Warrants
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.
Private Placement November 6, 1998
Under the terms of a private placement done by the Company in reliance on
Regulation D, Rule 506, 300,000 shares of common stock in the Company at $5.00
per share with a warrant effective until October 14, 2004 to purchase an
additional 300,000 shares at $5.00 per share were sold to Lyons Capital Corp., a
Bermuda corporation. The purchaser was a foreign entity with sufficient
financial sophistication developed through its business dealings to properly
assess this investment and complete access to registration information. The
offering was closed on November 6, 1998, and resulted in receipt by the Company
of $1,500,000. This Registration does not apply to these shares. No integration
questions arise in conjunction with this sale.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit Description
- ------- -----------
3. Articles of Incorporation and Bylaws
3a. Articles of Incorporation and Amendments*
3b. Bylaws*
4. Instruments Defining the Rights of Holders, Including Indentures
4a. Certificate of Designation*
4b. Subscription Agreement*
4c. Nine-Month Warrant*
4d. Twelve-Month Warrant*
4e. Fifteen-Month Warrant*
4f. Preferred Warrants*
4g. Registration Rights*
4h. Instructions to Transfer Agent*
4i. Agreement and Amendment*
4j. Agreement and Amendment for Queensway Financial Holdings Limited*
4k. Three-Month Warrant*
4l. Swartz Warrant*
4m. Escrow Agreement*
4n. Exhibit A to Excrow Agreement*
5. Opinion re Legality
5a. Opinion of Counsel regarding Registration*
5b. Opinion of Counsel regarding Preferred Offering Warrant
Extension*
10. Material Contracts
10a. Program Management Agreement with Amendment*
10b. Employment and Stock Agreement, dated as of December 9, 1998
between Medcare Technologies, Inc. and Jeffrey S. Aronin*
10c. Sublease dated as of December 31, 1997 between Medcare
Technologies, Inc. and Delta Dental Association*
20. Reports furnished to Security Holders
20a. Stock Option Plan 1995*
61
<PAGE>
20b. Stock Option Plan 1996*
20c. Stock Option Plan 1997 -- $4.50 options*
20d. Stock Option Plan 1997 -- $6.50 options*
23. Consent of Experts and Counsel
23a. Consent of Independent Auditor
23b. Consent of Counsel*
27. Financial Data Schedule
99. Additional Exhibits
99a. Officer's Certificate*
99a. Form of Specimen Preferred Stock Certificate*
* indicates previously submitted exhibit
62
<PAGE>
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The issuer will file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to include
any prospectus required by section 10(a)(3) of the Securities Act, to reflect in
the prospectus any facts or events which represent a fundamental change in the
information in the registration statement and to include any additional or
changed material information on the plan of distribution.
For determining liability under the Securities Act, the issuer will treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
The issuer will file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the State of Illinois.
MEDCARE TECHNOLOGIES, INC.
By: /s/ Jeffrey S. Aronin
------------------------------------------
Jeffrey S. Aronin, CEO and President
By: /s/ Alan Jagiello
------------------------
Alan Jagiello, CFO
64
<PAGE>
EXHIBIT 23a
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
As independent auditors, we hereby consent to the inclusion this Form SB-2A
Statement of our reports, relating to the consolidated financial statements of
Medcare Technologies, Inc. for the years ended December 31, 1998 and 1997 and
any amendments thereto. We also consent to the reference to this firm under the
heading "Experts" in this Registration Statement.
/s/ Clancy and Co.
------------------
CLANCY AND CO., P.L.L.C.
Certified Public Accountants
April 30, 1999
65
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 1998 Form
10KSB and is qualified in its entirety by reference to such financial
statements.</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,826,086
<SECURITIES> 0
<RECEIVABLES> 271,240
<ALLOWANCES> 45,165
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 283,630
<DEPRECIATION> 65,231
<TOTAL-ASSETS> 3,381,888
<CURRENT-LIABILITIES> 469,743
<BONDS> 0
0
12
<COMMON> 7,825
<OTHER-SE> 2,904,308
<TOTAL-LIABILITY-AND-EQUITY> 3,381,888
<SALES> 786,586
<TOTAL-REVENUES> 786,586
<CGS> 0
<TOTAL-COSTS> 4,687,400
<OTHER-EXPENSES> 29,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (162,109)
<INCOME-PRETAX> (3,769,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,769,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,769,953)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
