<PAGE>
As filed with the Securities and Exchange Commission on May 24, 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. [ ]
1
<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>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item
No.
Sections in Prospectus
<S> <C> <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.............................Changes In and Disagreements
Accounting and Financial Disclosure 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 24, 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
6
<PAGE>
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:
<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 2,822,344 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
Series "B" preferred stock private placement
Dated 5/18/99 1,600,000
---------
Total 2,822,344
</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 13,108,813
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 Year Year
Ended Ended 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 13,108,813 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 13,108,813 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
11
<PAGE>
persons. This is an estimate of the probable number of shares to be resold. Any
sale of these securities could have a 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
12
<PAGE>
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
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 Assume all exercised
Common
- ---------- ------- -------- --------------------
<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 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" 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
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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>
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
15
<PAGE>
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 and warrants outstanding that are not
covered by this Prospectus that would result in an additional 2,822,344 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 13,108,813
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 has been 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.
16
<PAGE>
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 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
Shares
Common 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 . 806 806 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 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 . 807 870 0 0 $7.346 June 20, 2002
Glenn A. Adams 813 .... 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 April 30,
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
20
<PAGE>
Harmel S. Rayat to Terry Johnston and Ranjit Bhogal, pursuant to the resolution
of the Board of Directors dated September 18, 1998.
<TABLE>
<CAPTION>
Name of Optionee Total Reserved NumberExercised 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 NumberExercised 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 NumberExercised 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.
21
<PAGE>
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 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
<TABLE>
<CAPTION>
Name/Age Title
- -------- ------
<S> <C>
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
</TABLE>
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 was elected in 1998 and Mr. Jagiello was elected in
1999.
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
22
<PAGE>
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, 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:
<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
24
<PAGE>
dividends as may be declared from time to time by the Board of Directors out of
funds legally available, and in the event of 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.
25
<PAGE>
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.
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>
<S> <C>
Date of Notice of Redemption at Company's Election % of Stated Value
-------------------------------------------------- -----------------
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
26
<PAGE>
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."
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.
27
<PAGE>
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."
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, 1999, 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
28
<PAGE>
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
29
<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
2,766,708 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
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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 ("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.
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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
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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 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.
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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 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.
For the Year Ended December 31, 1998
------------------------------------
RESULTS OF OPERATIONS
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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, 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.
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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.
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.
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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 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.
For the Three Months Ended March 31, 1999
-----------------------------------------
RESULTS OF OPERATIONS
Revenues. The Company experienced a 74% increase in revenues over last
year's first quarter results with revenues of $394,063 and $227,008 for the
three months ended March 31, 1999 and 1998, respectively. As of March 31, 1999,
the Company had 47 MedCare Program sites established versus 12 sites as of March
31, 1998. The Company has also introduced a new version of the MedCare Program
to physicians which requires each new physician to share the up front costs, pay
the clinician's salary and pay MedCare a set monthly management fee. Under the
new version, the physician enjoys a potentially higher revenue stream, while at
the same time allows MedCare to reach a greater number of doctors that were
previously excluded from the MedCare Program.
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, 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 March 31, 1999, the Company has not generated any revenues from
Medcareonline.com.
General and Administrative Expenses. During the three months ended March
31, 1999, the Company incurred $1,392,416 in general and administrative
expenses, an increase of 82% over first quarter 1998 expenses of $765,710. The
Company experienced a $.12 per share loss for the quarter ended March 31, 1999,
versus a $.06 per share loss for the quarter ended March 31, 1998. 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, development of Medcareonline.com,
and ongoing general operating expenses.
Interest Income. Interest income was $24,032 and $42,669 for the quarters
ended March 31, 1999 and
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<PAGE>
1997, respectively. Interest earned in the future will be dependent on Company
funding cycles and prevailing interest rates.
Provision for Income Taxes. As of March 31, 1999, the Company's accumulated
deficit was $7,521,192. Accordingly, the Company has recorded a full valuation
allowance against any income tax benefit to date.
Liquidity and Capital Resources
As of March 31, 1999, the Company's cash balance was $1,549,597 compared
to $2,826,086 as of March 31, 1998. The Company has financed its operations
primarily through private placement of Common Shares, Preferred Shares and the
exercise of Stock Options.
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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
38
<PAGE>
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.
39
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
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 15,5000 $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:
40
<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 67,500 87,500 $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 $6.00 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
On May 10, 1999, Medcare Technologies, Inc., dismissed Clancy and Co.,
P.L.L.C., as its independent public 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
41
<PAGE>
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 practices, financial statement
disclosure, or auditing scope or procedure.
The Company has engaged Arthur Andersen LLP as its new independent public
accountants effective with the dismissal of its former accountants. During the
Company's two most recent fiscal years prior to the engagement, there have been
no consultations with the newly engaged accountants with regard to either the
application of accounting principle as to any specific transaction, the type of
audit opinion that would be rendered on the Company's financial statements, or
any matter of disagreements with the former accountants.
The Company disclosed the above in a Form 8-K filing dated May 17, 1999.
42
<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
43
<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 $415,165 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 12 41
Convertible Series A at
December 31, 1998 and 1997
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 (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.
44
<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)
----------- -----------
New Loss Available to Common Stockholders ($3,769,953) ($1,540,942)
Earnings Per Common Share & Common
Share Equivalants ($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.
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>
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
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 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>
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>
Issuance of Common Stock For
or 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.
48
<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
49
<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.
50
<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, December 31,
1998 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.
51
<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.
52
<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.
53
<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:
1998 1997
---- ----
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
======== ========
Depreciation charged to expense during the years ended December 31, 1998
and 1997 was $65,231 and $9,546, respectively.
54
<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 Option Plan (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>
55
<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:
1998 1997
---- ----
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)
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.
56
<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>
57
<PAGE>
<TABLE>
<CAPTION>
<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
58
<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.
59
<PAGE>
Interim Financial Statements
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current Assets
Cash $1,549,597 $2,826,086
Accounts Receivable, net of Allowance for Doubtful Accounts of
$45,061 and $45,165 339,748 271,240
------------ -------------
Total Current Assets 1,889,345 3,097,326
Property and Equipment, Net 364,469 283,630
Intangible Assets-the MedCare Program, net of
Accumulated Amortization of $85 and $68 915 932
============ =============
Total Assets $2,254,729 $3,381,888
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $213,007 260,142
Accrued Liabilities 85,898 209,601
------------ -------------
Total Current Liabilities 298,905 469,743
Stockholders' Equity
Preferred Stock $.25 Par Value, Authorized 1,000,000; Issued
and outstanding, 50 Convertible Series A
at March 31, 1999 and December 31, 1998 12 12
Common Stock - $0.001 Par Value Authorized 100,000,000; Issued
and Outstanding, 7,831,105 and 7,825,105 Shares at
March 31, 1999 and December 31, 1998, respectively 7,831 7,825
Additional Paid in Capital 9,414,173 9,396,179
Retained Earnings (7,466,192) (6,491,871)
------------ -------------
Total Stockholders' Equity 1,955,824 2,912,145
------------ -------------
Total Liabilities and Equity $2,254,729 $3,381,888
============ =============
</TABLE>
60
<PAGE>
MEDCARE TECHNOLOGIES, INC AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
(Unaudited)
Three Months Three Months
Ended Ended
3/31/99 3/31/98
----------- ------------
<S> <C> <C>
Revenues $ 394,063 $ 227,008
General and Administrative Expenses 1,392,416 765,710
----------- ------------
Operating Loss (998,353) (538,702)
Interest Income 24,032 42,669
----------- ------------
Net Loss Available to Common Stockholders ($974,321) ($496,033)
Earnings Per Common Share & Common
Share Equivalants ($0.12) ($0.06)
Weighted Number of Common Shares Outstanding 7,829,949 7,734,915
</TABLE>
61
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
(Unaudited)
For the Three For the Three
Months Ended Months Ended
3/31/99 3/31/98
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities - Net Loss ($ 974,321) ($ 496,033)
Adjustments to Reconcile Net Loss to Net Cash Providing by Operating Activities:
Depreciation and Amortization 20,541 3,385
(Increase) Decrease in Accounts Receivable (68,508) (102,153)
(Increase) Decrease in Prepaid Expenses 0 61,663
Increase (Decrease) in Accounts Payables and Accrued Liabilities (170,838) 46,952
----------- -----------
Total Adjustments (218,805) 9,847
Net Cash Used by Operating Activities (1,193,126) (486,186)
Cash Flow from Invesing Activities:
Purchase of Property & Equipment (101,363) (8,725)
----------- -----------
Net Cash Flows from Investing Activities (101,363) (8,725)
Cash Flow from Financing Activity
Proceeds from sale of common stock 18,000 1,281,000
Advances (Repayments) to Officers 0 (1,000)
----------- -----------
Net Cash Provided by Financing Activities 18,000 1,280,000
Increase (Decrease) in Cash and Cash Equivalants ($1,276,489) $ 785,089
Cash and Cash Equivalants at Beginning of Period $ 2,826,086 $ 3,440,791
Cash and Cash Equivalants at End of Period $ 1,549,597 $ 4,225,880
Supplemental Information
Cash Paid for:
Interest 0 0
Income taxes 0 0
</TABLE>
62
<PAGE>
MEDCARE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1. Statement of Information Furnished
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with Form 10QSB instructions and in the opinion of
management contains all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March 31,
1999, the results of operations for the three months period ended March 31,
1999, and the statement of cash flows for the three months period ended March
31, 1999. These results have been determined on the basis of generally accepted
accounting principles and practices and applied consistently with those used in
the preparation of the Company's 1998 Annual Report on Form 10-KSB.
Certain information and footnote disclosures normally included in the financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying
consolidated financial statements be read in conjunction with the financial
statements and notes thereto incorporated by reference in the Company's 1998
Annual Report on Form 10-KSB.
63
<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
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.
64
<PAGE>
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 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.
On May 18, 1999, the Company, pursuant to Regulation D, Rule 506, issued
400 shares of Series B preferred stock (par value $0.25) (the "Series B
Preferred") and related warrants described below for $4,000,000 ($10,000 per
share). The proceeds were placed into an escrow account subject to the approval
of the transaction by the shareholders of the Company at its scheduled annual
meeting. If shareholder approval is not obtained, the preferred stock will be
cancelled and the proceeds returned to the investors with accrued interest.
Prior to the shareholder meeting, neither the investors nor the Company can
convert or redeem any of the Series B Preferred. The Company will use the net
proceeds for the expansion of its Medcare program to additional sites, working
capital and potential acquisitions. Currently, there are no specific
acquisitions identified. The Series B Preferred, related warrants, and the
common stock underlying the Series B Preferred are not included in this
registration statement. The key provisions regarding the issuance and conversion
of Series B Preferred are as follows:
Holders
The Series B Preferred was sold to six accredited investors in reliance of
Rule 506 of Regulation D.
Dividends
The holders of the Series B Preferred shall be entitled to receive a 6.0%
annual dividend, which shall be cumulative and which shall accrue daily from the
date of issuance and be payable, at the option of the Company, either (i) in
shares of Common Stock upon conversion of the Series B Preferred or (ii) in
cash.
Preferred Rank
The Series B Preferred shall rank senior to the Common Stock, and shall
rank pari passu with the Series A Preferred Stock issued by the Company in
respect to dividend preferences and payments upon liquidation and dissolution.
Conversion by Holders
Subject to the limitations discussed below, each share of the Series B
Preferred shall be convertible into shares of Common Stock at a variable
conversion rate (the "Conversion Rate") equal to the Conversion Amount (defined
below) divided by the applicable Conversion Price (defined as follows). The
"Conversion Price" is the lesser of (i) the fixed conversion price (the "Fixed
Conversion Price"), which is a flat 125% of the average of the closing bid
prices for the Common Stock during the 5 consecutive trading days immediately
preceding the issuance date of the applicable shares of the Series B Preferred,
or (ii) the variable conversion price (the "Variable Conversion Price"). The
Variable Conversion Price is the lower of (a) the closing bid price on the day
before the holder delivers the required notice of his intention to convert to
the Company or (b) the average of the 10 lowest closing bid prices in the 40
trading days immediately preceding the date such notice is given. Both the Fixed
Conversion Price and the Variable Conversion Price are subject to adjustment if
certain events occur. The "Conversion Amount" is defined as $10,000, plus any
stock dividends that have accrued but have not been paid out, plus any default
interest (equal to 15%) for dividends which the Company has elected to pay in
cash but has failed to pay on a timely basis.
The investors' right to convert the Series B Preferred is limited as
follows. From the date of issuance of the Series B Preferred through and
including the date which is 120 days after the date of issuance, no shares of
the Series B Preferred may be converted. From 121 days after the date of
issuance through the date which is 150 days after the date of issuance, the
investors may convert up to 1/3 of their shares. From 151 days after the date of
issuance through the date which is 180 days after the date of issuance, the
investors may convert up to 2/3 of their shares. From the date which is 181 days
following the date of issuance through the expiration date of the Series B
Preferred (5 years after the date of issuance), the investors may convert up to
all of their shares. The foregoing restrictions do not apply if certain events
occur.
Mandatory Conversion
The shares of Series B Preferred mature five years after they are issued,
and any shares of the Series B Preferred left outstanding on the applicable
maturity date are automatically converted into shares of Common Stock.
Other Provisions
The terms of the Series B Preferred contains other provisions, which upon
certain events, require redemption or conversion of the preferred stock at the
option of investors or the Company.
Warrants
Along with the Series B Preferred, the Company issued stock warrants to the
investors. Subject to the vesting schedule described below, each warrant
entitles its holder to 200 shares of Common Stock for (i) each issued share of
the Series B Preferred held on the applicable vesting date and (ii) each share
of the Series B Preferred converted prior to the applicable vesting date at the
Fixed Conversion Price. The Warrants expire five years after they are issued.
The vesting dates of the Warrants are (i) the date which is 120 days after the
date of issuance of the applicable Series B Preferred Shares; (ii) the date
which is 300 days after the date of issuance of the applicable Series B
Preferred Shares and (iii) the date which is 480 days after the date of issuance
of the applicable Series B Preferred Shares. The exercise price of each Warrant
is 125% of the average of the closing bid prices of the Company's Common Stock
for the five consecutive trading days immediately preceding the applicable
vesting date.
Investor Call Option
For every (i) unconverted Series B Preferred share held by the investors on
the first anniversary of the closing and (ii) preferred share converted at the
Fixed Conversion Price prior to the first anniversary of the closing, the
investors have the right to subscribe for an additional preferred share and
related warrants under the same terms and conditions of the original closing
(revised to reflect the Company's then current common stock market price). Each
investor may exercise this right only at such time when the closing market price
of the Company's common stock is greater than the Fixed Conversion Price.
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
65
<PAGE>
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
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
</TABLE>
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.
Series B Preferred Stock
As explained above, 400 shares of Series B Preferred Stock and related
warrants were issued on May 18, 1999 for $4,000,000 in reliance on Regulation D,
Rule 506. This registration does not apply to this offering and no integration
issues should 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*
66
<PAGE>
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*
6. Series B Preferred Stock agreements
6a. Certificate of Designation
6b. Securities Purchase Agreement
6c. Registration Rights Agreement
6d. Form of Warrant
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*
16. Letter from the Former Accountant
20. Reports furnished to Security Holders
20a. Stock Option Plan 1995*
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 (included in Exhibit 5a)
27. Financial Data Schedule
99. Additional Exhibits
99a. Officer's Certificate*
99a. Form of Specimen Preferred Stock Certificate*
* indicates previously submitted exhibit
67
<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.
68
<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 Jeffrey S. Aronin
----------------------
Jeffrey S. Aronin, CEO, President and Director
By: Alan Jagiello
-----------------
Alan Jagiello, CFO, Treasurer, Secretary
and Director
By: Greg Wujek
--------------
Greg Wujek, VP of Managed Care, Director
69
<PAGE>
Exhibit 5a
[BARACK FERRAZZANO KIRSCHBAUM PERLMAN & NAGELBERG LETTERHEAD]
May 18, 1999
Medcare Technologies, Inc.
1515 West 22nd Street, Suite 1210
Oak Brook, IL 60523
Ladies and Gentlemen:
We have acted as special counsel to Medcare Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the offering (the "Offering") by
certain stockholders of the Company of the Company's common stock, par value
$0.001 per share (the "Common Stock") as described in the Company's Registration
Statement on Form SB-2 (Reg. No. 333-41611) (the "Registration Statement"). At
your request, this letter is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Incorporation of the Company, as amended, and
the Company's by-laws;
(b) The Registration Statement, including the prospectus constituting
a part thereof (the "Prospectus");
(c) Minutes and records of the corporate proceedings of the Company
relating to the Offering; and
(d) A form of stock certificate representing the Common Stock.
We have made such legal investigation as we deemed necessary for purposes
of this opinion. In that investigation, we have assumed the genuineness of all
signatures, the proper execution of all documents submitted to us as originals,
the conformity to the original documents of all documents submitted to us as
copies, and the authenticity and proper execution of the originals of such
copies. We have not made any independent factual investigation, have relied
without such investigation on all the listed documents, and disclaim any duty to
make such an independent factual investigation.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
policy considerations which may limit the rights of parties to obtain certain
remedies and (iv) any laws except the laws of the State of Illinois, the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
<PAGE>
Medcare Technologies, Inc.
May 18, 1999
Page 2
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that when (i) the Registration Statement becomes effective and (ii) the shares
of Common Stock to be sold thereunder have been issued upon the terms and
conditions set forth in the Registration Statement (including, in the case of
shares issued pursuant to the exercise of warrants or options, the receipt by
the Company of payment therefor in accordance with the terms thereof), then such
shares of Common Stock will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. We hereby consent to the
use of our name under the heading "Experts and Legal Matters" in the Prospectus.
In giving the foregoing consents, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. This opinion is being furnished
to you solely for your benefit in connection with the transactions set forth
above. It may not be relied upon by, nor a copy of it delivered to, any other
party (except as expressly stated above), without our prior written consent.
This opinion is based upon our knowledge of the law and facts as of the date
hereof, and we assume no duty to communicate with you with respect to any matter
that comes to our attention hereafter.
Very truly yours,
/s/ Barack Ferrazzano Kirschbaum Perlman & Nagelberg
BARACK FERRAZZANO KIRSCHBAUM
PERLMAN & NAGELBERG
<PAGE>
Exhibit 6a.
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
MEDCARE TECHNOLOGIES, INC.
Medcare Technologies, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held adopted resolutions
(i) authorizing a series of the Company's previously authorized preferred stock,
par value $0.25 per share, and (ii) providing for the designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of 1,000 shares of Series B Convertible
Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 800 shares of Series
B Convertible Preferred Stock (the "Preferred Shares"), par value $0.25 per
share, which shall have the following powers, designations, preferences and
other special rights:
(1) Dividends. The Preferred Shares shall bear dividends
---------
("Dividends") at a rate of 6.0% per annum, which shall be cumulative, accrue
daily from the Issuance Date (as defined below) and be payable either (i) in
shares of the Company's common stock, par value $0.001 per share, upon
conversion of the Preferred Shares or (ii) at the option of the Company, in cash
on the first day of each Calendar Quarter (as defined below) beginning on the
first day of the Calendar Quarter immediately following the Issuance Date (each
a "Dividend Date"). If a Dividend Date is not a Business Day (as defined below)
then the Dividend shall be due and payable on the Business Day immediately
following the Dividend Date. Dividends which accrue during any period shall be
payable in cash only if the Company provides written notice ("Dividend Election
Notice") to each holder of Preferred Shares at least 20 days prior to the
Dividend Date specifying the per share dividend amount to be paid (the "Cash
Dividend Amount"). The amount of any Dividend payable on the initial Dividend
Date or for any other period less than a full Calendar Quarter shall be prorated
and computed on the basis of a 365-day year and the actual number of days
elapsed. Any Dividends for which the Company has given a Dividend Election
Notice and which are not paid on the corresponding Dividend Date of such accrued
and unpaid Dividends' Dividend Date shall bear interest at the rate of 15.0% per
annum from such Dividend Date until the same is paid (the "Default
1
<PAGE>
Interest"). "Calendar Quarter" means each of the three-month periods ending on
March 31, June 30, September 30 and December 31, respectively.
(2) Holder's Conversion of Preferred Shares. A holder of Preferred
---------------------------------------
Shares shall have the right, at such holder's option, to convert the Preferred
Shares into shares of the common stock on the following terms and conditions:
(a) Conversion Right. Subject to Section 2(j), at any time or
----------------
times on or after the Issuance Date (as defined below), any holder of Preferred
Shares shall be entitled to convert any whole number of Preferred Shares into
fully paid and nonassessable shares (rounded to the nearest whole share in
accordance with Section 2(h)) of Common Stock, at the Conversion Rate (as
defined below); provided, however, that in no event shall any holder be entitled
to convert Preferred Shares in excess of that number of Preferred Shares which,
upon giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 4.99% of the total outstanding shares of Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of the
Preferred Shares with respect to which the determination of such proviso is
being made, but shall exclude the number of shares of Common Stock which would
be issuable upon (i) conversion of the remaining, nonconverted Preferred Shares
beneficially owned by the holder and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants or convertible
preferred stock) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 2(a), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Section 2(a), in determining the number of outstanding shares Common
Stock a holder may rely on the number of outstanding shares of Common Stock as
reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written request of any holder, the Company
shall promptly, but in no event later than one (1) Business Day following the
receipt of such notice, confirm in writing to any such holder the number of
shares Common Stock then outstanding. In any case, the number of outstanding
shares Common Stock shall be determined after giving effect to conversions of
Preferred Shares and exercise of Warrants (as defined below) by such holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. Notwithstanding the foregoing, each holder of
Preferred Shares shall have the sole obligation to determine whether the
restrictions contained in this Section 2(a) apply to such holder.
(b) Conversion Rate. The number of shares of Common Stock
---------------
issuable upon conversion of each of the Preferred Shares pursuant to Sections
(2)(a) and 2(g) and Section 5 and for purposes of calculating the Redemption
Price of Company Redemption in Lieu of
2
<PAGE>
Conversion in Section 6(a) shall be determined according to the following
formula (the "Conversion Rate"):
Conversion Amount
-----------------
Conversion Price
For purposes of this Certificate of Designations, the following terms shall
have the following meanings:
(i) "Conversion Price" means, on a per share basis, as of the
Conversion Date (as defined below) or other date of determination of the
applicable Preferred Shares, the lesser of (A) the Variable Conversion Price (as
defined below) and (B) the Fixed Conversion Price (as defined below);
(ii) "Variable Conversion Price" means, as of any date of
determination, the product of the (A) Conversion Percentage (as defined below)
and (B) the Market Price (as defined below);
(iii) "Conversion Percentage" means, as of any date of
determination, 100%, subject to adjustment as provided herein;
(iv) "Market Price" means the lesser of (A) the average of the
ten lowest Closing Bid Prices of the Common Stock during the 40 consecutive
trading days immediately preceding a date of determination and (B) the Closing
Bid Price (as defined below) of the Common Stock on the date of determination;
(v) "Conversion Amount" means, on a per share basis, the sum
of (A) the Additional Amount (as defined below) and (B) $10,000;
(vi) "Additional Amount" means, on a per share basis, the
difference of (A) the sum of (I) unpaid Default Interest through the date of
determination plus (II) (.06) (N/365) ($10,000), minus (B) the sum of all Cash
Dividend Amounts paid in full prior to the date of determination;
(vii) "Fixed Conversion Price" means, 125% of the average of the
Closing Bid Prices for the Common Stock during the 5 consecutive trading days
immediately preceding the Issuance Date of such Preferred Share, subject to
adjustment as provided herein;
(viii) "N" means, the number of days from, but excluding, the
Issuance Date of the applicable Preferred Share through and including the
Conversion Date or the Maturity Date for the Preferred Shares for which
conversion and/or redemption is being elected, as the case may be;
3
<PAGE>
(ix) "Issuance Date" means, with respect to each Preferred
Share, the date of issuance of such Preferred Share;
(x) "Initial Issuance Date" means the first date on which
any Preferred Shares are issued by the Company;
(xi) "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in the City of New York are authorized or
required by law to remain closed;
(xii) "Securities Purchase Agreement" means that certain
securities purchase agreement between the Company and the initial holders of the
Preferred Shares;
(xiii) "Registration Rights Agreement" means that certain
registration rights agreement between the Company and the initial holders of the
Preferred Shares relating to the filing of a registration statement covering the
resale of the Conversion Shares;
(xiv) "Conversion Shares" means shares of Common Stock issuable
upon conversion of Preferred Shares;
(xv) "Warrants" means the warrants to purchase shares of Common
Stock issued by the Company in accordance with the Securities Purchase
Agreement;
(xvi) "Closing Bid Price" means, for any security as of any
date, the last closing bid price for such security on The Nasdaq SmallCap Market
(as reported by Bloomberg Financial Markets ("Bloomberg")), or, if The Nasdaq
SmallCap Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded (as reported by
Bloomberg), or if the foregoing do not apply, the last closing bid price of such
security in the over-the-counter market on the electronic bulletin board (as
reported by Bloomberg) or if no closing bid price is reported by Bloomberg, the
last closing trade price of such security as reported by Bloomberg, or, if no
last closing trade price of such security is reported by Bloomberg, the average
of the bid prices of any market makers for such security as reported in the
"pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as mutually determined by the Company and the holders of a majority
of the outstanding Preferred Shares (including for purposes of this
determination any Preferred Shares with respect to which the Closing Bid Price
is being determined). If the Company and the holders of Preferred Shares are
unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(f)(iii). (All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period).
(c) Adjustment of Conversion Price for Failure to Obtain and Maintain
-----------------------------------------------------------------
Effectiveness of Registration Statement. If (i) the registration statement (the
- ---------------------------------------
"Registration
4
<PAGE>
Statement") covering the resale of all the applicable Registrable Securities (as
defined in the Registration Rights Agreement) and required to be filed by the
Company pursuant to the Registration Rights Agreement is not declared effective
by the Securities and Exchange Commission ("SEC") on or before the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement) or (ii)
on any day after the Registration Statement has been declared effective by the
SEC, sales of all the Registrable Securities required to be included in a
Registration Statement cannot be made (other than during any Allowable Grace
Period (as defined in Section 3(u) of the Registration Rights Agreement))
pursuant to the respective Registration Statement (whether because of a failure
to keep the Registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration Statement, to
register sufficient shares of Common Stock or otherwise but shall expressly
exclude the failure to make sales due to the absence of buyers for such
Registrable Securities) (a "Registration Default"), then, as relief for the
damages to any holder of Preferred Shares by reason of any such delay in or
reduction of its ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Conversion Percentage and the Fixed Conversion Price shall be
adjusted as follows:
(I) Conversion Percentage. The Conversion Percentage
---------------------
in effect at such time shall be reduced by a number of percentage points
equal to the sum of (A) 1.25, if a Registration Statement is not declared
effective by its Effectiveness Deadline, plus (B) the product of (I) .05
multiplied by (II) the sum of (y) the number of days after such
Effectiveness Deadline that the relevant Registration Statement has not
been declared effective by the SEC and (z) the number of days during which
a Registration Default has occurred (such number of days in (y) and (z)
being collectively referred to as the "Registration Statement Default
Days"); and
(II) Fixed Conversion Price. The Fixed Conversion Price
----------------------
in effect at such time shall be reduced by an amount equal to the product
of (A) the Fixed Conversion Price in effect as of the Issuance Date
multiplied by (B) the sum of (I) .0125, if the Registration Statement is
not declared effective by the Effectiveness Deadline, plus (II) the product
of (x) .0005 multiplied by (y) the sum of the Registration Statement
Default Days.
(d) Adjustment to Conversion Price -- Dilution and Other Events. In
-----------------------------------------------------------
order to prevent dilution of the rights granted under this Certificate of
Designations, the Fixed Conversion Price, the Variable Conversion Price and the
Conversion Price will be subject to adjustment from time to time as provided in
this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of Common
------------------------------------------------------------
Stock. Except as provided in Section 2(d)(iv), if during the period beginning
on the Initial Issuance Date and ending on the earlier of (A) the first
anniversary of the Initial Issuance Date or (B) the date which is 270 days after
the Initial Registration Statement is declared effective by the SEC (the
"Initial Adjustment Period"), the Company issues or sells, or is deemed to have
issued or sold, any shares of Common Stock (other than Preferred Shares or
shares of Common Stock issued upon
5
<PAGE>
conversion of Preferred Shares or deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined below) or Common Stock which
is an Excluded Security (as defined below)) for a consideration per share less
than a price equal to a Fixed Conversion Price in effect immediately prior to
such issuance or sale, then immediately after such issue or sale, the Fixed
Conversion Price then in effect shall be reduced to an amount equal to such
consideration per share received. Except as provided in Section 2(d)(iv), if and
whenever on or after the ending of the Initial Adjustment Period, or in the case
of an Excluded Security, if and whenever on or after the Initial Issuance Date,
the Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than Preferred Shares or shares of Common Stock issued upon
conversion of Preferred Shares or deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined below)) for a consideration
per share less than a price (the "Applicable Price") equal to the Fixed
Conversion Price in effect immediately prior to such issuance or sale, then
immediately after such issue or sale, the Fixed Conversion Price then in effect
shall be reduced to an amount equal to the product of (x) the Fixed Conversion
Price then in effect and (y) the quotient of (1) the sum of (I) the product of
the Applicable Price multiplied by the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale and (II)
the consideration, if any, received by the Company upon such issue or sale,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale. For purposes of determining the adjusted Fixed Conversion Price under
this Section 2(d)(i), the following shall be applicable:
(A) Issuance of Options. If and whenever on or after the
-------------------
Initial Issuance Date, the Company in any manner grants any rights or
options to subscribe for or to purchase Common Stock (other than pursuant
to an Approved Stock Plan or upon conversion of the Preferred Shares) or
any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible Securities is less than the Applicable Price, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount
of such Convertible Securities issuable upon the exercise of such Options
at the time of issuance of such Options (without regard to limitations on
exercise, conversion or exchange) shall be deemed to be outstanding and to
have been issued and sold by the Company for such price per share. For
purposes of this Section 2(d)(i)(A), the "price per share for which Common
Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" is determined by dividing (I) the
total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of all such Options at the time of issuance of such Options (without regard
to limitations on exercise, conversion or exchange), plus in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the conversion or
exchange thereof, by (II) the total maximum number of
6
<PAGE>
shares of Common Stock issuable upon exercise of such Options at the time
of issuance of such Options (without regard to limitations on exercise,
conversion or exchange) or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. Except
as set forth in Section 2(d)(i)(C) below, no adjustment of the Fixed
Conversion Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If and whenever on
----------------------------------
or after the Initial Issuance Date, the Company in any manner issues or
sells any Convertible Securities and the price per share for which Common
Stock is issuable upon such conversion or exchange is less than the
Applicable Price, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities at the
time of issuance of such Convertible Securities (without regard to
limitations on exercise, conversion or exchange) shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For the purposes of this Section 2(d)(i)(B), the "price per
share for which Common Stock is issuable upon such conversion or exchange"
is determined by dividing (I) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the conversion or exchange thereof at
the time of issuance of such Convertible Securities (without regard to
limitations on exercise, conversion or exchange), by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities at the time of issuance of such
Convertible Securities (without regard to limitations on exercise,
conversion or exchange). Except as set forth in Section 2(d)(i)(C) below,
no adjustment of an Fixed Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is
made upon exercise of any Options for which adjustment of an Fixed
Conversion Price had been or are to be made pursuant to other provisions of
this Section 2(d)(i), no further adjustment of such Fixed Conversion Price
shall be made by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
---------------------------------------------
purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Fixed
Conversion Price of any Preferred Shares in effect at the time of such
change shall be readjusted to the Fixed Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold; provided that no adjustment pursuant to
this Section 2(d)(i) shall be made if such adjustment would result in an
increase of such Fixed Conversion Price then in effect.
7
<PAGE>
(D) Certain Definitions. For purposes of determining the
-------------------
adjusted Fixed Conversion Price under this Section 2(d)(i), the following
terms have the meanings set forth below:
(I) "Approved Stock Plan" shall mean any stock option
or similar plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, officer or director.
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually outstanding at
such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i) hereof regardless of whether the
Options or Convertible Securities are actually exercisable at such time,
but excluding any shares of Common Stock owned or held by or for the
account of the Company or issuable upon conversion of the Preferred Shares
or exercise of the Warrants.
(III) "Options" means any rights, warrants or options
to subscribe for or purchase Common Stock or Convertible Securities.
(IV) "Convertible Securities" means any stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable for Common Stock.
(V) "Excluded Securities" means any of the following
(i) shares of Common Stock or warrants for the purchase of Common Stock
issued by the Company for which (a) the aggregate purchase price for any
single transaction is less than $500,000, (b) the aggregate purchase price
for all transactions in the aggregate is less than $1,000,000 and (c) the
purchase price per share is not less than 85% of the Closing Bid Price of
the Common Stock on the trading day immediately preceding the issuance of
such Common Stock, provided that for the purpose of clauses (a) and (b)
above the aggregate purchase price of the transaction shall include the
value of any warrants issued and for the purpose of clause (c) above the
purchase price per share shall not include the value of any warrants issued
(the value of any warrants issued shall be calculated pursuant to the
Black-Scholes valuation method as of the date of issuance); (ii) warrants
issued by the Company to a public relations firm in connection with such
firm's performing services for the Company where (x) the Company is not
affiliated with such public relations firm, (y) the total compensation
received by such public relations firm (including the valuation of the
warrants as determined by Black-Scholes) is equivalent to the market price
for such services to be rendered, and (z) the strike or exercise price of
the warrants is not less than the Closing Bid Price of the Common Stock on
the day such warrants are issued; and (iii) any transaction involving the
Company's issuances of securities in connection with any strategic
partnership, joint venture or other strategic arrangement (where the
primary purpose of such transaction is not to raise equity capital).
8
<PAGE>
(E) Effect on Fixed Conversion Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any
-------------------------------------
Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the average of the Closing Bid Prices of such securities
for the five consecutive trading days immediately preceding the date of
receipt. In case any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "Valuation Event"), the fair value of such
consideration will be determined within 48 hours of the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser
selected by the Company, which appraiser shall be reasonably acceptable to
two-thirds (2/3) of the holders of the Preferred Shares. The
determination of such appraiser shall be binding upon all parties absent
manifest error.
(II) Integrated Transactions. In case any Option is
-----------------------
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01
and the aggregate consideration received by the Company in such integrated
transaction shall be included in the adjustment calculation in Section
2(d)(i) above.
(III) Treasury Shares. The number of shares of
---------------
Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) Record Date. If the Company takes a record of the
-----------
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities, or (2) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such
9
<PAGE>
record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the
case may be.
(ii) Adjustment of Fixed Conversion Price upon
-----------------------------------------
Subdivision or Combination of Common Stock. If the Company at any time
- ------------------------------------------
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, each Fixed Conversion Price in effect immediately prior to
such subdivision will be proportionately reduced. If the Company at any time
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, each
Fixed Conversion Price in effect immediately prior to such combination will be
proportionately increased. Any adjustment under this Section 2(d)(ii) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(iii) Reorganization, Reclassification, Consolidation,
------------------------------------------------
Merger or Sale. Any recapitalization, reorganization, reclassification,
- --------------
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person (as defined below) or other transaction in each case which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as
"Organic Change." Prior to the consummation of any Organic Change, the Company
will make appropriate provision (in form and substance satisfactory to the
holders of a majority of the Preferred Shares then outstanding) to insure that
each of the holders of the Preferred Shares will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the shares
of Common Stock otherwise acquirable and receivable upon the conversion of such
holder's Preferred Shares, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred Shares
had such Organic Change not taken place (without taking into account any
limitations or restrictions on the timing or amount of conversions). In any
such case, the Company will make appropriate provision (in form and substance
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) with respect to such holders' rights and interests to insure that
the provisions of this Section 2(d) and Section 2(e) will thereafter be
applicable to the Preferred Shares (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Company, an immediate adjustment of each of the Fixed
Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, if the value so reflected is less than such
Fixed Conversion Price in effect immediately prior to such consolidation, merger
or sale and an immediate revision to the Fixed Conversion Price to reflect the
price of the common stock of the surviving entity and the market in which such
common stock is traded). The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the entity
purchasing such assets assumes, by written instrument (in form and substance
satisfactory to the holders of a majority of
10
<PAGE>
the Preferred Shares then outstanding), the obligation to deliver to each holder
of Preferred Shares such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire. "Person"
shall mean an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.
(iv) Adjustment of Variable Conversion Price upon Issuance
-----------------------------------------------------
of Convertible Securities. If and whenever after the Issuance Date, the Company
- -------------------------
in any manner issues or sells Convertible Securities that are convertible into
or exercisable or exchangeable for Common Stock at a price which may vary with
the market price of the Common Stock (the formulation for such variable price
being herein referred to as, the "Variable Price") and such Variable Price is
not calculated using the same formula used to calculate the Variable Conversion
Price in effect immediately prior to the time of such issue or sale, the Company
shall provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("Variable Notice") on the date of issuance of
such Convertible Securities. If the holders of Preferred Shares representing at
least two-thirds (2/3) of the Preferred Shares then outstanding provide written
notice via facsimile and overnight courier (the "Variable Price Election
Notice") to the Company within five (5) Business Days of receiving a Variable
Notice that such holders desire to replace the Variable Conversion Price then in
effect with the Variable Price described in such Variable Notice, then from and
after the date of the Company's receipt of the Variable Price Election Notice
the Variable Conversion Price will automatically be replaced with the Variable
Price (together with such modifications to this Certificate of Designations as
may be required to give full effect to the substitution of the Variable Price
for the Variable Conversion Price), subject to further adjustments as provided
in this Certificate of Designations. A holder's delivery of a Variable Price
Election Notice shall serve as the consent required to amend this Certificate of
Designations pursuant to Section 15 below. In the event that a holder delivers a
Conversion Notice at any time after the Company's issuance of Convertible
Securities with a Variable Price but before such holder's receipt of the
Company's Variable Notice, then such holder shall have the option by written
notice to the Company to rescind such Conversion Notice or to have the
Conversion Price be equal to such Variable Price for the conversion effected by
such Conversion Notice.
(v) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 2(d) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided, however, that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 2(d).
(vi) Adjustment of Fixed Conversion Price Upon Major
-----------------------------------------------
Corporate Event Announcement. In the event (A) the Company makes a public
- ----------------------------
announcement that it intends to consolidate or merge with or into another Person
or engage in a business combination involving the issuance or exchange of more
than 50% of the Company's outstanding Common Stock, (B) the Company makes a
public announcement that it intends to sell or transfer all or substantially all
of
11
<PAGE>
the Company's assets, or (C) any Person (including the Company) publicly
announces a purchase, tender or exchange offer for more than 50% of the
Company's outstanding Common Stock (the transactions described in clauses (A),
(B) and (C) above are hereinafter referred to as "Major Corporate Events" and
the date of the announcement referred to in clause (A), (B) or (C) is
hereinafter referred to as the "Announcement Date"), then the Fixed Conversion
Price, effective upon the Announcement Date and continuing through and including
the Adjusted Conversion Price Termination Date (as defined below), shall be
equal to the Conversion Price which would have been applicable for a conversion
by the holder on the Announcement Date. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth in
Section 2(b). For purposes hereof, "Adjusted Conversion Price Termination Date"
shall mean, with respect to any proposed Major Corporate Event for which a
public announcement as contemplated by this Section 2(c)(vi) has been made, the
date upon which the Company or other Person (in the case of clause (C) above)
consummates or publicly announces the termination or abandonment of the proposed
Major Corporate Event which was the subject of the previous public announcement.
(vii) Notices.
--------
(A) Promptly following, but in no event later than
one (1) Business Day after, any adjustment of the Conversion Price pursuant
to this Section 2(d), the Company will give written notice thereof to each
holder of the Preferred Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Company will give written notice to each
holder of the Preferred Shares at least ten (10) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock, or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of the Preferred Shares at least ten (10) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in
no event shall such notice be provided to such holder prior to such
information being made known to the public.
(viii) Minimum Adjustments; Calculations. No adjustment in
---------------------------------
the Conversion Price pursuant to Section 2(d)(i) shall be required unless
such adjustment would require a cumulative increase or decrease of at least
1% in such price; provided, however, that any adjustments that by reason of
this Section 2(d)(viii) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until made.
All calculations under this Section 2(d)(viii) shall be made to the nearest
cent (with $.005 being rounded upward) or to the nearest one-tenth of a
share (with .05 of a share being rounded upward), as the case may be.
12
<PAGE>
(e) Purchase Rights. If at any time after the Initial
---------------
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "Purchase
Rights"), then the holders of the Preferred Shares will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
timing or amount of conversions) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of the Common Stock are
to be determined for the grant, issue or sale of such Purchase Rights.
(f) Mechanics of Conversion. Subject to the Company's
-----------------------
inability to fully satisfy its obligations under a Conversion Notice (as defined
below) as provided for in Section 4:
(i) Holder's Delivery Requirements. To convert
------------------------------
Preferred Shares into full shares of Common Stock on any date (the "Conversion
Date"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m. Eastern Time, on such date, a
copy of a fully executed notice of conversion in the form attached hereto as
Exhibit I (the "Conversion Notice") to the Company or its designated transfer
- ---------
agent (the "Transfer Agent"), and (B) if required by Section 2(f)(vii),
surrender to a carrier, for overnight delivery to the Company as soon as
practicable following such date, the original certificate(s) representing the
Preferred Shares being converted (or an indemnification undertaking with respect
to such shares in the case of their loss, theft or destruction) (the "Preferred
Stock Certificate(s)"). Unless the shares issuable upon conversion are to be
issued in the same name as the name in which such Preferred Stock are
registered, each Preferred Stock Certificate surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Company duly
executed by the holder or such holder's duly authorized agent and pay an amount,
if any, sufficient to cover any applicable transfer or similar tax.
(ii) Company's Response. Upon receipt by the
------------------
Company of a facsimile copy of a Conversion Notice, the Company shall (A)
immediately send, via facsimile, a confirmation of receipt of such Conversion
Notice to such holder and (B) on the second Business Day following the date of
receipt, credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account with
The Depository Trust Company (the "DTC"); provided, however, if the DTC is
unable to credit the holder's account, then the Company shall, on or before the
second Business Day following receipt of the Conversion Notice issue and
surrender to a common carrier for overnight delivery to the address specified in
the Conversion Notice, a certificate, registered in the name of the holder or
its designee, for the number of shares of Common Stock to which the holder shall
be entitled pursuant to such request. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion is
greater than the number of Preferred Shares being converted, then the Company
shall, at its own expense, as soon as practicable and in no event later than
five (5) Business Days after the Company shall have received the applicable
Preferred Stock Certificate(s), issue and
13
<PAGE>
deliver to the holder a new Preferred Stock Certificate representing the number
of Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute
------------------
as to the determination of the Closing Bid Price or the arithmetic calculation
of the Conversion Rate, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via facsimile
within two (2) Business Days of receipt of such holder's Conversion Notice. If
such holder and the Company are unable to agree upon the determination of the
Closing Bid Price or arithmetic calculation of the Conversion Rate within two
(2) Business Days of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within two (2) Business Day
submit via facsimile (A) the disputed determination of the Closing Bid Price to
an independent, reputable investment bank (which investment bank has been
approved by the holders of at least two-thirds (2/3) the Preferred Shares then
outstanding, which approval shall not be unreasonably withheld), or (B) the
disputed arithmetic calculation of the Conversion Rate to its independent,
outside accountant. The Company shall direct the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results as promptly as practicable,
but in no event later than four (4) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties absent manifest error.
(iv) Record Holder. The person or persons entitled
-------------
to receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within
-----------------------------------
five Business Days after the Company's or the Transfer Agent's (as applicable)
receipt of a facsimile copy of a Conversion Notice, the Company shall fail to
issue a certificate for the number of shares of Common Stock to which a holder
is entitled or to credit the holder's balance account with The Depository Trust
Company for such number of shares of Common Stock to which the holder is
entitled upon such holder's conversion of the Preferred Shares, pursuant to
Section 2(f)(ii), in addition to all other available remedies which such holder
may pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof), the Company shall pay additional
damages to such holder on each date after such fifth (5th) Business Day that
such conversion is not timely effected in an amount equal to 0.5% of the product
of (A) the sum of the number of shares of Common Stock not issued to the holder
on a timely basis pursuant to Section 2(f)(ii) and to which such holder is
entitled and (B) the Closing Bid Price of the Common Stock on the last possible
date which the Company could have issued such Common Stock to such holder
without violating Section 2(f)(ii).
(vi) Company's Failure to Issue Certificates. If
---------------------------------------
within ten (10) Business Days after the Company's receipt of the Preferred Stock
Certificates to be converted and the Conversion Notice the Company shall fail to
issue a new Preferred Stock Certificate representing
14
<PAGE>
the number of Preferred Shares to which such holder is entitled, pursuant to
Section 2(f)(ii), in addition to all other available remedies which such holder
may pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof), the Company shall pay additional
damages to such holder on each date after such tenth (10th) Business Day that
such delivery of such Preferred Stock Certificates is not timely effected in an
amount equal to 0 .5% of the product of (A) the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such Preferred
Stock Certificate as of the last possible date which the Company could have
issued such Preferred Stock Certificate to such holder without violating Section
2(f)(ii) and (B) the Closing Bid Price of the Common Stock on the last possible
date which the Company could have issued such Preferred Stock Certificate to
such holder without violating Section 2(f)(ii).
(vii) Book-Entry. Notwithstanding anything to the
----------
contrary set forth herein, upon conversion or redemption of Preferred Shares in
accordance with the terms hereof, the holder thereof shall not be required to
physically surrender the certificate representing the Preferred Shares to the
Company unless the full number of Preferred Shares represented by the
certificate are being converted or redeemed. The holder and the Company shall
maintain records showing the number of Preferred Shares so converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to the holder and the Company, so as not to require physical
surrender of the certificate representing the Preferred Shares upon each such
conversion. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if Preferred Shares represented by a certificate
are converted as aforesaid, the holder may not transfer the certificate
representing the Preferred Shares unless the holder first physically surrenders
the certificate representing the Preferred Shares to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the holder a new
certificate of like tenor, registered as the holder may request, representing in
the aggregate the remaining number of Preferred Shares represented by such
certificate. The holder and any assignee, by acceptance of a certificate,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of any Preferred Shares, the number of Preferred Shares
represented by such certificate may be less than the number of Preferred Shares
stated of the face thereof. Each certificate for Preferred Shares shall bear the
following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW
THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED
BY THIS CERTIFICATE, INCLUDING SECTION 2(f)(vii) THEREOF.
THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS
CERTIFICATE MAY BE LESS THAN THE NUMBER OF PREFERRED SHARES
STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(f)(vii) OF
THE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS.
15
<PAGE>
(g) Mandatory Conversion. If any Preferred Shares
--------------------
remain outstanding on the Maturity Date (as defined below), then all such
Preferred Shares shall be converted into shares of Common Stock as of such date
in accordance with this Section 2 as if the holders of such Preferred Shares had
given the Conversion Notice on the Maturity Date; provided, however, that if a
Triggering Event has occurred and is continuing on the Maturity Date, then the
Company shall, within five Business Days following the Maturity Date (unless
otherwise notified in writing by the holder of such holder's request to have the
Preferred Shares converted into Common Stock), pay to each holder of Preferred
Shares then outstanding, in immediately available funds, an amount equal to the
Triggering Event Redemption Price (as defined below). All holders of Preferred
Shares shall, on the Maturity Date, surrender all Preferred Stock Certificates,
duly endorsed for cancellation, to the Company, provided that on such Maturity
Date the Company shall not currently be in violation of its obligations under
this Section 2(g) and Section 2(f) and the Company shall, promptly, but in no
event later than three (3) Business Days following the Maturity Date, credit the
aggregate number of shares of Common Stock to which each holder shall be
entitled to such holder's balance account at the Depository Trust Company,
unless the Company shall be otherwise directed by the holder in accordance with
the provisions of the Certificate of Designations. Notwithstanding the
foregoing, if the Common Stock is not designated for quotation on The Nasdaq
SmallCap Market or The Nasdaq National Market or listed on The New York Stock
Exchange, Inc. but such events do not constitute a Triggering Event, then the
Maturity Date shall be extended until the Common Stock is so designated or
listed. "Maturity Date" means the date which is five years after the applicable
Issuance Date, subject to extension as described in the immediately preceding
sentence.
(h) Fractional Shares. The Company shall not issue
-----------------
any fraction of a share of Common Stock upon any conversion. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a fraction of
a share of Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up or down to the
nearest whole share.
(i) Taxes. The Company shall pay any and all taxes
-----
which may be imposed upon it with respect to the issuance and delivery of shares
of Common Stock upon the conversion of the Preferred Shares, provided, however,
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of Common Stock or
other securities or property in a name other than that of the holders of the
Preferred Shares to be converted and such holder shall pay such amount, if any,
to cover any applicable transfer or similar tax.
(j) Conversion Restrictions. The right of a holder
-----------------------
of Preferred Shares to convert Preferred Shares pursuant to this Section 2 shall
be limited as set forth below. Without the prior consent of the Company, a
holder of Preferred Shares shall not be entitled to convert an aggregate number
of Preferred Shares from the Initial Issuance Date of such Preferred Shares
through the date of this determination in excess of the number of Preferred
Shares which when divided by the number of Preferred Shares purchased by such
holder on such Initial Issuance Date
16
<PAGE>
would exceed (i) 0.00 for the period beginning on the Initial Issuance Date and
ending on and including the date which is 120 days after the Initial Issuance
Date, (ii) 0.33 for the period beginning on and including the date which is 121
days after the Initial Issuance Date and ending on and including the date which
is 150 days after the Initial Issuance Date, (iii) 0.66 for the period beginning
on and including the date which is 151 days after the Initial Issuance Date and
ending on and including the date which is 180 days after the Initial Issuance
Date, and (iv) 1.00 for the period beginning on and including the date which is
181 days after the Initial Issuance Date and ending on and including the
Maturity Date. Notwithstanding the foregoing, the conversion restrictions set
forth in this Section 2(j) shall not apply (A) on and after any date on which
the Common Stock is not listed on The Nasdaq SmallCap Market, The Nasdaq
National Market or The New York Stock Exchange, Inc. or has been suspended from
trading (excluding suspensions of not more than one day resulting from business
announcements by the Company), or any such delisting or suspension is threatened
or pending (including, without limitation, the Company is not in compliance with
published listing requirements), (B) on or after any date on which there shall
have occurred an event constituting a Major Transaction (as defined in Section
3(c)), Triggering Event (as defined in Section 3(d) excluding a Triggering Event
pursuant to Section 3(d)(v)) or a Material Adverse Change (as defined below),
(C) on or after any date on which there shall have been a public announcement of
a pending Major Transaction, (D) on or after the date the Company delivers a
Notice of Conversion at Company's Election (as defined in Section 5), (E) with
respect to any conversion of Preferred Shares at a price equal to the Fixed
Conversion Price then in effect, or (F) on or after the first date on which the
average of the Closing Bid Prices of the Common Stock on the twenty (20)
consecutive trading days immediately preceding such date is less than $3.00
(subject to adjustment for stock splits, stock dividends, stock combinations and
other similar transactions). "Material Adverse Change" means any change, event,
result or happening not in the normal course of the Company's business or
operations involving, directly or indirectly, the Company or any of its
subsidiaries resulting in a material adverse effect on the business, properties,
assets, operations, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.
(k) Adjustment of Conversion Restrictions upon
------------------------------------------
Issuance of Convertible Securities. If the Company in any manner issues or sells
- ----------------------------------
Convertible Securities that are convertible into Common Stock and are subject to
(i) restrictions on the amount of shares that can be converted, or (ii) no
restrictions on the amount of shares that can be converted (the restriction on
conversions or lack thereof being herein referred to as the "Conversion
Restriction"), and such Conversion Restriction is not formulated using the same
time periods and percentages used in Section 2(j), then the Company shall
provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("Conversion Restriction Notice") on the date of
issuance of such Convertible Securities. If the holders of Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then outstanding
which remain subject to the restrictions in Section 2(j) provide written notice
via facsimile and overnight courier (the "Conversion Restriction Election
Notice") to the Company within five (5) Business Days of receiving a Conversion
Restriction Notice that such holders desire to replace the conversion
restrictions set forth in Section 2(j) then in effect with the Conversion
Restriction described in such Conversion Restriction Notice, then from and after
the date of the Company's receipt of the Conversion Restriction Election Notice
the conversion restrictions set forth in Section 2(j) automatically will be
replaced with the Conversion Restrictions (together
17
<PAGE>
with such modifications to this Certificate of Designations as may be required
to give full effect to the substitution of the Conversion Restrictions for the
conversion restrictions set forth in Section 2(j)). A holder's delivery of a
Conversion Restriction Election Notice shall serve as the consent required to
amend this Certificate of Designations pursuant to Section 15 below.
(3) Redemption at Option of Holders.
-------------------------------
(a) Redemption Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of Preferred Shares contained herein, simultaneous
with or after the occurrence of a Major Transaction (as defined below),
provided, that the consummation or public announcement of such Major Transaction
shall have occurred during the period beginning on the Issuance Date of the
applicable Preferred Shares and ending on the later of (a) the first anniversary
of such Issuance Date and (b) the date which is 270 days after the date the
Registration Statement registering the applicable Registrable Securities is
declared effective by the SEC, each holder of Preferred Shares shall have the
right, at such holder's option, but solely in accordance with the provisions of
Section 3(e), to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to the greater of (i) 115%
of the Liquidation Value (as defined in Section 11); and (ii) the product of (A)
the Conversion Rate at such time, and (B) the Closing Bid Price on the date of
the public announcement of such Major Transaction or the next date on which the
exchange or market on which the Common Stock is traded is open if such public
announcement is made (X) after 12:00 p.m. Eastern Time, on such date or (Y) on a
date on which the exchange or market on which the Common Stock is traded is
closed (the "Major Transaction Redemption Price").
(b) Redemption Option Upon Triggering Event. In addition to all
---------------------------------------
other rights of the holders of Preferred Shares contained herein, simultaneous
with or after the occurrence of a Triggering Event (as defined below), each
holder of Preferred Shares shall have the right, at such holder's option, but
solely in accordance with the provisions of 3(f), to require the Company to
redeem all or a portion of such holder's Preferred Shares at a price per
Preferred Share equal to the greater of (X) 115% of the Liquidation Value and
(Y) the product of (A) the Conversion Rate at such time, and (B) the greater of
(I) the Closing Bid Price on the trading day immediately preceding such
Triggering Event or (II) the Closing Bid Price on the date of the holder's
delivery to the Company of a Notice of Redemption at Option of Buyer Upon
Triggering Event (as defined below) or, if such date of delivery is not a
trading day, the next date on which the exchange or market on which the Common
Stock is traded is open (the "Triggering Event Redemption Price" and,
collectively with the Major Transaction Redemption Price, the "Redemption
Price").
(c) "Major Transaction". A "Major Transaction" shall be deemed
-------------------
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination
of the Company with or into another Person (other than (A) a consolidation,
merger or other business combination in which holders of the Company's voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity
18
<PAGE>
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company);
(ii) the sale or transfer of all or substantially all of
the Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock.
(d) "Triggering Event". A "Triggering Event" shall be deemed to
-----------------
have occurred at such time as any of the following events:
(i) the failure of the Registration Statement (as defined
in the Registration Rights Agreement) to be declared effective by the SEC on or
prior to the date that is 180 days after the applicable Issuance Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
a Registration Default continues for a period of ten consecutive trading days;
(iii) suspension from listing or delisting of the Common
Stock from The Nasdaq SmallCap Market, The Nasdaq National Market or The New
York Stock Exchange, Inc. for a period of five consecutive days;
(iv) the Company's failure to deliver Conversion Shares
within 10 days of the Conversion Date or the Company's notice to any holder of
Preferred Shares, including by way of public announcement, at any time, of its
intention not to comply with proper requests for conversion of any Preferred
Shares into shares of Common Stock, including due to any of the reasons set
forth in Section 4(a) below; or
(v) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement, the
Registration Rights Agreement, this Certificate of Designations or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated thereby or hereby, except to the extent that
such breach would not have a Material Adverse Effect (as defined in Section 3(a)
of the Securities Purchase Agreement) and except, in the case of a breach of a
covenant which is curable, only if such breach continues for a period of at
least 10 days.
(e) Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No later than 5 days prior to the public announcement of such Major
- -----------
Transaction, the Company shall deliver written notice thereof via facsimile and
overnight courier (a "Notice of Major Transaction") to each holder of Preferred
Shares. At any time after receipt of a Notice of Major Transaction (or, in the
event a
19
<PAGE>
Notice of Major Transaction is not delivered at least 5 days prior to a Major
Transaction, at any time on or after the date which is 5 days prior to a Major
Transaction but in no event later than two (2) days prior to consummation of
such Major Transaction), any holder of the Preferred Shares then outstanding may
require the Company to redeem all or a portion of the holder's Preferred Shares
then outstanding by delivering written notice thereof via facsimile and
overnight courier (a "Notice of Redemption at Option of Buyer Upon Major
Transaction") to the Company, provided, however, that the holders shall only
have the right to submit a Notice of Redemption at Option of Buyer upon Major
Transaction so long as (A) the average of the Closing Bid Prices for the five
consecutive trading days immediately preceding each trading day during the
period beginning on the date immediately following the announcement of such
Major Transaction and ending on and including the date the Notice of Redemption
at Option of Buyer upon Major Transaction is sent to the Company shall be
greater than the Fixed Conversion Price as in effect on such trading day and (B)
in the case of a Major Transaction pursuant to Section 3(c)(iii) above, the
tender offer price is less than $4.50 per share (as adjusted for stock split,
stock dividends, stock combinations and other similar transactions) or the
tender offer price is less than the than the average of the Closing Bid Prices
of the Common Stock for the five consecutive trading days immediately preceding
the day such Major Transaction was first publicly announced. The Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is submitting for redemption, and
(ii) the applicable Major Transaction Redemption Price, as calculated pursuant
to Section 3(a).
(f) Mechanics of Redemption at Option of Buyer Upon Triggering
----------------------------------------------------------
Event. Within two (2) Business Days after the occurrence of a Triggering Event,
- -----
the Company shall deliver written notice thereof via facsimile and overnight
courier (a "Notice of Triggering Event") to each holder of Preferred Shares. At
any time after the earlier of a holder's receipt of a Notice of Triggering Event
and such holder becoming aware of a Triggering Event, any holder of Preferred
Shares then outstanding may require the Company to redeem all or a portion of
the holder's Preferred Shares then outstanding by delivering written notice
thereof via facsimile and overnight courier (a "Notice of Redemption at Option
of Buyer Upon Triggering Event") to the Company, provided that such Notice of
Redemption at Option of Buyer upon Triggering Event may only be sent during the
period beginning on the date of the occurrence of the Triggering Event and
ending on the later of the date which is (a) 30 days after the date on which
such holder of the Preferred Shares receives a Notice of Triggering Event from
the Company, (b) 30 days after the termination of the Escrow Agreement, between
the initial holders of the Preferred Shares, the Company and American National
Bank and Trust Company of Chicago, in accordance with Section 9 thereof, and (c)
the date on which such Triggering Event is cured, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of Preferred
Shares that such holder is submitting for redemption, and (ii) the applicable
Triggering Event Redemption Price, as calculated pursuant to Section 3(b).
(g) Payment of Redemption Price. Upon the Company's receipt of a
---------------------------
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a Notice(s)
of Redemption at Option of Buyer Upon Major Transaction from any holder of
Preferred Shares, the Company shall promptly but in no event later than one (1)
Business Day, notify each holder of Preferred Shares by
20
<PAGE>
facsimile of the Company's receipt of such Notice(s) of Redemption at Option of
Buyer Upon Triggering Event or Notice(s) of Redemption at Option of Buyer Upon
Major Transaction and each holder which has sent such a notice shall promptly
submit, if required by Section(2)(f)(vii), to the Company or its Transfer Agent
such holder's Preferred Stock Certificates which such holder has elected to have
redeemed. The Company shall deliver the applicable Triggering Event Redemption
Price, in the case of a redemption pursuant to Section 3(f), to such holder
within ten (10) Business Days after the Company's receipt of a Notice of
Redemption at Option of Buyer Upon Triggering Event and, in the case of a
redemption pursuant to Section 3(e), the Company shall deliver the applicable
Major Transaction Redemption Price contemporaneously with the consummation of
the Major Transaction; provided that, if required by Section 2(f)(vii), a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of the
Preferred Shares to be redeemed, the Company shall redeem an amount from each
holder of Preferred Shares being redeemed equal to such holder's pro-rata amount
(based on the number of Preferred Shares held by such holder relative to the
number of Preferred Shares outstanding) of all Preferred Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted for
redemption (other than pursuant to a dispute as to the arithmetic calculation of
the Redemption Price), in addition to any remedy such holder of Preferred Shares
may have under this Certificate of Designation, the Securities Purchase
Agreement and the Registration Rights Agreement, the applicable Redemption Price
payable in respect of such unredeemed Preferred Shares shall bear interest at
the rate of 1.25% per month (prorated for partial months) until paid in full. In
the event that the Company fails to pay such unpaid applicable Redemption Price
in full to a holder of Preferred Shares by the 10/th/ Business Day following
delivery of a Notice of Redemption at Option of Buyer Upon Triggering Event or
contemporaneously with the consummation of the Major Transaction, such holder
shall have the option (the "Void Optional Redemption Option") to, in lieu of
redemption, require the Company to promptly return to such holder(s) all of the
Preferred Shares that were submitted for redemption by such holder(s) under this
Section 3 and for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the "Void Optional
Redemption Notice"). Upon the Company's receipt of such Void Optional Redemption
Notice(s) prior to payment of the full applicable Redemption Price to such
holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering Event
or the Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the
case may be, shall be null and void with respect to those Preferred Shares
submitted for redemption and for which the applicable Redemption Price has not
been paid, (ii) the Company shall immediately return any Preferred Share
Certificates submitted to the Company by each holder for redemption under this
Section 3(g) and for which the applicable Redemption Price has not been paid and
(iii) the Fixed Conversion Price of such returned Preferred Shares shall be
adjusted to the lesser of (A) the Fixed Conversion Price as in effect on the
date on which the Void Optional Redemption Notice(s) is delivered to the Company
and (B) the lowest Closing Bid Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or
the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the
case may be, is delivered to the Company and ending on the date on which the
Void Optional Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Fixed Conversion Price then in effect. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid Price or the
arithmetic calculation
21
<PAGE>
of the Redemption Price, such dispute shall be resolved pursuant to Section
2(f)(iii) above with the term "Redemption Price" being substituted for the term
"Conversion Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights following such notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3 shall have priority to payments
to other stockholders (other than the holders of the Series A Preferred Stock)
in connection with a Major Transaction .
(4) Inability to Fully Convert.
--------------------------
(a) Holder's Option if Company Cannot Fully Convert. If, upon
-----------------------------------------------
the Company's receipt of a Conversion Notice or on the Maturity Date, the
Company cannot issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (I) does not have a sufficient number of shares of Common Stock
authorized and available, (II) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation the Exchange Cap (as defined in Section
14 below), from issuing all of the shares of Common Stock which are to be issued
to a holder of Preferred Shares pursuant to a Conversion Notice or (III) fails
to have a sufficient number of shares of Common Stock registered for resale
under the Registration Statement, then the Company shall issue as many shares of
Common Stock as it is able to issue in accordance with such holder's Conversion
Notice and pursuant to Section 2(f) and, with respect to the unconverted
Preferred Shares, the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("Mandatory Redemption") at a
price per Preferred Share (the "Mandatory Redemption Price") equal to the
product of (A) the Conversion Rate and (B) the Closing Bid Price as of such
Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(III), require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2(f);
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were to be
converted pursuant to such holder's Conversion Notice (provided that a holder's
voiding its Conversion Notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(iii), require
the Company to issue shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) at a Conversion Price equal to
the average of Closing Bid Prices of the Common Stock for the five
22
<PAGE>
consecutive trading days preceding such holder's Notice in Response to Inability
to Convert (as defined below) or such other market price that satisfies the
applicable exchange or trading market.
(b) Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
promptly, but in no event later than two (2) Business Days send via facsimile to
a holder of Preferred Shares, upon receipt of a facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as described in Section
4(a), a notice of the Company's inability to fully satisfy such holder's
Conversion Notice (the "Inability to Fully Convert Notice"). Such Inability to
Fully Convert Notice shall indicate (i) the reason why the Company is unable to
fully satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory Redemption
Price. Such holder shall notify the Company of its election pursuant to Section
4(a) above by delivering written notice no later than ten (10) Business Days
from the Date of receipt of the Inability to Fully Convert Notice via facsimile
to the Company ("Notice in Response to Inability to Convert").
(c) Payment of Mandatory Redemption Price. If a holder shall
-------------------------------------
elect to have its Preferred Shares redeemed pursuant to Section 4(a)(i), the
Company shall pay the Mandatory Redemption Price in cash to such holder within
ten (10) Business Days of the Company's receipt of the holder's Notice in
Response to Inability to Convert. If the Company shall fail to pay the
applicable Mandatory Redemption Price to such holder on a timely basis as
described in this Section 4(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, such unpaid amount shall bear interest at the
rate of 1.25% per month (prorated for partial months) until paid in full. In the
event that Company fails to pay the Mandatory Redemption Price in full to such
holder by the 10/th/ Business Day following delivery of a Notice in Response to
Inability to Convert, such holder may void the Mandatory Redemption with respect
to those Preferred Shares for which the full Mandatory Redemption Price has not
been paid and (i) receive back such Preferred Shares and (ii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Fixed Conversion Price in effect on the date on which the
holder voided the Mandatory Redemption and (B) the lowest Closing Bid Price
during the period beginning on the Conversion Date and ending on the date the
holder voided the Mandatory Redemption. Notwithstanding the foregoing, if the
Company fails to pay the applicable Mandatory Redemption Price within such ten-
day period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Price, such dispute shall be resolved pursuant to
Section 2(f)(iii) with the term "Redemption Price" being substituted for the
term "Conversion Rate".
(d) Pro-rata Conversion and Redemption. In the event the Company
-----------------------------------
receives a Conversion Notice, Notice of Redemption at Option of Buyer Upon Major
Transaction or Notice of Redemption at Option of Buyer Upon Triggering Event
from more than one holder of Preferred Shares on the same day and the Company
can convert and/or redeem some, but not all, of the Preferred Shares pursuant to
this Section 4, the Company shall convert and redeem from each holder of
Preferred Shares electing to have Preferred Shares converted and redeemed at
such time an amount equal to such holder's pro-rata amount (based on the number
of Preferred Shares held by
23
<PAGE>
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being converted and redeemed at such time.
(5) Conversion at the Company's Election. On any day immediately
------------------------------------
following at least thirty (30) consecutive trading days during which the Closing
Bid Price of the Common Stock on each trading day during such thirty (30)
consecutive trading days is not less than 200% of the applicable Fixed
Conversion Price in effect on the first day of such thirty (30) consecutive
trading days, the Company shall have the right, in its sole discretion, to
require that any or all of the outstanding Preferred Shares be converted
("Conversion at Company's Election") at the Conversion Rate; provided that the
Conditions to Conversion at the Company's Election (as set forth below) and the
other terms of this Section 5 are satisfied. The Company shall exercise its
right to Conversion at Company's Election by providing each holder of Preferred
Shares written notice ("Notice of Conversion at Company's Election") at least
twenty (20) trading days prior to the date selected by the Company for
conversion ("Company's Election Conversion Date"). If the Company elects to
require conversion of some, but not all, of such Preferred Shares, the Company
shall convert an amount from each holder of Preferred Shares equal to such
holder's pro rata amount (based on the number of such Preferred Shares held by
such holder relative to the number of such Preferred Shares outstanding on date
of the Company's delivery of the Notice of Conversion at Company's Election) of
all Preferred Shares the Company is requiring to be converted. The Notice of
Conversion at Company's Election shall indicate (x) the number of Preferred
Shares the Company has selected for conversion, (y) the Company's Election
Conversion Date, which date shall be not less than 20 or more than 30 trading
days after each holder's receipt of such notice, and (z) each holder's pro rata
share of outstanding Preferred Shares the Company is requiring to be converted.
All Preferred Shares selected for conversion in accordance with the provision of
this Section 5 and which have not been converted prior to the Company's Election
Conversion Date shall be converted as of the Company's Election Conversion Date
in accordance with Section 2 as if the holders of such Preferred Shares selected
by the Company to be converted had given the Conversion Notice on the Company's
Election Conversion Date and the Company's Election Conversion Date were the
holder's Conversion Date. If required by Section 2(f)(vii), all holders of
Preferred Shares shall thereupon and in no event later than two Business Days
after the Company's Election Conversion Date surrender all Preferred Stock
Certificates selected for conversion, duly endorsed for cancellation, to the
Company. "Conditions to Conversion at the Company's Election" means the
following conditions: (i) on each day during the period beginning 90 days prior
to the date of the Company's Notice of Conversion at Company's Election and
ending on and including the Company's Election Conversion Date, the Registration
Statement shall be effective and available for the sale of no less than 100% of
the sum of (A) the number of shares of Common Stock then issuable upon the
conversion of all outstanding Preferred Shares and exercise of all outstanding
Warrants (in each case, without regard to any limitations on conversion or
exercise herein or elsewhere), and (B) the number of Conversion Shares that are
then held by the holders of the Preferred Shares and Warrant Shares that are
then held by the holders of the Warrants; (ii) on each day during the period
beginning on and including the date which is thirty (30) trading days prior to
the date of receipt by the holders of Preferred Shares of the Company's Notice
of Conversion at Company's Election and ending on and including the Company's
Election Conversion Date, the Common Stock is designated for quotation on The
Nasdaq SmallCap Market, The Nasdaq National Market or listed on The New York
Stock
24
<PAGE>
Exchange, Inc. and is not suspended from trading; (iii) on each day during the
thirty (30) consecutive trading days immediately preceding the date of the
receipt by the holders of Preferred Shares of the Notice of Conversion at
Company's Election, the Closing Bid Price of the Common Stock is at least 200%
of the Fixed Conversion Price in effect on the first day of such thirty (30)
consecutive trading days; (iv) on each day during the period beginning on and
including the date of the receipt by the holders of Preferred Shares of the
Notice of Conversion at Company's Election and ending on and including the
Company's Election Conversion Date, the Closing Bid Price of the Common Stock is
at least 80% of the Closing Bid Price on the trading day immediately preceding
the date of the receipt by the holders of Preferred Shares of the Notice of
Conversion at Company's Election; (v) during the period beginning on the Initial
Issuance Date and ending on and including the Company's Election Conversion
Date, the Company shall have delivered all Conversion Shares upon conversion of
the Preferred Shares to the holders of Preferred Shares on a timely basis as set
forth in Section 2(f)(ii) of this Certificate of Designations; (vi) during the
period beginning 60 trading days prior to the date of the Company's Notice of
Conversion at the Company's Election and ending on and including the Company's
Election Conversion Date there shall not have occurred a Triggering Event nor
shall a Triggering Event be continuing which shall not have been cured (in each
case, other than a Triggering Event set forth in Section 3(d)(v)); (vii) during
the period beginning on the Initial Issuance Date and ending on and including
the Company's Election Conversion Date, there shall not have occurred the
consummation of a Major Transaction or a public announcement of a pending Major
Transaction which has not been abandoned or terminated; (viii) the Company shall
not have completed more than four (4) prior Conversion at the Company's
Elections; (ix) during the period beginning 30 trading days prior to the date of
the Company's Notice of Conversion at Company's election and ending on and
including the Company's Election Conversion Date, there shall not have been any
Grace Period under Section 3(u) of the Registration Rights Agreement; and (x)
the Company otherwise has satisfied its obligations and is not in default under
this Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, provided, however, that if a Buyer shall have
waived in writing its right to redeem which resulted either pursuant to a
Triggering Event or a Major Transaction, then the Company shall not be required
to satisfy clauses (vi) and (vii) hereof in order to require such Buyer to
convert any or all of its Preferred Shares at the Company's election pursuant to
this Section 5. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for conversion) into
Common Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Conversion Date.
(6) Company's Right to Redeem in Lieu of Conversion. Subject to the
-----------------------------------------------
terms and conditions of this Section 6, at any time after the Initial Issuance
Date, and so long as the Company has provided appropriate notice as described
below, the Company may elect to redeem Preferred Shares submitted for conversion
in lieu of converting such Preferred Shares, provided that the Conversion Price
for such Preferred Shares (as reflected in the Conversion Notice for such
Preferred Shares) on the Conversion Date is less than a price (the "Redemption
in Lieu of Conversion Trigger Price") equal to the Market Price on the Initial
Issuance Date (appropriately adjusted for any stock split, stock dividend,
combination or other similar transaction) (a "Company Redemption in Lieu of
Conversion"). If the Company elects to redeem some, but not all, of the
Preferred Shares submitted for conversion, the Company shall redeem a number of
Preferred Shares from each holder
25
<PAGE>
of Preferred Shares submitted for conversion on the applicable date equal to
such holder's pro-rata amount (based on the number of Preferred Shares held by
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares submitted for conversion which the Company elects to redeem.
(a) Redemption Price of Company Redemption in Lieu of Conversion. The
------------------------------------------------------------
"Redemption Price of Company Redemption in Lieu of Conversion" shall be an
amount per Preferred Share equal to the product of (i) the Conversion Rate on
the applicable Conversion Date and (ii) the Closing Bid Price on the Conversion
Date.
(b) Mechanics of Company Redemption in Lieu of Conversion. The
-----------------------------------------------------
Company shall exercise its right to redeem by delivering written notice by
facsimile and overnight courier ("Notice of Company Redemption in Lieu of
Conversion") to (i) each holder of the Preferred Shares and (ii) the Transfer
Agent. Such Notice of Company Redemption in Lieu of Conversion shall indicate
(A) the maximum, if any, aggregate number of Preferred Shares which the Company
will redeem in connection with the Company Redemption in Lieu of Conversion and
(B) confirm the time period during which the Company may effect Company
Redemption in Lieu of Conversion, which period shall begin on and include the
date which is five Business Days after the date of delivery to all of the
holders of the Notice of Redemption in Lieu of Conversion and shall end on and
include the date which is 30 calendar days after the fifth business day
following the date of receipt by all of the holders of the Notice of Redemption
in Lieu of Conversion (the "Redemption in Lieu of Conversion Period"). If the
Company elects to limit the number of Preferred Shares which it will redeem
during the Redemption in Lieu of Conversion Period, the Company shall allocate
for redemption from each holder of Preferred Shares a number of Preferred Shares
equal to such holder's pro-rata amount (based on the number of Preferred Shares
held by such holder on the date of the Notice of Company Redemption in Lieu of
Conversion relative to the total number of Preferred Shares outstanding on such
date). The Company may terminate a Redemption in Lieu of Conversion Period at
any time with respect to Preferred Shares which have not been submitted for
conversion by delivering written notice of such termination to each holder of
Preferred Shares by facsimile and overnight courier at least five (5) Business
Days prior to the effective date of such termination. Notwithstanding anything
to the contrary in this Section 6, the Company shall convert Preferred Shares
pursuant to Section 2 if such Preferred Shares are submitted for conversion (i)
before the beginning, or after the effective date of the termination, of the
Redemption in Lieu of Conversion Period, (ii) for a Conversion Price (as
reflected in the Conversion Notice) greater than or equal to the Redemption in
Lieu of Conversion Trigger Price or (iii) are in excess of such holder's pro
rata allocation of the maximum number of Preferred Shares the Company indicated
that it would redeem in its Notice of Company Redemption in Lieu of Conversion.
(c) Payment of Redemption Price. The Company shall pay the applicable
----------------------------
Redemption Price of Company Redemption in Lieu of Conversion to the holder of
the Preferred Shares being redeemed in cash by wire transfer within ten (10)
Business Days after the applicable Conversion Date on which such Preferred
Shares are submitted for conversion. If the Company shall fail to pay the
applicable Redemption Price of Company Redemption in Lieu of Conversion to such
holder on a timely basis as described in this Section 6(c), in addition to any
remedy such holder of
26
<PAGE>
Preferred Shares may have under this Certificate of Designations and the
Securities Purchase Agreement, such unpaid amount shall bear interest at the
rate of 1.25% per month until paid in full. If the Company fails to pay such
unpaid applicable Redemption Price of Company Redemption in Lieu of Conversion
by the 10/th/ Business Day following the applicable Conversion Date in full to
each holder, each holder of Preferred Shares submitted for redemption pursuant
to this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid, shall have the option to, in
lieu of redemption, (A) to require the Company to promptly return to each holder
all of the Preferred Shares that were submitted for redemption by such holder
under this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid or (B) to convert those
Preferred Shares for which the applicable Redemption Price of the Company
Redemption in Lieu of Conversion has not been paid at a Conversion Price equal
to the lesser of (I) the Conversion Price applicable to such conversion on the
date on which such Preferred Shares were originally presented for conversion and
(II) the Conversion Price which would have been in effect if such Preferred
Shares were presented for conversion on the Business Day immediately following
the last day on which the Company could have effected a timely Company
Redemption in Lieu of Conversion, by sending written notice thereof to the
Company via facsimile (the "Void Company Redemption Notice"). Upon the Company's
receipt of such Void Company Redemption Notice(s), requesting the return of the
Preferred Shares, prior to payment of the full applicable redemption price to
each holder, (i) the Company's Redemption in Lieu of Conversion shall be null
and void with respect to those Preferred Shares submitted for redemption and for
which the applicable redemption price has not been paid and with respect to any
Preferred Shares submitted in the future for conversion in the same Redemption
in Lieu of Conversion Period, (ii) the Company shall immediately return any
Preferred Shares submitted to the Company by each holder for redemption under
this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid and (iii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (I) the Conversion Price applicable to such conversion on the date on
which such Preferred Shares were originally presented for conversion and (II)
the lowest Conversion Price which would have been in effect if such Preferred
Shares were presented for conversion on any Business Day during the period
beginning on the Business Day immediately following the last day on which the
Company could have effected a timely Company Redemption in Lieu of Conversion
and ending on the date of the Company's receipt of the applicable Void Company
Redemption Notice. Notwithstanding the foregoing, if the Company fails to pay
the applicable Redemption Price of Company Redemption in Lieu of Conversion to a
holder within the time period described in this Section 6(d) due to a dispute as
to the arithmetic calculation of the Redemption Price of Company Redemption in
Lieu of Conversion, such dispute shall be resolved pursuant to Section 2(f)(iii)
above with the term "Redemption Price of Company Redemption in Lieu of
Conversion" being substituted for the term "Conversion Rate." If the Company
fails to timely effect a Company Redemption in Lieu of Conversion in accordance
with this Section 6, the Company shall not be allowed to submit another Notice
of Company Redemption in Lieu of Conversion without the prior written consent of
the holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding.
27
<PAGE>
(d) Company Must Have Immediately Available Funds or Credit
-------------------------------------------------------
Facilities. The Company shall not be entitled to send any Notice of Company
- ----------
Redemption in Lieu of Conversion pursuant to Section 6(b) above and begin the
redemption procedure under this Section 6, unless it has:
(i) the full amount of the Redemption Price of Company
Redemption in Lieu of Conversion in cash, available in a demand or other
immediately available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar financial
institutions that are available for use in redeeming the Preferred Shares, in
the full amount of the Redemption Price of Company Redemption in Lieu of
Conversion;
(iii) a written agreement with a standby underwriter ready,
willing and able to purchase from the Company a sufficient number of shares of
stock to provide proceeds necessary to redeem any Preferred Shares that are not
converted prior to a Company Redemption in Lieu of Conversion; or
(iv) a combination of the items set forth in the preceding
clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price
of Company Redemption in Lieu of Conversion.
(7) Redemption at the Company's Election. On and after the third
------------------------------------
anniversary of the date on which the SEC shall have declared the Registration
Statement effective, the Company shall have the right, in its sole discretion,
to require that all, but not less than all, of the outstanding Preferred Shares,
which are convertible into the Conversion Shares covered by such Registration
Statement (the "Redeemable Preferred Shares") be redeemed for each Buyer for
which redemption is permitted pursuant to this Section 7 ("Redemption at
Company's Election") at a price per share equal to 115% of the Liquidation Value
("Company's Election Redemption Price"); provided that the Conditions to
Redemption at the Company's Election (as set forth below) and the other terms of
this Section 7 are satisfied. The Company shall exercise its right to Redemption
at Company's Election by providing each holder of Preferred Shares written
notice ("Notice of Redemption at Company's Election") at least 20 trading days
prior to the date selected by the Company for such redemption (the "Company's
Election Redemption Date"). The Notice of Redemption at Company's Election shall
indicate the Company's Election Redemption Date. If the Company has exercised
its right of Redemption at Company's Election and the conditions to such
Redemption at Company's Election have been satisfied, then all Redeemable
Preferred Shares outstanding at the Company's Election Redemption Date shall be
redeemed as of the Company's Election Redemption Date by payment by the Company
to each holder of Redeemable Preferred Shares of the Company's Election
Redemption Price. If required by Section 2(f)(vii), all holders of Redeemable
Preferred Shares shall thereupon and within two Business Days after the
Company's Election Redemption Date, or such earlier date as the Company and each
holder of Redeemable Preferred Shares mutually agree, surrender all outstanding
Preferred Stock Certificates, duly endorsed for cancellation, to the Company. If
the Company fails to pay the full Company's Election Redemption Price with
respect
28
<PAGE>
to any Redeemable Preferred Shares then the Redemption at Company's Election
shall be null and void with respect to such Preferred Shares and the holder of
such Preferred Shares shall be entitled to all the rights of a holder of
outstanding Preferred Shares set forth in this Certificate of Designations.
"Conditions to Redemption at the Company's Election" means the following
conditions: (i) during the period beginning on the Initial Issuance Date and
ending on and including the Company's Election Redemption Date, the Company
shall have delivered Conversion Shares upon conversion of the Preferred Shares
to the holders of the Preferred Shares on a timely basis as set forth in Section
2(f)(ii) of this Certificate of Designations (ii) on each day during the period
beginning 30 trading days prior to the date of Notice of Redemption at Company's
Election and ending on and including the Company's Election Redemption Date, the
Registration Statement for the Conversion Shares relating to the Redeemable
Preferred Shares shall be effective and available for the sale of no less than
100% of the sum of (A) the number of shares of Common Stock then issuable upon
the conversion of all outstanding Redeemable Preferred Shares and exercise of
all outstanding Warrants (without regard to any limitations on conversion herein
or elsewhere), and (B) the number of Conversion Shares that are then held by the
holders of the Preferred Shares and Warrant Shares that are then held by the
holders of the Warrants; (iii) on each day during the period beginning 30
trading days prior to the date of Notice of Redemption at Company's Election and
ending on and including the Company's Election Redemption Date, the Common Stock
is designated for quotation on The Nasdaq SmallCap Market or The Nasdaq National
Market or listed on The New York Stock Exchange, Inc. and is not suspended from
trading; (iv) during the period beginning 60 trading days prior to the date of
Notice of Redemption at Company's Election and ending on and including the
Company's Election Redemption Date, there shall not have occurred a Triggering
Event nor shall a Triggering Event be continuing which shall not have been cured
(in each case, other than a Triggering Event described in Section 3(d)(v)); (v)
during the period beginning 20 trading days prior to the date of the Company's
Notice of Redemption at Company's election and ending on and including the
Company's Election Redemption Date, there shall not have been any Grace Period
under Section 3(u) of the Registration Rights Agreement; and (vi) the Company
otherwise has satisfied its obligations and is not in default under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, provided, however, that if a Buyer shall have
waived in writing its right to redeem which resulted pursuant to a Triggering
Event, then the Company shall not be required to satisfy clause (iv) hereof in
order to redeem all of such Buyer's Preferred Shares at the Company's election
pursuant to this Section 7. Notwithstanding the above, any holder of Preferred
Shares may convert such shares (including Preferred Shares selected for
redemption) into Common Stock pursuant to Section 2(a) on or prior to the date
immediately preceding the Company's Election Redemption Date.
(8) Reissuance of Certificates. Subject to Section 2(f)(vii), in the
--------------------------
event of a conversion or redemption pursuant to this Certificate of Designations
of less than all of the Preferred Shares represented by a particular Preferred
Stock Certificate, the Company shall promptly cause to be issued and delivered
to the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so converted or
redeemed.
(9) Reservation of Shares. The Company shall, so long as any of the
---------------------
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common
29
<PAGE>
Stock, solely for the purpose of effecting the conversion of the Preferred
Shares, such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Preferred Shares then
outstanding (without regard to any limitations on conversions); provided that
the number of shares of Common Stock so reserved shall at no time be less than
200% of the number of shares of Common Stock for which the Preferred Shares are
at any time convertible. The initial number of shares of Common Stock reserved
for conversions of the Preferred Shares and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of the
Preferred Shares based on the number of Preferred Shares held by each holder at
the time of issuance of the Preferred Shares or increase in the number of
reserved shares, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder's Preferred Shares, each transferee shall
be allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and which
remain allocated to any person or entity which does not hold any Preferred
Shares shall be allocated to the remaining holders of Preferred Shares, pro rata
based on the number of Preferred Shares then held by such holder.
(10) Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Certificate of Designations.
(11) Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "Preferred Funds"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class junior in rank to the Preferred Shares in respect of the preferences as to
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to the sum of (i) $10,000 and
(ii) the Additional Amount (such sum being referred to as the "Liquidation
Value"); provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Preferred Shares and holders of shares of other
classes or series of preferred stock of the Company that are of equal rank with
the Preferred Shares as to payments of Preferred Funds (the "Pari Passu
Shares"), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to all
holders of Preferred Shares and Pari Passu Shares. The purchase or redemption by
the Company of stock of any class, in any manner permitted by law, shall not,
for the purposes hereof, be regarded as a liquidation, dissolution or winding up
of the Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company of all or
substantially all of its assets, shall, for the purposes hereof, be deemed to be
a liquidation, dissolution or winding up of the Company. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder.
30
<PAGE>
(12) Preferred Rank; Participation. All shares of Common Stock shall
-----------------------------
be of junior rank to all Preferred Shares and the Series A Preferred Stock shall
rank pari passu with the Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding up of
the Company. The rights of the shares of Common Stock shall be subject to the
preferences and relative rights of the Preferred Shares. Without the prior
express written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, the Company shall not hereafter authorize or
issue additional or other capital stock that is of rank senior to or pari passu
with to the Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
Without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Certificate of
Incorporation or bylaws, or file any resolution of the board of directors of the
Company with the Secretary of State of the State of Delaware containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Preferred Shares relative to the holders
of the Common Stock or the holders of any other class of capital stock. In the
event of the merger or consolidation of the Company with or into another
corporation, the Preferred Shares shall maintain their relative powers,
designations and preferences provided for herein and no merger shall result
inconsistent therewith.
(13) Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted or
- -------------------
redeemed as provided herein, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares.
(14) Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of the Preferred Shares if the issuance of such
shares of Common Stock would exceed that number of shares of Common Stock which
the Company may issue upon Conversion of the Preferred Shares (the "Exchange
Cap") without breaching the Company's obligations, if any, under the rules or
regulations of the Nasdaq Stock Market or such exchange on which the stock is
then traded except that such limitation shall not apply in the event that the
Company (a) obtains the approval of its stockholders as required by applicable
rules and regulations of the Nasdaq Stock Market or such other exchange on which
the stock is then traded for issuances of Common Stock in excess of such amount
or (ii) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of a majority of the Preferred Shares then outstanding. Until such
approval or written opinion is obtained or such action has been taken by the
required number of holders, no purchaser of Preferred Shares pursuant to the
Securities Purchase Agreement (the "Purchasers") shall be issued, upon
conversion of Preferred Shares, shares of Common Stock in an amount greater than
the product of (i) the Exchange Cap amount multiplied by (ii) a fraction, the
numerator of which is the number of Preferred Shares issued to such Purchaser
pursuant to the Securities Purchase Agreement and the denominator of which is
the aggregate amount of all the Preferred Shares issued to the Purchasers
pursuant to the Securities Purchase Agreement (the "Cap Allocation Amount"). In
the event that
31
<PAGE>
any Purchaser shall sell or otherwise transfer any of such Purchaser's Preferred
Shares, the transferee shall be allocated a pro rata portion of such Purchaser's
Cap Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares then
held by each such holder.
(15) Vote to Change the Terms of or Issue Preferred Shares. The
-----------------------------------------------------
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares, or (b) any issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(16) Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s), the Company
shall execute and deliver new preferred stock certificate(s) of like tenor and
date; provided, however, the Company shall not be obligated to re-issue
preferred stock certificates if the holder contemporaneously requests the
Company to convert such Preferred Shares into Common Stock.
(17) Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Certificate of Designations
- -----------------
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly described herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the holder thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
32
<PAGE>
(18) Specific Shall Not Limit General; Construction. No specific
----------------------------------------------
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein. This Certificate of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the drafter
hereof.
(19) Failure or Indulgence Not Waiver. No failure or delay on the part
--------------------------------
of a holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
(20) Notice. Whenever notice is required to be given, it shall be
------
given in accordance with Section 9(f) of the Securities Purchase Agreement.
(21) Restriction on Transfer of Preferred Shares. In addition to any
-------------------------------------------
restrictions on transfer in the Securities Purchase Agreement, a holder of
Preferred Shares may only transfer such Preferred Shares with the prior written
consent of the Company, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, the Preferred Shares may be transferred, without
the prior consent of the Company, (i) upon the transfer of all or any portion of
the Preferred Shares to any existing holder of Preferred Shares and (ii) to any
transferee, provided that the transferor, transfers all of its Preferred Shares
to such transferee. Notwithstanding anything to the contrary contained in this
Section 21, a holder of Preferred Shares shall be entitled to pledge such
Preferred Shares in connection with a bona fide margin account or other loan
secured by such Preferred Shares. In addition, notwithstanding anything to the
contrary in this Section 21, the initial holder, HFTP Investment L.L.C., shall
have the right without the consent of the Company, to transfer all or any
portion of its Preferred Shares to a maximum of one Affiliated Transferee. An
"Affiliated Transferee" shall mean (i) an Affiliate of the holder, (ii) any
holder of the Preferred Shares and (iii) any Affiliate of a holder of Preferred
Shares.
* * * * * *
33
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by _______________, its ___________, as of May __, 1999.
MEDCARE TECHNOLOGIES, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
34
<PAGE>
EXHIBIT I
MEDCARE TECHNOLOGIES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series ___ Convertible Preferred Stock (the "Certificate of Designations"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series ___ Convertible
Preferred Stock, par value $0.25 per share (the "Preferred Shares"), of Medcare
Technologies, Inc., a Delaware corporation (the "Company"), indicated below into
shares of common stock, par value $0.001 per share (the "Common Stock"), of the
Company, by tendering the stock certificate(s) representing the Preferred Shares
specified below as of the date specified below.
Date of Conversion: __________________________________________
Number of Preferred Shares to be converted: ___________________________
Stock certificate no(s). of Preferred Shares to be converted:___________
Please confirm the following information:
Conversion Price: __________________________________________
Number of shares of Common Stock
to be issued: __________________________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ________________________________
________________________________
________________________________
________________________________
Facsimile Number: ________________________________
Authorization: ________________________________
By:_____________________________
Title:__________________________
Dated: _______________________________________
Account Number:
(if electronic book entry transfer):____________________________
Transaction Code Number
(if electronic book entry transfer):____________________________
35
<PAGE>
ACKNOWLEDGMENT
--------------
The Company hereby acknowledges this Conversion Notice and hereby directs
Holladay Stock Transfer, Inc. to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated May ___,
1999 from the Company and acknowledged and agreed to by Holladay Stock Transfer,
Inc.
MEDCARE TECHNOLOGIES, INC.
By:________________________
Name:______________________
Title:_____________________
36
<PAGE>
Exhibit 6b.
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of May 18, 1999,
by and among Medcare Technologies, Inc., a Delaware corporation, with
headquarters located at 1515 West 22/nd/ Street, Suite 1210, Oak Brook, Illinois
60521 (the "COMPANY"), and the investors listed on the Schedule of Buyers
attached hereto (individually, a "Buyer" and collectively, the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act");
B. The Company has authorized the following new series of its Preferred
Stock, par value $0.25 per share which shall be called the Company's Series B
Convertible Preferred Stock (the "Preferred Stock"), which shall be convertible
into shares of the Company's common stock, par value $0.001 per share (the
"Common Stock") (as converted, the "Conversion Shares"), in accordance with the
terms of the Company's Certificate of Designations, Preferences and Rights of
the Preferred Shares, substantially in the form attached hereto as Exhibit A
---------
(the "Certificate of Designations");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially (i) an aggregate of 400 shares of the Preferred Stock
(the "Initial Preferred Shares") in the respective amounts set forth opposite
each Buyer's name on the Schedule of Buyers attached hereto and (ii) warrants to
purchase up to 200 shares of Common Stock (as exercised collectively, the
"Warrant Shares") (1) for each Initial Preferred Share held by such Buyer on
each Warrant Vesting Date (as defined below) and (2) for each Initial Preferred
Share converted by such Buyer before each Warrant Vesting Date at a Conversion
Price (as defined in the Certificate of Designations) equal to the Fixed
Conversion Price (as defined in the Certificate of Designations) of such Initial
Preferred Shares as in effect on the date of conversion, such Warrants to be
substantially in the form attached as Exhibit E (the "Warrants");
---------
D. Subject to the terms and conditions set forth in this Agreement, each
Buyer shall have the right to purchase a number of additional shares of
Preferred Stock equal to up to the sum of (i) the number of Initial Preferred
Shares held by such Buyer on the date which is one year after the Initial
Closing Date and (ii) the number of Initial Preferred Shares converted by such
Buyer before the date which is one year after the Initial Closing Date at a
Conversion Price equal to the Fixed Conversion Price of such shares of Preferred
Stock as in effect on the date of conversion (collectively, the "Additional
Preferred Shares") and Warrants to purchase up to 200 shares of Common Stock (i)
for each Additional Preferred Share held by such Buyer on each Warrant Vesting
Date and (ii) for each Additional Preferred Share converted by such Buyer before
each Warrant Vesting Date at a Conversion Price equal to the Fixed Conversion
Price of such Additional Preferred Shares as in effect on the date of conversion
(the Initial Preferred Shares, and the Additional Preferred
<PAGE>
Shares collectively are referred to in this Agreement as the "Preferred
Shares");
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "Registration Rights
---------
Agreement") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
a. Purchase of Preferred Shares. Subject to satisfaction (or waiver)
----------------------------
of the conditions set forth in Sections 6(a) and 7(a), the Company shall issue
and sell to the Buyers and the Buyers severally shall purchase from the Company
an aggregate of 400 Initial Preferred Shares in the respective amounts set forth
opposite each Buyer's name on the Schedule of Buyers along with the related
Warrants (the "Initial Closing"). Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 1(c), 6(b) and 7(b), at the option of each
Buyer, the Company shall issue and sell to each such Buyer and each such Buyer
may purchase from the Company that number of Additional Preferred Shares equal
to up to the sum of (i) the number of Preferred Shares held by such Buyer on the
date which is one year after the Initial Closing Date and (ii) the number of
Preferred Shares converted by such Buyer, before the date which is one year
after the Initial Closing Date at a Conversion Price equal to the Fixed
Conversion Price of such Preferred Shares as in effect on the date of conversion
along with the related Warrants (the "Additional Closing" and together with the
Initial Closing, the "Closings"). The purchase price (the "Purchase Price") of
each Preferred Share and the related Warrant at each of the Closings shall be an
aggregate of $10,000. "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in the city of New York are authorized or
required by law to remain closed.
b. The Initial Closing Date. The date and time of the Initial
------------------------
Closing (the "Initial Closing Date") shall be 10:00 a.m. Central Time, within
three (3) Business Days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. The Additional Closing Date. The date and time of the Additional
---------------------------
Closing (the "Additional Closing Date") shall be 10:00 a.m. Central time, on the
date which is 25 days after the first anniversary of the Initial Closing Date,
subject to satisfaction (or waiver) of the conditions to the Additional Closing
set forth in Sections 6(b) and 7(b) and the conditions contained in this Section
1(c) (or such later date as is mutually agreed to by the Company and the
Buyers). At any time during the period beginning on and including the date
which is one year after the Initial Closing Date and ending on and including the
date which is 20 days after the first anniversary of the Initial Closing Date,
but subject to the requirements of Sections 6(b) and 7(b) and the conditions
contained in this Section 1(c); each Buyer may purchase, at such Buyer's option,
Additional Preferred Shares
2
<PAGE>
by delivering written notice to the Company (a "Additional Share Notice") at
least five Business Days (the "Additional Share Notice Date") prior to the
Additional Closing Date. The Additional Share Notice shall set forth (i) the
number of Additional Preferred Shares such Buyer will purchase (which number
shall not exceed the sum of (a) the number of Preferred Shares held by such
Buyer on the date which is one year after the Initial Closing Date and (b) the
number of Preferred Shares converted by such Buyer before the date which is one
year after the Initial Closing Date at a Conversion Price equal to the Fixed
Conversion Price of such Preferred Shares as in effect on the date of
conversion) along with the related Warrants and (ii) the aggregate Purchase
Price for the Additional Preferred Shares. A Buyer shall only be allowed to
deliver an Additional Share Notice on a day on which the Closing Bid Price (as
defined in the Certificate of Designations) of the Common Stock is greater than
the Fixed Conversion Price of the Initial Preferred Shares in effect on such
date. The Additional Closing shall occur on the Additional Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693. (The Initial Closing Date and the Additional Closing Dates
collectively are referred to in this Agreement as the "Closing Dates").
d. Warrant Vesting Dates. The "Warrant Vesting Dates" shall be (i)
---------------------
the date which is 120 days after the Issuance Date (as defined in the
Certificate of Designations) of the applicable Preferred Shares, (ii) the date
which is 300 days after the Issuance Date of the applicable Preferred Shares and
(iii) the date which is 480 days after the Issuance Date of the applicable
Preferred Shares.
e. Form of Payment. On the Initial Closing Date, (i) each Buyer
---------------
shall deposit the Purchase Price with the escrow agent (the "Escrow Agent")
identified in the Escrow Agreement, a form of which is attached hereto as
Exhibit F (the "Escrow Agreement"), for the Preferred Shares and the related
Warrants to be issued and sold to such Buyer at the Initial Closing, by wire
transfer of immediately available funds in accordance with the Escrow Agent's
written wire instructions, and (ii) the Company shall deliver to each Buyer
stock certificates (the "Stock Certificates") representing such number of the
Preferred Shares indicated opposite such Buyer's name on the Schedule of Buyers
along with the related Warrants, duly executed on behalf of the Company and
registered in the name of such Buyer. By signing this Agreement, the Company
and the Buyers agree to all of the terms and conditions of, and become parties
to, the Escrow Agreement, all of the provisions of which are incorporated herein
by this reference as if set forth in full. On the Additional Closing date (i)
each Buyer shall pay the Purchase Price to the Company for the Preferred Shares
and the related Warrants to be issued and sold to such Buyer by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions, and (ii) the Company shall deliver to each Buyer Stock
Certificates representing such number of the Preferred Shares as is equal to the
number of Additional Preferred Shares being purchased by such Buyer along with
the related Warrants, duly executed on behalf of the Company and registered in
the name of such Buyer.
3
<PAGE>
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred
------------------
Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the Warrant Shares issuable upon exercise thereof (the
Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares,
collectively are referred to herein as the "Securities"), for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. Such Buyer understands that it
must bear the economic risk of this investment indefinitely, unless the
Securities are registered pursuant to the 1933 Act and any applicable states
securities laws or an exemption from such registration is available, and that
the Company has no present intention of registering any such Securities other
than as contemplated by the Registration Rights Agreement.
b. Accredited Investor Status. Such Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a) of Regulation D. By reason of
its business and financial experience and knowledge, such Buyer is capable of
evaluating the risks and merits of the investment made pursuant to this
Agreement.
c. Reliance on Exemptions. Such Buyer understands that the
----------------------
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have been
-----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Sections 3 and 9(m) below. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
e. No Governmental Review. Such Buyer understands that no United
----------------------
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in
4
<PAGE>
the Securities nor have such authorities passed upon or endorsed the merits of
the offering of the Securities.
f. Transfer or Resale. Such Buyer understands that except as
------------------
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a form reasonably satisfactory to the Company,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Buyer provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated
under the 1933 Act (or a successor rule thereto) ("Rule 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or other
-------
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
AN OPINION OF COUNSEL, IN A FORM REASONABLY SATISFACTORY TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if (i) such Securities are registered for sale under the 1933 Act, (ii)
in connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a form reasonably satisfactory to the Company, to the
effect that a public sale, assignment or transfer of such Securities may be made
without registration under
5
<PAGE>
the 1933 Act, or (iii) such holder provides the Company with reasonable
assurances that such Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold. Each Buyer acknowledges, covenants and agrees to
sell the Securities represented by a certificate(s) from which the legend has
been removed, only pursuant to (i) a registration statement effective under the
1933 Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement, the Registration
--------------------------
Rights Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered on behalf of such Buyer and are valid and binding
agreements of such Buyer enforceable against such Buyer in accordance with their
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that jurisdiction
---------
specified on the Schedule of Buyers.
j. No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Registration Rights Agreement and the Escrow Agreement by such
Buyer and the consummation by such Buyer of the transactions contemplated hereby
and thereby will not (i) result in a violation of the organizational or
formation documents filed with each Buyer's jurisdiction of organization; or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its
------------------------------
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 3(a)) are
-------------
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations or financial condition of the Company and its
Subsidiaries taken as a whole or on the authority or ability of the Company to
perform its obligations under the Transaction Documents (as defined below) or
the Certificate of Designations.
6
<PAGE>
b. Authorization; Enforcement; Compliance with Other Instruments.
-------------------------------------------------------------
(i) The Company has the requisite corporate power and authority to enter into
and perform its obligations under this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions
(as defined in Section 5), the Warrants and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the "Transaction Documents"), and
to issue the Securities in accordance with the terms hereof and thereof, (ii)
the execution and delivery of the Transaction Documents by the Company and the
execution and filing of the Certificate of Designations by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Shares and the
Warrants and the reservation for issuance and the issuance of the Conversion
Shares and the Warrant Shares issuable upon conversion or exercise thereof, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders (except such stockholder approval as may be required by the Nasdaq
SmallCap Market for the issuance of a number of shares of Common Stock which is
greater than 20% of the number of shares outstanding on the Initial Closing
Date), (iii) this Agreement is and, when executed and delivered, the other
Transaction Documents will be duly executed and delivered by the Company, (iv)
this Agreement and, when executed and delivered, the other Transaction
Documents, constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies, and (v) prior to each of the Closing Dates, the Certificate of
Designations will have been filed with the Secretary of State of the State of
Delaware and will be in full force and effect, enforceable against the Company
in accordance with its terms.
c. Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 100,000,000 shares of Common Stock, of which as of the date
hereof 7,831,160 shares were issued and outstanding, 4,000,000 shares were
issuable and reserved for issuance pursuant to the Company's stock option and
purchase plans and 255,919 shares are issuable and reserved for issuance
pursuant to securities (other than the Preferred Shares and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 1,000,000 shares of Preferred Stock, of which as of the date hereof, 50
shares of Series A Preferred Stock were issued and outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no
-------------
shares of the Company's capital stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company excluding any pledges by third parties to any financial or other lending
institution; (ii) there are no outstanding debt securities issued by the
Company; (iii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries; (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act
7
<PAGE>
(except the Registration Rights Agreement); (v) there are no outstanding
securities of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vi) there are no securities or instruments containing anti-
dilution or similar provisions that will be triggered by the issuance of the
Securities as described in this Agreement; and (vii) the Company does not have
any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement. The Company has furnished to the Buyers true and
correct copies of the Company's Certificate of Incorporation, as amended and as
in effect on the date hereof (the "Certificate of Incorporation"), and the
Company's By-laws, as in effect on the date hereof (the "By-laws"), and the
terms of all securities convertible into or exercisable for Common Stock and the
material rights of the holders thereof in respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized
----------------------
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Certificate of Designations. At least 3,200,000
shares of Common Stock (subject to adjustment pursuant to the Company's covenant
set forth in Section 4(f) below) have been duly authorized and reserved for
issuance upon conversion of the Preferred Shares and exercise of the Warrants.
Upon conversion or exercise in accordance with the Certificate of Designations
or the Warrants, as the case may be, the Conversion Shares and the Warrant
Shares will be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. Assuming the
truthfulness of the representations and warranties of the Buyers contained in
Section 2, the issuance by the Company of the Securities is exempt from
registration under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
------------ -------------
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares and the Warrant Shares) will
not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock of the Company or the By-laws; (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party; or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the principal market or exchange on which the Common Stock is traded or
listed) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 3(e), neither the Company nor its
-------------
Subsidiaries is in violation of any term of (i) its Certificate of
Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of Preferred Stock or By-laws or their organizational charter
or by-laws, respectively, or (ii) any statute, rule or regulation applicable to
the Company or its Subsidiaries and neither the Company nor its Subsidiaries is
in default under any material contract, agreement,
8
<PAGE>
mortgage, indebtedness, indenture, instrument, judgment, decree or order, except
for defaults as would not have a Material Adverse Effect. The business of the
Company and its Subsidiaries is not being conducted, and shall not be conducted,
in violation of any law, ordinance or regulation of any governmental entity.
Except as specifically contemplated by this Agreement and as required under the
1933 Act and any applicable state securities laws and except such as have been
obtained as of the date hereof, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents or the Certificate of Designations in
accordance with the terms hereof or thereof. Except as disclosed in Schedule
--------
3(e), all consents, authorizations, orders, filings and registrations which the
- ----
Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof. The Company and its
Subsidiaries are unaware of any facts or circumstances which might reasonably be
expected to give rise to any of the foregoing. The Company is not in violation
of the listing requirements of The Nasdaq SmallCap Market as in effect on the
date hereof and on each of the Closing Dates and has no actual knowledge of any
facts which would reasonably lead to delisting or suspension of the Common Stock
by The Nasdaq SmallCap Market in the foreseeable future.
f. SEC Documents; Financial Statements. Except as set forth on
-----------------------------------
Schedule 3(f), since December 31, 1997, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the 1934 Act, (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC Documents"). A
complete list of the Company's SEC Documents is set forth on Schedule 3(f). As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except as set
forth on Schedule 3(f), as of their respective dates, the financial statements
of the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, and (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Buyers with any material, nonpublic
information. The Company will meet the requirements for the use of Form S-3 for
registration of the resale of the Registrable Securities (as defined in the
Registration Rights Agreement) by the Buyers on and after June 1, 1999.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g),
-------------------------- -------------
since December 31, 1998 there has been no material adverse change and no
material adverse development
9
<PAGE>
in the business, properties, operations, financial condition, liabilities
results of operations of the Company or its Subsidiaries, taken as a whole. The
Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
any of its Subsidiaries have any actual knowledge that its creditors intend to
initiate involuntary bankruptcy proceedings or any actual knowledge of any fact
which would reasonably lead a creditor to do so. Except as disclosed in Schedule
3(g), since December 31, 1998, the Company has not declared or paid any
dividends, sold any assets in excess of $25,000 outside of the ordinary course
of business or had capital expenditures in excess of $250,000.
h. Absence of Litigation. Except as disclosed in Schedule 3(h),
--------------------- -------------
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Company's Subsidiaries or any of the Company's or the Company's Subsidiaries'
officers or directors in their capacities as such. Except as set forth in
Schedule 3(h), to the knowledge of the Company none of the directors or officers
of the Company have been involved in securities related litigation during the
past five years.
i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares.
-------------------------------------------------------------
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the Certificate of Designation and the transactions contemplated thereby.
The Company further acknowledges that each Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
the Transaction Documents and the Certificate of Designations and the
transactions contemplated thereby and any advice given by any of the Buyers or
any of their respective representatives or agents in connection with the
Transaction Documents and the Certificate of Designations and the transactions
contemplated thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
---------------------------------------------------
Circumstances. Except for the issuance of the Preferred Stock and Warrants
- -------------
contemplated by this Agreement, no event, liability, development or circumstance
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws on a
registration statement (including by way of incorporation by reference) filed
with the SEC relating to an issuance and sale by the Company of its Common Stock
and which has not been publicly disclosed.
k. No General Solicitation. Neither the Company, nor any of its
-----------------------
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any
10
<PAGE>
security or solicited any offers to buy any security, under circumstances that
would require registration of any of the Securities under the 1933 Act or cause
this offering of Securities to be integrated with prior offerings by the Company
for purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of The Nasdaq
Stock Market, Inc., nor will the Company or any of its Subsidiaries take any
action or steps that would require registration of the Securities under the 1933
Act or cause the offering of the Securities to be integrated with other
offerings.
m. Employee Relations. Neither the Company nor any of its
------------------
Subsidiaries is involved in any union labor dispute nor, to the actual knowledge
of the Company or any of its Subsidiaries, is any such dispute threatened.
Neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement. No executive officer (as defined in Rule 501(f) of the
1933 Act) has notified the Company's Board of Directors that such officer
intends to leave the Company or otherwise terminate such officer's employment
with the Company. No executive officer, to the actual knowledge of the Company
and its Subsidiaries, is in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement, non-
competition agreement, or any other contract or agreement or any restrictive
covenant, and to the actual knowledge of the Company and its Subsidiaries, the
continued employment of each such executive officer does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters.
n. Intellectual Property Rights. The Company and its Subsidiaries
----------------------------
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(n), none of the
-------------
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate within two years from the date of this Agreement. The Company and its
Subsidiaries do not have any actual knowledge of any infringement by the Company
or its Subsidiaries of trademarks, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secrets or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 3(n), no claim, action or proceeding
-------------
has been made or brought against, or to the Company's actual knowledge, has been
threatened against, the Company or its Subsidiaries regarding trademarks, trade
name rights, patents, patent rights, inventions, copyrights, licenses, service
names, service marks, service mark registrations, trade secrets or other
infringement; and the Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
o. Environmental Laws. Except such as would not have a Material
------------------
Adverse Effect, the Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them
11
<PAGE>
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval.
p. Title. The Company and its Subsidiaries have good and marketable
-----
title in fee simple to all real property owned by them and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p) or such
-------------
as do not interfere with the use made of such property by the Company or any of
its Subsidiaries. Any real property and facilities held under lease by the
Company or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as not materially interfere with the use
made of such property and buildings by the Company and its Subsidiaries.
q. Insurance. The Company and each of its Subsidiaries maintain
---------
insurance of the types and in such amounts as management of the Company believes
to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
r. Regulatory Permits. Except the absence of which would not have a
------------------
Material Adverse Effect, the Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
s. Internal Accounting Controls. The Company and each of its
----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. Tax Status. Except as set forth on Schedule 3(t), the Company and
---------- -------------
each of its Subsidiaries has made or filed all federal and state income and all
other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and for which the Company has
12
<PAGE>
set aside on its books provision reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
u. Certain Transactions. Except as set forth on Schedule 3(u) or in
-------------------- -------------
the SEC Documents filed at least ten days prior to the date hereof and other
than the grant of stock options disclosed on Schedule 3(c), none of the
-------------
officers, directors, or "affiliates" or "associates" (as such terms are defined
in Rule 12b-2 under the 1934 Act) of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such affiliate or associate.
v. Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and Warrant Shares issued upon exercise of the Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Preferred Shares in accordance with
this Agreement and the Certificate of Designations and its obligation to issue
the Warrant Shares in accordance with this Agreement and the Warrants is, in
each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.
w. No Other Agreements. The Company has not, directly or indirectly,
-------------------
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.
x. Application of Takeover Protections. The Company and its board of
-----------------------------------
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-
takeover provision under the Certificate of Incorporation or the laws of the
state of its incorporation which is or could become applicable to the Buyers as
a result of the Buyers and the Company fulfilling their obligations under the
Transaction Documents and the Certificate of Designation, including, without
limitation, the Company's issuance of the Securities and the Buyer's ownership
of the Securities.
y. Rights Agreement. The Company has not adopted a shareholder
----------------
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.
z. Year 2000 Compliance. The Company has initiated a review and
--------------------
assessment of all areas within its and each Subsidiary's business and operations
that could be materially adversely affected by the "Year 2000 Problem" (that is,
the risk that computer applications used by the Company or any of the
Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999). The Company currently does not expect remediation costs to be material
nor does it expect any
13
<PAGE>
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 complaint 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.
4. COVENANTS.
---------
a. Best Efforts. Each party shall use its best efforts timely to
------------
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to the
------
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before each of the
Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or "Blue
Sky" laws of the states of the United States following each of the Closing
Dates.
c. Reporting Status. Until the later of (i) the date which is one
----------------
year after the date on which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) and (ii) the date is three (3) years from the
last Closing Date to occur (the "Reporting Period"), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale
---------------
of the Preferred Shares for substantially the same purposes and in substantially
the same amounts as indicated in Schedule 4(d).
-------------
e. Financial Information. The Company agrees to send the following
---------------------
to each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period: (i) within two (2) days after the filing thereof with the SEC,
a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act; (ii) on the same day as
the release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
14
<PAGE>
f. Reservation of Shares. The Company shall take all action
---------------------
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares (without regard to any
limitations on conversions) and 100% of the number of shares of Common Stock
needed to provide for the issuance of the Warrant Shares.
g. Additional Financing; Right of First Refusal. Subject to the
--------------------------------------------
exceptions described below, the Company agrees that during the period beginning
on the date hereof and ending on the Additional Financing Restriction Date (as
defined below), neither the Company nor its Subsidiaries will, without the prior
written consent of the holders of the Preferred Shares representing at least
two-thirds (?) of the Preferred Shares then outstanding, negotiate or contract
with any party for any equity financing (including any debt financing with an
equity component) or issue any equity securities of the Company or any
Subsidiary or securities convertible or exchangeable into or for equity
securities of the Company or any Subsidiary (including debt securities with an
equity component) in any form ("Future Offerings"). Subject to the exceptions
described below, the Company agrees that during the period beginning on the
date hereof and ending on the date which is one year after the Initial Closing,
neither the Company nor its Subsidiaries will, without the prior written consent
of the holders of the Preferred Shares representing at least two-thirds (?) of
the Preferred Shares then outstanding, negotiate or contract with any party for
any Future Offering other than a Variable Convertible Offering, unless it shall
have first delivered to each Buyer or a designee appointed by such Buyer written
notice (the "Future Offering Notice") describing the proposed Future Offering,
including the terms and conditions thereof, and providing each Buyer an option
to purchase up to its Aggregate Percentage (as defined below), as of the date of
delivery of the Future Offering Notice, in the Future Offering on the same terms
and conditions set forth in the Future Offering Notice. The limitations referred
to in the preceding two sentences are collectively referred to as the "Capital
Raising Limitations". Subject to the exceptions described below, the Company
agrees that during the period beginning on the date hereof and ending on the
date which is 180 days after the Registration Statement is declared effective,
neither the Company nor its Subsidiaries will, without the prior written consent
of the holders of the Preferred Shares representing at least two-thirds (2/3) of
the Preferred Shares then outstanding, issue any securities of the Company or
any Subsidiary which are convertible into, exercisable or exchangeable for, or
carry the right to receive shares of Common Stock at any conversion, exercise or
exchange rate or other price that is based upon and/or varies with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such security ("Variable Convertible Offerings"), unless it shall
have first delivered to each Buyer or a designee appointed by such Buyer written
notice (the "Variable Convertible Offering Notice") describing the proposed
Variable Convertible Offering, including the terms and conditions thereof, and
providing each Buyer an option to purchase up to its Aggregate Percentage (as
defined below), as of the date of delivery of the Variable Convertible Offering
Notice, in the Variable Convertible Offering on the same terms and conditions
set forth in the Variable Convertible Offering Notice. The limitations referred
to in the preceding sentence are collectively referred to as the "Variable
Convertible Limitations." For purposes of this Section 4(g), "Aggregate
Percentage" at any time with respect to any Buyer shall mean (I) in the case of
Future Offerings, 50% of, and (II) in the case of Variable Convertible
Offerings, (a) for the first two million dollars of such Variable Convertible
Offering 100% of, (b) for the next two million dollars of such Variable
Convertible Offering, 0% of, and for all amounts above the first four million
dollars of such Variable Convertible Offering, 50% of the percentage
15
<PAGE>
obtained by dividing (i) the aggregate number of Preferred Shares purchased by
such Buyer at the Closings by (ii) the aggregate number of Preferred Shares
purchased by all Buyers at the Closings. A Buyer can exercise its option to
participate in a Future Offering or a Variable Convertible Offering, as the case
may be, by delivering written notice thereof to participate to the Company
within ten (10) Business Days of receipt of a Future Offering Notice or Variable
Convertible Offering Notice, as the case may be, which notice shall state the
quantity of securities being offered in the Future Offering or the Variable
Convertible Offering, as the case may be, that such Buyer will purchase, up to
its Aggregate Percentage, and that number of securities it is willing to
purchase in excess of its Aggregate Percentage. In the event that one or more
Buyers fail to elect to purchase up to each such Buyer's Aggregate Percentage
then each Buyer which has indicated that it is willing to purchase a number of
securities in excess of its Aggregate Percentage shall be entitled to purchase
its pro rata portion (determined in the same manner as described in the
preceding sentence) of the securities in the Future Offering or the Variable
Convertible Offering, as the case may be, which one or more Buyers have not
elected to purchase. In the event the Buyers fail to elect to fully participate
in the Future Offering or the Variable Convertible Offering, as the case may be,
within the periods described in this Section 4(g), the Company shall have 30
days thereafter to sell the securities of the Future Offering or the Variable
Convertible Offering, as the case may be, for which such Buyers' rights were not
exercised, upon the same terms and conditions (including the amount thereof)
specified in the Future Offering Notice or the Variable Convertible Offering
Notice, as the case may be. In the event the Company has not sold such
securities of the Future Offering or the Variable Convertible Offering, as the
case may be, within such 30 day period, the Company shall not thereafter issue
or sell such securities without first offering such securities to the Buyers in
the manner provided in this Section 4(g). The Capital Raising Limitations and
the Variable Convertible Limitations shall not apply to (i) a loan from a
commercial bank without any equity component, (ii) any transaction involving the
Company's issuances of securities (A) as consideration in a merger or
consolidation, (B) in connection with any strategic partnership or joint venture
(the primary purpose of which is not to raise equity capital), or (C) as
consideration for the acquisition of a business, product or license or other
assets by the Company, (iii) the issuance of Common Stock in a firm commitment,
underwritten public offering with net proceeds of at least $15,000,000, (iv) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof, or
(v) the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan or stock
purchase plan for the benefit of the Company's employees or directors. The
Buyers shall not be required to participate or exercise their right of first
refusal with respect to a particular Future Offering in order to exercise their
right of first refusal with respect to later Future Offerings. The "Additional
Financing Restriction Date" is the date which is the earlier of (A) the date
which is 180 days after the Initial Closing Date and (B) the first date on which
all of the following shall have occurred (x) the Registration Statement has been
declared effective by the SEC, (y) the Company has received shareholder approval
for the issuance of greater than 20% of the Common Stock outstanding on the
Issuance Date upon conversion of the Preferred Shares and exercise of Warrants
and (z) the Company delivers an opinion of counsel and an officer's certificate
representing that the Future Offering will not be integrated with the offering
of the Preferred Shares and the Warrants for purposes of the 1933 Act or any
applicable stockholder approval provision, including without limitation, under
the rules of The Nasdaq Stock Market, Inc.
16
<PAGE>
h. Listing. The Company shall promptly secure the listing of all of
-------
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
The Nasdaq SmallCap Market), if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents and the Certificate of Designations. The Company shall
maintain the Common Stock's authorization for listing on The Nasdaq SmallCap
Market, The Nasdaq National Market or NYSE. Neither the Company nor any of its
Subsidiaries shall take any action which may result in the delisting or
suspension of the Common Stock on The Nasdaq SmallCap Market, The Nasdaq
National Market or NYSE (other than to switch listings from The Nasdaq SmallCap
Market, The National Nasdaq Market or NYSE). The Company shall promptly provide
to each Buyer copies of any notices it receives from The Nasdaq SmallCap Market,
The Nasdaq National Market or NYSE regarding the continued eligibility of the
Common Stock for listing on such automated quotation system or securities
exchange. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(h).
i. Expenses. Subject to Section 9(l) below, following the Initial
--------
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys' fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby up to an aggregate of $40,000.
j. Transactions With Affiliates. So long as (i) any Preferred Shares
----------------------------
or Warrants are outstanding or (ii) any Buyer owns Conversion Shares or Warrant
Shares with a market value of $100,000 the Company shall not, and shall cause
each of its Subsidiaries not to, enter into, amend, modify or supplement, or
permit any Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two years, stockholders who beneficially own 5% or more of the
Common Stock, or affiliates or with any individual related by blood, marriage or
adoption to any such individual or with any entity in which any such entity or
individual owns a 5% or more beneficial interest (each a "Related Party"),
except for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any agreement, transaction, commitment or arrangement on
an arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party or (c) any agreement,
transaction, commitment or arrangement which is approved by a majority of the
disinterested directors of the Company. For purposes hereof, any director who is
also an officer of the Company or any Subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "Affiliate" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) shares common control with that person or entity. "CONTROL" or
"CONTROLS" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
k. Filing of Form 8-K. On or before the tenth Business Day following
------------------
the Initial Closing Date and on or before the third Business Day following the
Additional Closing Date and the
17
<PAGE>
Additional Share Notice Date the Company shall file a Form 8-K with the SEC
describing the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing, in each case in the form required by
the 1934 Act.
l. Proxy Statement. The Company shall provide each stockholder
---------------
entitled to vote at a meeting of stockholders of the Company, which meeting
shall occur on or before July 31, 1999 (the "Stockholder Meeting Deadline"), a
proxy statement, which has been previously reviewed by the Buyers and a counsel
of their choice, soliciting each such stockholder's affirmative vote at such
stockholder meeting for approval of the Company's issuance of all of the
Securities as described in this Agreement, and the Company shall use its best
efforts to solicit its stockholders' approval of such issuance of the Securities
and cause the Board of Directors of the Company to recommend to the stockholders
that they approve such proposal. Such proxy statement shall not seek approval of
any matters other than the approval described in the preceding sentence and the
election of directors. If the Company (I) fails to hold a meeting of its
stockholders by the Stockholder Meeting Deadline or (II) holds a meeting prior
to such time but fails to receive the affirmative vote of its stockholders to
approve the issuance of the Securities, then, each Buyer shall have the right,
at such Buyer's option, to require the Company to redeem all or a portion of
such Buyer's Preferred Shares at a price per Preferred Share equal to 100% of
the Purchase Price plus any accrued interest accumulated in the Escrow Account
(as defined in the Escrow Agreement between the Buyers and the Company, the
"Escrow Agreement") pursuant to the Escrow Agreement. In addition, if the
Company fails to hold a meeting of its stockholders by the Stockholder Meeting
Deadline (other than by reason of an SEC Fault (as defined below)) as partial
relief (which remedy shall not be exclusive of any other remedies available at
law or in equity), the Company shall pay to each holder of Preferred Shares for
each Preferred Share which has not been redeemed, an amount in cash per
Preferred Share equal to the product of (i) $10,000; multiplied by (ii) .02;
multiplied by (iii) the quotient of (x) the number of days after the Stockholder
Meeting Deadline that a meeting of the Company's stockholders is not held,
divided by (y) 30. The Company shall make the payments referred to in the
immediately preceding sentence within five days of the earlier of (I) the
holding of the meeting of the Company's stockholders, the failure of which
resulted in the requirement to make such payments, and (II) the last day of each
30-day period beginning on the Stockholder Meeting Deadline. In the event the
Company fails to make such payments in a timely manner, such payments shall bear
interest at the rate of 1.25% per month (pro rated for partial months) until
paid in full. The "Stockholder Trigger Date" means, the earlier of (A) the
Stockholder Meeting Deadline and (B) the date on which the Company holds a
meeting of its stockholders for the approval of the Company's issuance of all of
the Securities as described in this Agreement, but fails to receive the approval
of its stockholders for such proposal. An "Sec Fault" means that the Stockholder
Meeting Deadline is not met due to delays caused by the SEC's being unresponsive
to requests for delivery of comments on the proxy statement filed pursuant to
this Section 4(l) or the Company's inability otherwise to satisfy the SEC as to
such comments on a timely basis; provided however, that the Company shall have
(i) filed such proxy statement with the SEC on or before June 1, 1999, (ii) used
its best efforts to obtain such comments from the SEC, (iii) provided responses
to the SEC to such comments as soon as reasonably practicable after receipt of
such comments, and (iv) otherwise used its best efforts to have held the
stockholders meeting by the Stockholders Meeting Deadline.
18
<PAGE>
m. Capital Surplus. Upon the termination of the Escrow Agreement,
---------------
between the Buyers, the Company and American National Bank and Trust Company of
Chicago in accordance with Section 8 thereof, the amount to be represented in
the capital account for the Series B Convertible Preferred Stock at all times
for each outstanding Preferred Share shall not be less than an amount equal to
the product of (i) the Liquidation Preference (as defined in the Certificate of
Designations) and (ii) 115%.
n. Compliance with Section 9 of Securities Exchange Act. So long as
----------------------------------------------------
a Buyer holds any Preferred Shares, such Buyer will comply at all times with the
applicable provisions of Section 9 of the 1934 Act, and the rules promulgated
thereunder (including Regulation M), with respect to transactions involving the
securities of the Company.
o. Escrow. The Company and the Buyers shall comply with the terms of
------
the Escrow Agreement.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Preferred Shares or exercise of the
Warrants (the "Irrevocable Transfer Agent Instructions"). Prior to registration
of the Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares and the Warrant Shares, prior to registration of the
Conversion Shares and the Warrant Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, in a form reasonable satisfactory to the
Company, that registration of a resale by such Buyer of any of such Securities
is not required under the 1933 Act, the Company shall permit the transfer, and,
in the case of the Conversion Shares and the Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Buyer and without any restrictive legends.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
19
<PAGE>
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
a. Initial Closing Date. The obligation of the Company hereunder to
--------------------
issue and sell the Initial Preferred Shares to each Buyer at the Initial Closing
is subject to the satisfaction, at or before the Initial Closing Date, of each
of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction Documents
and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares and the related Warrants being purchased by
such Buyer at the Initial Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer contained
herein shall be true and correct as of the date when made and as of the
Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
Initial Closing Date.
b. Additional Closing Date. The obligation of the Company hereunder
-----------------------
to issue and sell the Additional Preferred Shares to each Buyer at the
Additional Closing is subject to the satisfaction, at or before the applicable
Additional Closing Date, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Additional Preferred Shares and the related Warrants being
purchased by such Buyer at the Additional Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by
the Company.
(ii) The representations and warranties of such Buyer contained
herein shall be true and correct as of the date when made and as of the
Additional Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
applicable Additional Closing Date.
20
<PAGE>
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------
a. Initial Closing Date. The obligation of each Buyer hereunder to
--------------------
purchase the Initial Preferred Shares at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Certificate of Designations, shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified
by such Secretary of State shall have been delivered to such Buyer.
(iii) The Common Stock shall be designated for quotation on The Nasdaq
SmallCap Market, The Nasdaq National Market or listed on the NYSE, and
shall not have been suspended from trading on or delisted from such
exchanges nor shall delisting or suspension by such exchanges have been
threatened either (A) in writing by such exchanges or (B) by falling below
the minimum listing maintenance requirements of such exchanges and the
Company has complied with the listing requirements of the Nasdaq SmallCap
Market for the Conversion Shares and the Warrant Shares issuable upon
conversion or exercise of the Initial Preferred Shares and the related
Warrants, as the case may be.
(iv) The representations and warranties of the Company contained
herein shall be true and correct as of the date when made and as of the
Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents or
Certificate of Designations to be performed, satisfied or complied with by
the Company at or prior to the Initial Closing Date. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Initial Closing Date, to the foregoing effect
which also shall include an update as of the Initial Closing Date regarding
the representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of Barack Ferrazzano
Kirschbaum Perlman & Nagelberg dated as of the Initial Closing Date, in
substantially the form of Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates for the Initial Preferred Shares and
the related Warrants being purchased by such Buyer at the Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "Resolutions").
21
<PAGE>
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and exercise of
the Warrants, at least 3,200,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within ten
days of the Initial Closing Date.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) the Certificate of
Incorporation and (C) By-laws, each as in effect at the Initial Closing
Date.
(xii) The Company shall have delivered to such Buyer a certified copy
of its Certificate of Incorporation as certified by the Secretary of State
of the State of Delaware within ten days of the Initial Closing Date.
(xiii) The Company shall have delivered to such Buyer a letter from
the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Initial Closing
Date.
(xiv) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by the Transaction
Documents as such Buyer or its counsel may reasonably request.
b. Additional Closing Date. The obligation of each Buyer
-----------------------
hereunder to purchase the Additional Preferred Shares at the Additional Closing
is subject to the satisfaction, at or before each of the Additional Closing
Date, of each of the following conditions, provided that these conditions are
for each Buyer's sole benefit and may be waived by such Buyer at any time in its
sole discretion:
(i) The Certificate of Designations, shall be in full force and
effect and shall not have been amended, without the knowledge or consent of
the Buyers, since the Initial Closing Date, and a copy thereof certified by
the Secretary of State of the State of Delaware shall have been delivered
to such Buyer.
(ii) The Common Stock shall be designated for quotation on The
Nasdaq SmallCap Market or The Nasdaq National Market or listed on the NYSE,
and shall not have been suspended from trading on or delisted from such
exchanges nor shall delisting or suspension by such exchanges have been
threatened either (A) in writing by such exchanges or (B) by falling below
the minimum listing maintenance requirements of such exchanges
22
<PAGE>
and all of the Conversion Shares and the Warrant Shares issuable upon
conversion or exercise of the Additional Preferred Shares and the related
Warrant, as the case may be, to be sold at the Additional Closing shall be
listed upon The Nasdaq National Market or the NYSE.
(iii) The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents or the Certificate of Designations to
be performed, satisfied or complied with by the Company at or prior to the
Additional Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the
Additional Closing Date, to the foregoing effect which also shall include
an update as of the Additional Closing Date regarding the representation
contained in Section 3(c) above.
(iv) Such Buyer shall have received the opinion of Barack Ferrazzano
Kirschbaum Perlman & Nagelberg dated as of the Additional Closing Date in
substantially the form of Exhibit C attached hereto.
---------
(v) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates for the Additional Preferred Shares and
the related Warrants being purchased by such Buyer at the Additional
Closing.
(vi) The Board of Directors of the Company shall have adopted, and
shall not have amended, the Resolutions.
(vii) As of the Additional Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, a number of
shares of Common Stock equal to at least 200% of the number of shares of
Common Stock which would be issuable upon conversion in full of the then
outstanding Preferred Shares (without regard to any limitations on
conversions) and 100% of the number of shares of Common Stock which would
be issuable upon conversion in full of the then outstanding Warrants,
including for such purposes the Additional Preferred Shares and related
Warrants to be issued at such Additional Closing.
(viii) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged
---------
in writing by the Company's transfer agent and Shall be in effect as of the
Additional Closing.
(ix) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in the state of such corporation's state of incorporation issued
by the Secretary of State of such state of incorporation as of a date
within ten days of the Additional Closing Date.
23
<PAGE>
(x) The Company shall have delivered to such Buyer a certified copy
of its Certificate of Incorporation as certified by the Secretary of State
of the State of Delaware within ten days of the Additional Closing Date.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) the Certificate of
Incorporation and (C) By-laws, each as in effect at the Additional Closing.
(xii) The Company shall have delivered to such Buyer a letter from
the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Additional Closing
Date.
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
---------------
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Buyer and all of their stockholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing persons' agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or the Certificate of Designations or any other
certificate, instrument or document contemplated hereby or thereby or (c) any
cause of action, suit or claim brought or made against such Indemnitee (other
than a cause of action, suit or claim which is (x) bought or made by the Company
and (y) is not a shareholder derivative suit) and arising out of or resulting
from (i) the execution, delivery, performance or enforcement by such Buyer of
the Transaction Documents or the Certificate of Designations or any other
certificate, instrument or document contemplated hereby or thereby. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 8 shall
be the same as those set forth in Sections 6(a) and (d) of the Registration
Rights Agreement, including, without limitation, those procedures with respect
to the settlement of claims and the Company's rights to assume the defense of
claims.
24
<PAGE>
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of
---------------------------------------
the State of Delaware shall govern all issues concerning the relative rights of
the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of Illinois, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Illinois or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Illinois. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting the City of Chicago, Illinois, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit,
action or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.
b. Counterparts. This Agreement may be executed in two or more
------------
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
----------------------------
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by
25
<PAGE>
the Company and the holders of at least two-thirds (?) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares then outstanding. No consideration shall
be offered or paid to any person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents or the Certificate of
Designations unless the same consideration also is offered to all of the parties
to the Transaction Documents or holders of the Preferred Shares, as the case may
be.
f. Notices. Any notices, consents, waivers or other communications
-------
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street, Suite
1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Jeffrey S. Aronin
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Facsimile: 312-984-3193
Attention: Michael J. Legamaro, Esq.
If to the Transfer Agent:
Halladay Stock Transfer, Inc.
2939 67/th/ Place
Scottsdale, Arizona 85251
Telephone: 602-481-3940
Facsimile: 602-481-3941
Attention: Tom Laucks
If to a Buyer, to it at the address and facsimile number set forth on
the Schedule of Buyers, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers, or at such other address and/or facsimile number
and/or to the attention of such other person as the recipient party
26
<PAGE>
has specified by written notice given to each other party five days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communications, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds (?) of the Preferred Shares then
outstanding including by merger or consolidation. The rights under this
Agreement shall not be assignable by any Buyers without prior written consent of
the Company. Notwithstanding the foregoing, the rights under this Agreement
shall be assignable by any Buyers, without the consent of the Company (i) upon
the transfer of all or any portion of Preferred Shares or Warrants to any
existing holder of the Preferred Shares and (ii) to any transferee, provided
that such Buyer transfers all of its Preferred Shares or Warrants and rights
hereunder to such transferee; provided, further, that any assignment shall not
release such Buyer from its obligations hereunder unless such obligations are
assumed by such assignee and the Company has consented to such assignment and
assumption, which consent shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained in the Transaction Documents or the
Certificate of Designations, Buyer shall be entitled to pledge the Securities in
connection with a bona fide margin account. Notwithstanding the foregoing, the
Buyer, HFTP Investment L.L.C., shall have the right without the consent of the
Company, to transfer all or any portion of its Preferred Shares to a maximum of
one (1) Affiliated Transferee. An "Affiliated Transferee" shall mean (i) an
Affiliate of a Buyer, (ii) any holder of Preferred Shares and (iii) any
Affiliate of a holder of Preferred Shares.
h. No Third Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section 9(l),
--------
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive each of
the Closings. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to
---------
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
consulted
27
<PAGE>
by the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Initial Closing shall not have
-----------
occurred with respect to a Buyer on or before three (3) Business Days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated by the
Buyers pursuant to this Section 9(l), the Company shall remain obligated to
reimburse the Buyers for expenses up to the amount described in Section 4(i)
above.
m. Placement Agent. The Company acknowledges that it has not engaged
---------------
any placement agent in connection with the sale of the Preferred Shares and the
related Warrants. The Company shall be responsible for the payment of any
placement agent's fees or brokers' commissions relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses) arising in connection with any such
claim.
n. No Strict Construction. The language used in this Agreement will
----------------------
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. Each Buyer and each holder of the Securities shall have
--------
all rights and remedies set forth in the Transaction Documents and the
Certificate of Designations and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the
rights which such holders have under any law. Any person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a payment
-----------------
or payments to the Buyers hereunder or pursuant to the Registration Rights
Agreement, the Certificate of Designations or the Warrants or the Buyers enforce
or exercise their rights hereunder or thereunder, and such payment or payments
or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any
28
<PAGE>
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
* * * * * *
29
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
MEDCARE TECHNOLOGIES, INC. HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:______________________________
Name: __________________________
Title: __________________________ By: ______________________________
Name: E. Kurt Kim
Its: Authorized Signatory
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
[Signature Page to Securities Purchase Agreement - p. 2 of 2]
AG SUPER FUND INTERNATIONAL PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: ______________________________
Name: Michael L. Gordon
Its: Managing Officer
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Number Of
Initial
Investor Address Preferred Investor's Representatives' Address
Investor Name And Facsimile Number Shares And Facsimile Number
- ------------------------ ------------------------------------- --------- -----------------------------------
<S> <C> <C> <C>
HFTP Investment L.L.C. c/o Promethean Asset Management L.L.C. 200 Promethean Asset Management L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: E. Kurt Kim Attn: E. Kurt Kim
James F. O'Brien, Jr. James F. O'Brien, Jr.
Telephone: 212-698-0580 Telephone: 212-698-0580
Facsimile: 212-98-0505 Facsimile: 212-698-0505
Residence: New York
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Telephone: 312-902-5200
Facsimile: 312-902-1061
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 110 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
GAM Arbitrage Investments, c/o Angelo, Gordon & Co., L.P. 15 Angelo, Gordon & Co., L.P.
Inc. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: British Virgin Islands
AG Super Fund International c/o Angelo, Gordon & Co., L.P. 15 Angelo, Gordon & Co., L.P.
Partners, L.P. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 20 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Of
Initial
Investor Address Preferred Investor's Representatives' Address
Investor Name And Facsimile Number Shares And Facsimile Number
- ------------------------ ---------------------------------- --------- -----------------------------------
<S> <C> <C> <C>
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 40 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Bermuda
</TABLE>
<PAGE>
SCHEDULES
---------
Schedule of Buyers
Schedule 3(a) - Subsidiaries
Schedule 3(c) - Capitalization
Schedule 3(e) - Conflicts
Schedule 3(g) - Material Changes
Schedule 3(h) - Litigation
Schedule 3(n) - Intellectual Property
Schedule 3(p) - Liens
Schedule 3(u) - Tax Status
Schedule 3(v) - Certain Transactions
Schedule 4(d) - Use of Proceeds
EXHIBITS
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Exhibit A - Form of Certificate of Designations, Preferences and
Rights of the Preferred Shares
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Company Counsel Opinion
Exhibit D - Form of Irrevocable Transfer Agent Instructions
Exhibit E - Form of Warrant
Exhibit F - Escrow Agreement
<PAGE>
Exhibit 6c.
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 18, 1999,
by and among MEDCARE TECHNOLOGIES, INC., a Delaware corporation, with
headquarters located at 1515 West 22/nd/ Street, Suite 1210, Oak Brook, IL 60521
(the "Company"), and the undersigned buyers (each, a "Buyer" and collectively,
the "Buyers").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "Securities Purchase Agreement"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers (i) up to 400
shares of the Company's Series B Convertible Preferred Stock, par value $.25 per
share (the "Initial Preferred Shares"), which will be convertible into shares
(as converted, the "Initial Conversion Shares") of the Company's common stock,
par value $.001 per share (the "Common Stock"), in accordance with the terms of
the Company's Certificate of Designations, Preferences and Rights of the Series
B Convertible Preferred Stock (the "Certificate of Designations"), and (ii) on
each Warrant Date (as defined below), warrants to purchase 200 shares of Common
Stock for (a) each Initial Preferred Share held by such Buyer on such Warrant
Date and (b) for each Initial Preferred Share converted by such Buyer before
such Warrant Date at a Conversion Price (as defined in the Certificate of
Designations) equal to the Fixed Conversion Price (as defined in the Certificate
of Designations) as in effect on the date of conversion (the "Initial Warrants"
and, as exercised, the "Initial Warrant Shares"). The "Warrant Dates" shall be
(A) the date which is 120 days after the Issuance Date (as defined in the
Certificate of Designations) of the applicable Preferred Shares, (B) the date
which is 300 days after the Issuance Date of the applicable Preferred Shares and
(C) the date which is 480 days after the Issuance Date of the applicable
Preferred Shares.
B. In connection with the Securities Purchase Agreement, the Buyers may
have the right, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to require the Company to issue and sell to the Buyers (I) a
number of additional Preferred Shares equal to the sum of (i) the number of
Initial Preferred Shares held by such Buyer on the date which is one year after
the Initial Issuance Date (as defined in the Certificate of Designations) and
(ii) the number of Initial Preferred Shares converted by such Buyer on or before
the date which is one year after the Initial Issuance Date at a Conversion Price
equal to the Fixed Conversion Price of such Initial Preferred Shares as in
effect on the date of conversion (the "Additional Preferred Shares" and,
collectively with the Initial Preferred Shares, the "Preferred Shares"), which
will be convertible into Common Stock (as converted, the "Additional Conversion
Shares" and, collectively with the Initial Conversion Shares, the "Conversion
Shares") in accordance with the Certificate of Designations, and (II) on each
Warrant Date, warrants to purchase 200 shares of common stock for (i) each
Additional Preferred Share held by such Buyer on such Warrant Date and (ii) for
each Additional Preferred Share converted by such Buyer before such Warrant Date
at a Conversion Price equal to
<PAGE>
the Fixed Conversion Price as in effect on the date of conversion (the
"Additional Warrants" and, collectively with the Initial Warrants, the
"Warrants"; and as exercised the "Additional Warrant Shares" and, collectively
with the Initial Warrant Shares, the "Warrant Shares").
C. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
-----------
As used in this Agreement, the following terms shall have the
following meanings:
a. "Investor" means a Buyer and any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis (ARule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
d. "Registrable Securities" means (i) the Conversion Shares issued or
issuable upon conversion of the Preferred Shares, (ii) the Warrant Shares issued
or issuable upon exercise of the Warrants and (iii) any shares of capital stock
issued or issuable with respect to the Conversion Shares, the Preferred Shares,
the Warrant Shares or the Warrants as a result of any stock split, stock
dividend, recapitalization, exchange or similar event or otherwise, without
regard to any limitations on conversions of Preferred Shares or exercises of
Warrants.
e. "Initial Registration Statement" means a registration statement or
registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Initial Preferred Shares and the Initial
Warrants.
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<PAGE>
f. "Additional Registration Statement" means a registration statement
or registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Additional Preferred Shares and the
Additional Warrants.
g. "Registration Statement" means Initial Registration Statement and
the Additional Registration Statement.
h. "Effectiveness Deadline" means the Initial Effectiveness Deadline
or the Additional Effectiveness Deadline, as applicable.
2. REGISTRATION.
------------
a. Mandatory Registration.
----------------------
(i) Initial Mandatory Registration. The Company shall prepare,
------------------------------
and, as soon as practicable file with the SEC an Initial Registration Statement
or Initial Registration Statements (as necessary) on Form S-3 covering the
resale of all of the Registrable Securities relating to the Initial Preferred
Shares which were issued on the Initial Closing Date (as defined in the
Securities Purchase Agreement) and the maximum number of related Initial
Warrants. In the event that Form S-3 is unavailable for such a registration, the
Company shall use such other form as is available for such a registration,
subject to the provisions of Section 2(e). Any initial Registration Statement
prepared pursuant hereto shall register for resale at least 1,600,000 shares of
Common Stock. The Company shall use its best efforts to cause such Registration
Statement to be declared effective by the SEC as soon as possible, but in no
event later than 90 days (or if the SEC reviews such Registration Statement, 120
days) after the Initial Closing Date (the "Initial Effectiveness Deadline").
(iii) Additional Mandatory Registration. The Company shall
---------------------------------
prepare, and, as soon as practicable, file with the SEC an Additional
Registration Statement or Additional Registration Statements (as necessary) on
Form S-3 covering the resale of all of the Registrable Securities relating to
the Additional Preferred Shares which were issued on the Additional Closing Date
(as defined in the Securities Purchase Agreement) and the maximum number of
related Additional Warrants. In the event that Form S-3 is unavailable for such
a registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(e). Any Additional
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the sum of (A) the product
of (x) 2.0 and (y) the number of Conversion Shares issuable upon conversion of
such Additional Preferred Shares (without regard to any limitations on
conversions) as of the date immediately preceding the date the Registration
Statement is initially filed with the SEC (as if the Additional Preferred Shares
were issued and outstanding on such date) and (B) the maximum number of
Additional Warrant Shares which may be issued upon exercise of the Additional
Warrants relating to the Additional Preferred Shares issued on such Additional
Closing Date, subject to adjustment as provided in Section 3(b). The Company
shall use its best efforts to cause such Registration Statement to be declared
effective by the SEC as soon as possible, but in no event later than 90 days (of
if the SEC reviews such
3
<PAGE>
Registration Statement, 120 days) after the Additional Closing Date (the
"Additional Effectiveness Deadline").
b. Piggy-Back Registrations. If at any time prior to the date on
------------------------
which the Registration Period (as hereinafter defined) with respect to all
Registration Statements shall have expired, the number of shares of Common Stock
available for sale under the Registration Statements is insufficient to cover
all of the Registrable Securities and the Company proposes to file with the SEC
a Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its securities (other than on
Form S-4 or Form S-8 (or their equivalents at such time) relating to securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans), the Company shall promptly send to each Investor written notice
of the Company's intention to file a Registration Statement and, if within ten
(10) business days after receipt of such notice, such Investor shall so request
in writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth below in this Section 2(b). No right to
registration of Registrable Securities under this Section 2(b) shall be
construed to limit any registration required under Section 2(a). The obligations
of the Company under this Section 2(b) may be waived by Investors holding a
majority of the Registrable Securities. If an offering in connection with which
an Investor is entitled to registration under this Section 2(b) is an
underwritten offering, then each Investor whose Registrable Securities are
included in such Registration Statement shall, unless otherwise agreed to by the
Company, offer and sell such Registrable Securities in an underwritten offering
using the same underwriter or underwriters and, subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common Stock
included in such underwritten offering. If a registration pursuant to this
Section 2(b) is to be an underwritten public offering and the managing
underwriter(s) advise the Company in writing, that in their reasonable good
faith opinion, marketing or other factors dictate that a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement is advisable to facilitate and not adversely affect the proposed
offering, then the Company shall include in such registration: (1) first, all
securities the Company proposes to sell for its own account, (2) second, up to
the full number of securities proposed to be registered for the account of the
holders of securities entitled to inclusion of their securities in the
Registration Statement by reason of demand registration rights, and (3) third,
the securities requested to be registered by the Investors and other holders of
securities entitled to participate in the registration, as of the date hereof,
drawn from them pro rata based on the number each has requested to be included
in such registration.
c. Allocation of Registrable Securities. The initial number of
------------------------------------
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
4
<PAGE>
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement.
d. Legal Counsel. Subject to Section 5 hereof, the Buyers holding a
-------------
majority of the Registrable Securities shall have the right to select one legal
counsel to review and oversee any offering pursuant to this Section 2 ("Legal
Counsel"), which shall be Katten Muchin & Zavis or such other counsel as
thereafter designated by the holders of a majority of Registrable Securities.
e. Ineligibility for Form S-3. In the event that Form S-3 is not
--------------------------
available for any registration of Registrable Securities hereunder, the Company
shall (i) register the sale of the Registrable Securities on another appropriate
form reasonably acceptable to the holders of a majority of the Registrable
Securities and (ii) undertake to register the Registrable Securities on Form S-3
as soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
f. Sufficient Number of Shares Registered. In the event the number of
--------------------------------------
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities which such
Registration Statement is required to cover or an Investor's allocated portion
of the Registrable Securities pursuant to Section 2(c), the Company shall amend
the Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover at least 200%
of such Registrable Securities (based on the market price of the Common Stock on
the trading day immediately preceding the date of filing of such amendment or
new Registration Statement), in each case, as soon as practicable, but in any
event not later than fifteen (15) days after the necessity therefor arises. The
Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if, on at least three trading days within any
seven trading day period, the number of Registrable Securities issued or
issuable upon conversion of the Preferred Shares and exercise of the Warrants
covered by such Registration Statement is greater than the quotient determined
by dividing (i) the number of shares of Common Stock available for resale under
such Registration Statement by (ii) 1.5. For purposes of the calculation set
forth in the foregoing sentence, any restrictions on the convertibility of the
Preferred Shares or exercise of the Warrants shall be disregarded and such
calculation shall assume that the Preferred Shares are then convertible into,
and the Warrants are then exercisable for, shares of Common Stock at the then
prevailing Conversion Rate (as defined in the Certificate of Designations) or
Exercise Price (as defined in the Warrants), respectively.
3. RELATED OBLIGATIONS.
-------------------
5
<PAGE>
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(b) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Sections 2(a) or 2(g),
the Company will use its best efforts to effect the registration of the
Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective as soon as practicable after such filing (but in
no event later than the Effectiveness Deadline). The Company shall keep each
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto) or (ii) the date on which the Investors shall have sold all the
Registrable Securities covered by such Registration Statement (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The term "best efforts"
shall mean, among other things, that the Company shall submit to the SEC, within
three business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall (a) permit Legal Counsel to review and comment
upon those Sections of (i) the Initial Registration Statement and the Additional
Registration Statement
6
<PAGE>
which are applicable to the Buyers at least four (4) business days prior to its
filing with the SEC and (ii) all other Registration Statements and all
amendments and supplements to all Registration Statements which are applicable
to the Buyers (except for Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K and any similar or successor reports)
within a reasonable number of days prior to the their filing with the SEC and
(b) not file any document in a form to which Legal Counsel reasonably objects.
In the event of a good faith disagreement as to the reasonableness of the
comments or objections of Legal Counsel, the Effectiveness Deadline for the
Registration Statement or any amendment or supplement thereto shall be extended
for the period of such good faith disagreement. The Company shall not submit a
request for acceleration of the effectiveness of a Registration Statement or any
amendment or supplement thereto without the prior approval of Legal Counsel,
which consent shall not be unreasonably withheld. The Company shall furnish to
Legal Counsel, without charge, (i) any correspondence from the SEC or the staff
of the SEC to the Company or its representatives relating to any Registration
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus included
in such Registration Statement and all amendments and supplements thereto. The
Company shall reasonably cooperate with Legal Counsel in performing the
Company's obligations pursuant to this Section 3.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, and all exhibits and each preliminary prospectus, (ii)
upon the effectiveness of any Registration Statement, ten (10) copies of the
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as such Investor may
reasonably request) and (iii) such other documents, including copies of any
preliminary or final prospectus, as such Investor may reasonably request from
time to time in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as Legal Counsel or any Investor reasonably requests, (ii) prepare and
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (v) make any change in the Company's Certificate of Incorporation or
by-laws that the Company's board of directors determines in good faith to be
contrary to the best interests of the Company and its shareholders, (w) qualify
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(e), (x) subject itself to general taxation in any
such jurisdiction, or (y) file a general consent to service of process
7
<PAGE>
in any such jurisdiction. The Company shall promptly notify Legal Counsel and
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threat of any proceeding for such purpose.
f. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters (which shall be
reasonably acceptable to the Company) for the offering, the Company shall enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.
g. Subject to Section 3(u), as promptly as practicable after
becoming aware of such event or development, the Company shall notify Legal
Counsel and each Investor in writing of the happening of any event as a result
of which the prospectus included in a Registration Statement, as then in effect,
includes an untrue statement of a material fact or omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
promptly prepare a supplement or amendment to such Registration Statement to
correct such untrue statement or omission, and deliver ten (10) copies of such
supplement or amendment to Legal Counsel and each Investor (or such other number
of copies as Legal Counsel or such Investor may reasonably request). The
Company shall also promptly notify Legal Counsel and each Investor in writing
(i) when a prospectus or any prospectus supplement or post-effective amendment
has been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be
delivered to Legal Counsel and each Investor by facsimile on the same day of
such effectiveness), (ii) of any request by the SEC for amendments or
supplements to a Registration Statement or related prospectus or related
information, and (iii) of the Company's reasonable determination that a post-
effective amendment to a Registration Statement would be appropriate.
h. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
i. At the reasonable request of any Investor, the Company shall
furnish to such Investor, within three (3) days of the effectiveness of the
Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, and (ii) an opinion, dated as of such date, of
counsel representing the Company for
8
<PAGE>
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Investors.
j. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel, (iii) any underwriter participating in any
disposition pursuant to a Registration Statement, (iv) one firm of accountants
or other agents retained by the Investors, and (v) one firm of attorneys
retained by such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall agree, and each Investor hereby
agrees, to hold in strict confidence and shall not make any disclosure (except
to an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements with the Company with respect
thereto, substantially in the form of this Section 3(j). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement, or (v) such Investor consents to the form and content of any such
disclosure. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of
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<PAGE>
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure designation and quotation of all the Registrable Securities
covered by the Registration Statement on the Nasdaq National Market or, if,
despite the Company's best efforts to satisfy the preceding clause (i) or (ii),
the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to
secure the inclusion for quotation on The Nasdaq SmallCap Market for such
Registrable Securities and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register with the National Association
of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
o. If requested by the managing underwriters or an Investor, the
Company shall (i) as soon as practicable incorporate in a prospectus supplement
or post-effective amendment such information as the managing underwriters or the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) as soon as practicable make all
required filings of such prospectus supplement or post-effective amendment after
being notified of the matters to be incorporated in such prospectus supplement
or post-effective amendment; and (iii) supplement or make amendments to any
Registration Statement if reasonably requested by an Investor or any underwriter
of such Registrable Securities.
p. INTENTIONALLY LEFT BLANK.
q. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
r. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
10
<PAGE>
s. Within two (2) business days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
---------
t. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
u. Notwithstanding anything to the contrary in this Agreement, at
any time after the Registration Statement has been declared effective by the
SEC, the Company may delay the disclosure of material non-public information
concerning the Company, the disclosure of which at the time is not, in the good
faith opinion of the Board of Directors of the Company, in the best interest of
the Company and, in the opinion of counsel to the Company, otherwise required (a
"Grace Period"); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period (provided that in such notice the Company shall not
disclose the content of such material non-public information to the Investors)
and the date on which the Grace Period will begin, and (ii) notify the Investors
in writing of the date on which the Grace Period ends; and, provided further,
that during any consecutive 365 day period, there shall be not more than two
Grace Periods and each Grace Period shall not exceed 10 days (an "Allowable
Grace Period"). For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the holders receive the
notice referred to in clause (i) above and shall end on and include the later of
the date the holders receive the notice referred to in clause (ii) above and the
date referred to in such notice. The provisions of Section 3(h) and the first
sentence of Section 3(g) hereof and Sections 2(c) and 3(d)(ii) of the
Certificate of Designations shall not be applicable during the period of any
Allowable Grace Period. Upon expiration of the Grace Period, the Company shall
again be bound by the first sentence of Section 3(g) with respect to the
information giving rise thereto. Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Certificate of Designations in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale prior to the Investor's receipt of the notice referred to in clause (i) and
for which the Investor has not yet settled.
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
a. At least seven (7) days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
11
<PAGE>
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(h), the
first sentence of 3(g) or 3(u), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(h) or the
first sentence of 3(g) or receipt of notice that no supplement or amendment is
required and, if so directed by the Company, such Investor shall deliver to the
Company (at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in such Investor's possession of the
current prospectus covering such Registrable Securities at the time of receipt
of such notice. Notwithstanding anything to the contrary, the Company shall
cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which an Investor has entered into a contract for sale prior to the
Investor's receipt of a notice from the Company of the happening of any event of
the kind described in Section 3(h) or the first sentence of 3(g) and for which
the Investor has not yet settled.
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
f. Each Investor whose Registrable Securities are included in a
Registration Statement understands that the 1933 Act may require delivery of a
prospectus relating thereto in connection with any sale thereof pursuant to such
Registration Statement, and each such Investor
12
<PAGE>
shall comply with the applicable prospectus delivery requirements of the 1933
Act in connection with any such sale.
g. Each Investor agrees to notify the Company promptly after the
date on which such Investor no longer holds any Registrable Securities, if such
date is prior to the expiration of the Registration Period.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and reasonable fees and
disbursements of Legal Counsel (which fees and disbursements shall not exceed
$10,000 in the aggregate) shall be paid by the Company.
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several, (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the
13
<PAGE>
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to Section 6(d), the Company shall
reimburse the Investors and each such controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or
disbursements or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(d); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(d), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
and (iv) shall not apply to amounts paid in settlement of any Claim, and the
contribution provision of Section 7 shall not apply, if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement and each Person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934 Act
(each an "Indemnified Party"), against any Claim or Indemnified Damages to which
any of them may become subject, under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), such Investor will
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in Section 7 shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which
14
<PAGE>
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and
any other party represented by such counsel in such proceeding. In the case of
an Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding a majority in interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates. The Indemnified Party or Indemnified Person shall cooperate
fully with the indemnifying party in connection with any negotiation or defense
of any such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the Indemnified Party
or Indemnified Person which relates to such action or claim. The indemnifying
party shall keep the Indemnified Party or Indemnified Person fully apprised at
all times as to the status of the defense or any settlement negotiations with
respect thereto. No indemnifying party shall be liable for any settlement of
any action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the prior
written consent of the Indemnified Party or Indemnified
15
<PAGE>
Person, consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such claim or litigation. Following
indemnification as provided for hereunder, the indemnifying party shall be
subrogated to all rights of the Indemnified Party or Indemnified Person with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
--------------------------
With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to
16
<PAGE>
such requirements (it being understood that nothing herein shall limit the
Company's obligations under Section 4(c) of the Securities Purchase Agreement)
and the filing of such reports and other documents is required for the
applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
--------------------------------
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who then hold at least two-thirds (2/3) of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.
11. MISCELLANEOUS.
-------------
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same
17
<PAGE>
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street
Suite 1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Jeffrey S. Aronin
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive
Suite 2700
Chicago, Illinois 60606
Telephone: 312-984-3100
Facsimile: 312-984-3150
Attention: Michael J. Legamaro, Esq.
If to Legal Counsel:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: 312-902-5200
Facsimile: 312-902-1061
Attention: Robert J. Brantman, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of Buyers
attached hereto, with copies to such Buyer's representatives as set forth on the
Schedule of Buyers or to such other address
18
<PAGE>
and/or facsimile number and/or to the attention of such other person as the
recipient party has specified by written notice given to each other party five
days prior to the effectiveness of such change. Written confirmation of receipt
(A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a courier or
overnight courier service shall be rebuttable evidence of personal service,
receipt by facsimile or receipt from a nationally recognized overnight delivery
service in accordance with clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall govern all
issues concerning the relative rights of the Company and the Buyers as its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of Illinois, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Illinois. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting the City of Chicago, Illinois, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the Securities Purchase Agreement, the Warrants
and the Certificate of Designations constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement, the Securities
Purchase Agreement, the Warrants and the Certificate of Designations supersede
all prior
19
<PAGE>
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Preferred Shares and the Warrants then outstanding
have been converted into or exercised for Registrable Securities without regard
to any limitation on conversions of the Preferred Shares or exercises of the
Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
- ------- ------
MEDCARE TECHNOLOGIES, INC. HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:_________________________ By:______________________________
Name:_______________________ Name: E. Kurt Kim
Its:________________________ Its: Authorized Signatory
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By:______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
21
<PAGE>
[Signature Page to Registration Rights Agreement - p. 2 of 2]
AG SUPER FUND INTERNATIONAL PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:_______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By:_______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By:_______________________________
Name: Michael L. Gordon
Its: Managing Officer
22
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number and Facsimile Number
- --------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
HFTP Investment L.L.C. c/o Promethean Asset Management L.L.C. Promethean Asset Management L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: E. Kurt Kim Attn: E. Kurt Kim
James F. O'Brien, Jr. James F. O'Brien, Jr
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
GAM Arbitrage c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
Investments, Inc. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
AG Super Fund c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
International 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
Partners, L.P. New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number and Facsimile Number
- --------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
</TABLE>
24
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
Re: Medcare Technologies, Inc.
--------------------------
Ladies and Gentlemen:
We are counsel to Medcare Technologies, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Purchase Agreement") entered into by and
among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders shares of its Preferred
Stock, $0.25 par value per share (the "Preferred Shares") convertible into
shares of the Company's common stock, $0.001 par value per share (the "Common
Stock") and the related Warrants (the "the Warrants") to acquire shares of
Common Stock. Pursuant to the Purchase Agreement, the Company also has entered
into a Registration Rights Agreement with the Holders (the "Registration Rights
Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants, under the Securities Act of 1933,
as amended (the "1933 Act"). In connection with the Company's obligations under
the Registration Rights Agreement, on _________________, the Company filed a
Registration Statement on Form S-3 (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:__________________________________
cc: [LIST NAMES OF HOLDERS]
<PAGE>
Exhibit 6d.
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO
COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS.
MEDCARE TECHNOLOGIES, INC.
Warrant To Purchase Common Stock
Warrant No.:_______________ Number of Shares: _________
Date of Issuance: _____________, 199_
Medcare Technologies, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ____________________, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof (subject to the vesting requirements of Section 1(c)
below), but not after 11:59 P.M. Central Time on the Expiration Date (as defined
herein) __________ ( ) fully paid nonassessable shares of Common Stock (as
defined herein) (subject to the vesting requirements of Section 1(c) below) of
the Company (the "Warrant Shares") at the purchase price per share provided in
Section 1(b) below; provided, however, that in no event shall the holder be
entitled to exercise this Warrant for a number of Warrant Shares in excess of
that number of Warrant Shares which, upon giving effect to such exercise, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.99% of the outstanding shares of the
Common Stock following such exercise. For purposes of the foregoing proviso,
the aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
proviso is being made, but shall exclude shares of Common Stock which would be
issuable upon (i) exercise of the remaining, unexercised Warrants beneficially
owned by the holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other
<PAGE>
securities of the Company beneficially owned by the holder and its affiliates
(including, without limitation, any convertible notes or preferred stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this provision, in determining the number of outstanding shares Common Stock
a holder may rely on the number of outstanding shares of Common Stock as
reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written request of any holder, the Company
shall promptly, but in no event later than one (1) Business Day following the
receipt of such notice, confirm in writing to any such holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding
shares Common Stock shall be determined after giving effect to conversions of
Preferred Shares and exercise of Warrants (as defined below) by such holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. Notwithstanding the foregoing, the holder of this
Warrant shall have the sole obligation to determine whether the restrictions
contained in this provision apply to such holder.
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the
-----------------------------
Warrants (the "Preferred Share Warrants") issued pursuant to Section 1 of that
certain Securities Purchase Agreement dated as of May __, 1999, among the
Company and the Buyers referred to therein (the "Securities Purchase
Agreement").
(b) Definitions. The following words and terms as used in this
-----------
Warrant shall have the following meanings:
(i) "Approved Stock Plan" shall mean any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer, director,
consultant or other service provider of the Company.
(ii) "Business Day" means any day other than Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law to remain closed.
(iii) "Certificate of Designations" means the Company's
Certificate of Designations, Preferences and Rights of the Preferred Shares.
(iv) "Closing Bid Price" means, for any security as of any date,
the last closing bid price for such security on the Principal Market (as defined
below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the
Principal Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if
-2-
<PAGE>
the foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price is reported for such security
by Bloomberg, the last closing trade price for such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as mutually determined by the Company and the holders
of the Preferred Shares. If the Company and the holders of the Preferred Shares
are unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(a) of this Warrant with the term
"Closing Bid Price" being substituted for the term "Market Price." (All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.)
(v) "Closing Sale Price" means, for any security as of any date, the
last closing trade price for such security on the Principal Market (as defined
below) as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the last closing ask price of such
security as reported by Bloomberg, or, if no last closing ask price is reported
for such security by Bloomberg, the average of the ask prices of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Sale Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Sale Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of Preferred Shares. If the Company and the
holders of Preferred Shares are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant to Section 2(a)
below with the term "Closing Sale Price" being substituted for the term "Market
Price." (All such determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period).
(vi) "Common Stock" means (i) the Company's common stock, par
value $0.001 per share, and (ii) any capital stock into which such Common Stock
shall have been changed or any capital stock resulting from a reclassification
of such Common Stock.
(vii) "Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below)
or Convertible Securities (as defined below) are actually exercisable or
convertible at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company or issuable upon exercise of the Preferred
Share Warrants.
-3-
<PAGE>
(viii) "Convertible Securities" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable for
Common Stock.
(ix) "Expiration Date" means the date five years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of Chicago or the
State of Illinois or on which trading does not take place on the principal
exchange or automated quotation system on which the Common Stock is traded (a
"Holiday"), the next date that is not a Holiday.
(x) "Market Price" means, with respect to any security for any
period, that price which shall be computed as the arithmetic average of the
Closing Bid Prices for such security for each trading day in such period.
(xi) "Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
(xii) "Other Securities" means (i) those warrants of the Company
issued prior to, and outstanding on, the date of issuance of this Warrant, (ii)
the Preferred Shares and (iii) the shares of Common Stock issued upon conversion
of the Preferred Shares.
(xiii) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(xiv) "Preferred Shares" means the shares of the Company's Series
B Convertible Preferred Shares issued pursuant to the Securities Purchase
Agreement.
(xv) "Principal Market" means the Nasdaq SmallCap Market.
(xvi) "Securities Act" means the Securities Act of 1933, as amended.
(xvii) "Warrant" means this Warrant and all Warrants issued in
exchange, transfer or replacement of any thereof.
(xviii) "Warrant Exercise Price" shall be equal to, with respect to
any Warrant Share, 125% of the average of the Closing Bid Prices for the five
consecutive trading days immediately preceding the Vesting Date (as defined
below) for such Warrant Share, subject to adjustment as hereinafter provided.
(xviii) "Warrant Period" means the period beginning on the date
hereof and ending on and including the Expiration Date.
-4-
<PAGE>
(c) Vesting of Warrant.
------------------
(i) On the date which is 120 days after the date hereof (the
"First Vesting Date"), this Warrant shall become, and thereafter during the
Warrant Period shall remain, exercisable with respect to that number of Warrant
Shares equal to the product obtained by multiplying (A) 200 by (B) the sum of
(x) the number of [Initial/Additional] Preferred Shares (as defined in the
Securities Purchase Agreement) issued on the date hereof to the initial holder
of this Warrant pursuant to the Securities Purchase Agreement and which remain
outstanding on the First Vesting Date and (y) the aggregate number of
[Initial/Additional] Preferred Shares issued on the date hereof to such holder
pursuant to the Securities Purchase Agreement which have been converted by such
holders before the First Vesting Date at a Conversion Price (as defined in the
Certificate of Designations) equal to the Fixed Conversion Price (as defined in
the Certificate of Designations) (such resulting number of shares is referred to
herein as the "First Vested Shares").
(ii) In addition to the First Vested Shares, on the date which
is 300 days after the date hereof (the "Second Vesting Date"), this Warrant
shall become, and thereafter during the Warrant Period shall remain, exercisable
with respect to an additional number of Warrant Shares equal to the product
obtained by multiplying (A) 200 by (B) the sum of (x) the number of
[Initial/Additional] Preferred Shares issued on the date hereof to the initial
holder of this Warrant pursuant to the Securities Purchase Agreement and which
remain outstanding on the Second Vesting Date and (y) the aggregate number of
shares of [Initial/Additional] Preferred Stock issued on the date hereof to such
holder pursuant to the Securities Purchase Agreement which have been converted
by such holders before the Second Vesting Date at a Conversion Price equal to
the Fixed Conversion Price (such resulting number of shares is referred to
herein as the "Second Vested Shares").
(iii) In addition to the First Vested Shares and the Second
Vested Shares, on the date which is 480 days after the date hereof (the "Third
Vesting Date"), this Warrant shall become, and thereafter during the Warrant
Period shall remain, exercisable with respect to an additional number of Warrant
Shares equal to the product obtained by multiplying (A) 200 by (B) the sum of
(x) the number of [Initial/Additional] Preferred Shares issued on the date
hereof to the initial holder of this Warrant pursuant to the Securities Purchase
Agreement and which remain outstanding on the Third Vesting Date and (y) the
aggregate number of shares of [Initial/Additional] Preferred Stock issued on the
date hereof to such holder pursuant to the Securities Purchase Agreement which
have been converted by such holders before the Third Vesting Date at a
Conversion Price equal to the Fixed Conversion Price (such resulting number of
shares is referred to herein as the "Third Vested Shares").
(iv) The right to exercise this Warrant with respect to that
number of Warrant Shares equal to the difference between (A) the total number of
Warrant Shares initially issuable hereunder (after giving effect to any
adjustment as provided herein) and (B) the sum of the First Vested Shares, the
Second Vested Shares and the Third Vested Shares (the "Vested Shares") shall be
deemed to have been forfeited by the holder hereof.
(v) Within five days of the First Vesting Date, the Second
Vesting Date and the Third Vesting Date (the "Vesting Date") the Company shall
provide the Warrant holder with
-5-
<PAGE>
written notice which shall contain the following information: (a) The Warrant
certificate number to which such written notice is applicable, (b) the Vesting
Date which triggered the requirement for the notice (i.e., First, Second or
Third), (c) the number of Warrant Shares that vested for the specified Warrant
on such Vesting Date and (d) the Warrant Exercise Price for those Warrant
Shares.
Section 2. Exercise of Warrant.
-------------------
(a) Subject to the terms and conditions hereof, this Warrant
may be exercised by the holder hereof then registered on the books of the
Company, in whole or in part, at any time on any Business Day on or after the
opening of business on the date hereof (subject to the vesting requirements of
Section 1(c) below) and prior to 11:59 P.M. Central Time on the Expiration Date
by (i) delivery of a written notice, in the form of the subscription notice
attached as Exhibit A hereto (the "Exercise Notice"), of such holder's election
---------
to exercise this Warrant, which notice shall specify the number of Warrant
Shares to be purchased, (ii) (A) p ayment to the Company of an amount equal to
the applicable Warrant Exercise Price multiplied by the number of Warrant Shares
as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the "Aggregate Exercise Price") in cash or wire transfer of
immediately available funds, and (iii) the surrender to a common carrier for
overnight delivery to the Company as soon as practicable following such date,
this Warrant (or an indemnification undertaking with respect to this Warrant in
the case of its loss, theft or destruction); provided, that if such Warrant
Shares are to be issued in any name other than that of the registered holder of
this Warrant, such issuance shall be deemed a transfer and the provisions of
Section 7 shall be applicable. In the event of any exercise of the rights
represented by this Warrant in compliance with this Section 2(a), the Company
shall on the second Business Day following the date of receipt of the Exercise
Notice, the Aggregate Exercise Price and this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction) (the "Exercise Delivery Documents"), credit such aggregate number
of shares of Common Stock to which the holder shall be entitled to the holder's
or its designee's balance account with The Depository Trust Company; provided,
however, if the holder who submitted the Exercise Notice requested physical
delivery of any or all of the Warrant Shares, then the Company shall, on or
before the second Business Day following receipt of the Exercise Delivery
Documents issue and surrender to a common carrier for overnight delivery to the
address specified in the Exercise Notice, a certificate, registered in the name
of the holder, for the number of shares of Common Stock to which the holder
shall be entitled pursuant to such request. Upon delivery of the Exercise Notice
and Aggregate Exercise Price referred to in clause (ii)(A) above or notification
to the Company of a Cashless Exercise referred to in Section 2(f), the holder of
this Warrant shall be deemed for all corporate purposes to have become the
holder of record of the Warrant Shares with respect to which this Warrant has
been exercised, irrespective of the date of delivery of this Warrant as required
by clause (iii) above or the certificates evidencing such Warrant Shares. In the
case of a dispute as to the determination of the Warrant Exercise Price, the
last reported sale price (as reported by Bloomberg) or the Market Price of a
security or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the disputed determinations or arithmetic calculations
to the holder via facsimile within one Business Day of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price, the last reported sale price (as
reported by Bloomberg) or Market Price or arithmetic calculation of the Warrant
Shares within one day of such disputed determination or arithmetic calculation
being
-6-
<PAGE>
submitted to the holder, then the Company shall immediately submit via facsimile
(i) the disputed determination of the Warrant Exercise Price, the last reported
sale price (as reported by Bloomberg) or the Market Price to an independent,
reputable investment banking firm or (ii) the disputed arithmetic calculation of
the Warrant Shares to its independent, outside accountant. The Company shall
cause the investment banking firm or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the holder
of the results no later than forty-eight (48) hours from the time it receives
the disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five Business Days after any exercise and at its own
expense, issue a new Warrant identical in all respects to this Warrant exercised
except it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant exercised,
less the number of Warrant Shares with respect to which such Warrant is
exercised.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to issue
to the holder within five (5) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of shares of Common Stock to which the
holder is entitled or to credit the holder's balance account with The Depository
Trust Company for such number of shares of Common Stock to which the holder is
entitled upon the holder's exercise of this Warrant or a new Warrant for the
number of shares of Common Stock to which such holder is entitled pursuant to
Section 2(b) hereof, the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each day the
issuance of such Common Stock certificate or new Warrant, as the case may be, is
not timely effected an amount equal to 0.125% of the product of (A) the sum of
the number of shares of Common Stock not issued to the holder on a timely basis
and to which the holder is entitled and/or, the number of shares represented by
the portion of this Warrant which is not being converted, as the case may be,
and (B) the average of the Closing Sale Price of the Common Stock for the three
consecutive trading days immediately preceding the last possible date which the
Company could have issued such Common Stock or Warrant, as the case may be, to
the holder without violating this Section 2.
(e) If, despite the Company's obligations provided in the Securities
Purchase Agreement and the Registration Rights Agreement (as defined in the
Securities Purchase Agreement), the Warrant Shares to be issued are not
registered for resale in accordance with the Registration Rights Agreement or a
Triggering Event (as defined in the Certificate of Designations) shall have
occurred, notwithstanding anything contained herein to the contrary and in
addition to and not in lieu of any of the other rights and remedies to which the
holder may be entitled by reason of the Company's failure fully to meet its
obligations under the Securities Purchase Agreement or the
-7-
<PAGE>
Registration Rights Agreement, the holder of this Warrant may, at its election
exercised in its sole discretion, exercise this Warrant in whole or in part and,
in lieu of making the cash payment otherwise contemplated to be made to the
Company upon such exercise in payment of the Aggregate Exercise Price, elect
instead to receive upon such exercise the "Net Number" of shares of Common Stock
determined according to the following formula (a "Cashless Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number shares with respect to
which this Warrant is then being exercised.
B= the last reported sale price (as reported
by Bloomberg) of the Common Stock on the date
immediately preceding the date of the
subscription notice.
C= the Warrant Exercise Price then in effect
for the applicable Warrant Shares at the time
of such exercise.
Section 3. Covenants as to Common Stock. The Company hereby covenants
----------------------------
and agrees as follows:
(a) This Warrant is, and any Preferred Share Warrants issued in
substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be validly issued,
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof.
(c) During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so
-8-
<PAGE>
long as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Certificate of Designations or any
waiver thereof which has an adverse effect on the rights granted hereunder shall
be given effect until the Company has taken appropriate action (satisfactory to
the holders of Preferred Share Warrants representing a majority of the shares of
Common Stock issuable upon the exercise of such Preferred Share Warrants then
outstanding) to avoid such adverse effect with respect to this Warrant. Without
limiting the generality of the foregoing, the Company (i) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Warrant Exercise Price then in effect, and (ii) will take all
such actions as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
-----
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issue or delivery of Common Stock or other securities or property in a
name other than that of the registered holders of this Warrant to be converted
and such holder shall pay such amount, if any, to cover any applicable transfer
or similar tax.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as
---------------------------------------
otherwise specifically provided herein, no holder, as such, of this Warrant
shall be entitled to vote or receive dividends or be deemed the holder of shares
of the Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to
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<PAGE>
the stockholders of the Company generally, contemporaneously with the giving
thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by
-------------------------
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution of
this Warrant or the Warrant Shares, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the holder does not agree to hold this Warrant or any of
the Warrant Shares for any minimum or other specific term and reserves the right
to dispose of this Warrant and the Warrant Shares at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act. The holder of this Warrant further represents, by acceptance hereof, that,
as of this date, such holder is an "accredited investor" as such term is
defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and
Exchange Commission under the Securities Act (an "Accredited Investor"). Upon
exercise of this Warrant, other than pursuant to a Cashless Exercise the holder
shall, if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the Warrant Shares so purchased are being acquired solely
for the holder's own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale and that such
holder is an Accredited Investor. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of this Warrant that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.
Section 7. Ownership and Transfer.
----------------------
(a) The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary, but
in all events recognizing any transfers made in accordance with the terms of
this Warrant.
(b) This Warrant and the rights granted hereunder shall not be
assignable by the holder hereof without the prior written consent of the
Company, which consent shall not be unreasonably withheld; provided, however,
that this Warrant and the rights granted to the holder hereof are transferable,
in whole or in part, without the consent of the Company, upon surrender of this
Warrant, together with a properly executed warrant power in the form of Exhibit
B attached hereto; (i) upon the transfer of all or any portion of Warrants to
any existing holder of the Warrants and (ii) to any transferee, provided that
such transferor, transfers the entire Warrant and its rights hereunder to such
transferee. Notwithstanding the foregoing, the Warrant holder, HFTP Investment
L.L.C., shall have the right without the consent of the Company, to transfer all
or any portion of its rights hereunder to a maximum of one (1) Affiliated
Transferee. An "Affiliated Transferee" shall mean (i) an Affiliate of a holder
of this Warrant, (ii) any holder of Preferred Shares and (iii) any Affiliate of
a holder of Preferred Shares.
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<PAGE>
(c) The holder of this Warrant understands that this Warrant has
not been and is not expected to be, registered under the Securities Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) registered thereunder, or (b) such holder shall have
delivered to the Company an opinion of counsel, in form reasonably satisfactory
to the Company, to the effect that the securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; provided that (i) any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
dated May __, 1999 by and between the Company and the Buyers listed on the
signature page thereto (the "Registration Rights Agreement") and the initial
holder of this Warrant (and certain assignees thereof) is entitled to the
registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares.
---------------------------------------------------------
The Warrant Exercise Price and the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares upon
Issuance of Common Stock. If and whenever during the Warrant Period the Company
issues or sells, or is deemed to have issued or sold, any shares of Common Stock
(other than Preferred Shares or shares of Common Stock issued upon conversion of
Preferred Shares or deemed to have been issued by the Company in connection with
an Approved Stock Plan (as defined below)) for a consideration per share less
than a price (the "Applicable Price") equal to a applicable Warrant Exercise
Price in effect immediately prior to such issuance or sale, then immediately
after such issue or sale, the Warrant Exercise Price then in effect shall be
reduced to an amount equal to the product of (x) the Warrant Exercise Price then
in effect and (y) the quotient of (1) the sum of (I) the product of the
Applicable Price multiplied by the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale and (II)
the consideration, if any, received by the Company upon such issue or sale,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale.
(b) Effect on Warrant Exercise Price of Certain Events. For
purposes of determining the adjusted Warrant Exercise Price under Section 8(a)
above, the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants
-------------------
any Options and the lowest price per share for which one share of Common Stock
is issuable upon the
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<PAGE>
exercise of any such Option or upon conversion or exchange of any Convertible
Securities issuable upon exercise of any such Option is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the granting or sale of
such Option for such price per share. For purposes of this Section 8(b)(i), the
"lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option and upon conversion or exchange of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Warrant Exercise Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities. Notwithstanding the foregoing, no adjustment shall be made pursuant
to this Section 8(b)(i) to the extent that such adjustment is based solely on
the fact that the Convertible Securities issuable upon exercise of such Option
are convertible into or exchangeable for Common Stock at a price which varies
with the market price of the Common Stock.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 8(b)(ii), the "lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion
or exchange of such Convertible Security. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Warrant Exercise Price had been or are to be made
pursuant to other provisions of this Section 8(b), no further adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 8(b)(ii) to the extent that such adjustment is based solely on the fact
that such Convertible Securities are convertible into or exchangeable for Common
Stock at a price which varies with the market price of the Common Stock.
(iii) Change in Option Price or Rate of Conversion. If the
---------------------------------------------
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock changes at any time, the Warrant Exercise Price
in effect at the time of such change shall be adjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of shares of Common Stock
acquirable hereunder shall be correspondingly readjusted. For purposes of this
Section 8(b)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are changed
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<PAGE>
in the manner described in the immediately preceding sentence, then such Option
or Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment pursuant to this Section 8(b) shall be made
if such adjustment would result in an increase of the Warrant Exercise Price
then in effect.
(c) Effect on Warrant Exercise Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Warrant Exercise Price under Sections 8(a)
and 8(b), the following shall be applicable:
(i) Calculation of Consideration Received. In case any Option is
-------------------------------------
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration received by the Company will be the
fair value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price of such securities for the twenty (20) consecutive
trading days immediately preceding the date of receipt. If any Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair value
of such portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined jointly by the Company and the holders of Preferred Share
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Preferred Share Warrants then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the fair value of such
consideration will be determined within five Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holders of Preferred Share Warrants
representing a majority of the shares of Common Stock obtainable upon exercise
of the Preferred Share Warrants then outstanding. The determination of such
appraiser shall be final and binding upon all parties and the fees and expenses
of such appraiser shall be borne jointly by the Company and the holders of
Preferred Shares.
(ii) Record Date. If the Company takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
-13-
<PAGE>
(d) Adjustment of Warrant Exercise Price upon Subdivision or
--------------------------------------------------------
Combination of Common Stock. If the Company at any time after the date of
- ---------------------------
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, any Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, any Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased. Any adjustment under this Section 8(d) shall become effective at the
close of business on the date the subdivision or combination becomes effective.
(e) Distribution of Assets. If the Company shall declare or make any
----------------------
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a "Distribution"), at any time
after the issuance of this Warrant, then, in each such case:
(i) any Warrant Exercise Price in effect immediately prior to
the close of business on the record date fixed for the determination of holders
of Common Stock entitled to receive the Distribution shall be reduced, effective
as of the close of business on such record date, to a price determined by
multiplying such Warrant Exercise Price by a fraction of which (A) the numerator
shall be the Closing Bid Price on the trading day immediately preceding such
record date minus the value of the Distribution (as determined in good faith by
the Company's Board of Directors) applicable to one share of Common Stock, and
(B) the denominator shall be the Closing Bid Price on the trading day
immediately preceding such record date; and
(ii) either (A) the number of Warrant Shares obtainable upon
exercise of this Warrant shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of Common
Stock entitled to receive the Distribution multiplied by the reciprocal of the
fraction set forth in the immediately preceding clause (i), or (B) in the event
that the Distribution is of common stock of a company whose common stock is
traded on a national securities exchange or a national automated quotation
system, then the holder of this Warrant shall receive an additional warrant to
purchase Common Stock, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the amount of the
assets that would have been payable to the holder of this Warrant pursuant to
the Distribution had the holder exercised this Warrant immediately prior to such
record date and with an exercise price equal to the amount by which the exercise
price of this Warrant was decreased with respect to the Distribution pursuant to
the terms of the immediately preceding clause (i).
-14-
<PAGE>
(f) Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this Warrant so as to protect the rights of the holders of the Preferred
Share Warrants; provided that no such adjustment will increase the Warrant
Exercise Price or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Section 8.
(g) Notices.
-------
(i) Immediately upon any adjustment of a Warrant Exercise
Price, the Company will give written notice thereof to the holder of this
Warrant, setting forth in reasonable detail, and certifying, the calculation of
such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least twenty (20) days prior to the date on which the Company closes
its books or takes a record (A) with respect to any dividend or distribution
upon the Common Stock, (B) with respect to any pro rata subscription offer to
holders of Common Stock or (C) for determining rights to vote with respect to
any Organic Change (as defined below), dissolution or liquidation, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
(iii) The Company will also give written notice to the holder of
this Warrant at least twenty (20) days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
Section 9. Purchase Rights; Reorganization, Reclassification,
--------------------------------------------------
Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to
- -----------------------------
Section 8 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the holder of this Warrant will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction in each case which is effected in such a
way that holders of Common Stock are entitled to receive (either directly or
upon subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "Organic Change." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other
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<PAGE>
Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the "Acquiring Entity")
written agreement (in form and substance satisfactory to the holders of
Preferred Share Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Preferred Share Warrants then outstanding) to
deliver to each holder of Preferred Share Warrants in exchange for such
Warrants, a security of the Acquiring Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant and satisfactory to
the holders of the Preferred Share Warrants (including, an adjusted warrant
exercise price equal to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and exercisable for a corresponding number
of shares of Common Stock acquirable and receivable upon exercise of the
Preferred Share Warrants, if the value so reflected is less than any Warrant
Exercise Price in effect immediately prior to such consolidation, merger or
sale). Prior to the consummation of any other Organic Change, the Company shall
make appropriate provision (in form and substance satisfactory to the holders of
Preferred Share Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Preferred Share Warrants then outstanding) to
insure that each of the holders of the Preferred Share Warrants will thereafter
have the right to acquire and receive in lieu of or in addition to (as the case
may be) the shares of Common Stock immediately theretofore acquirable and
receivable upon the exercise of such holder's Preferred Share Warrants, such
shares of stock, securities or assets that would have been issued or payable in
such Organic Change with respect to or in exchange for the number of shares of
Common Stock which would have been acquirable and receivable upon the exercise
of such holder's Warrant as of the date of such Organic Change (without taking
into account any limitations or restrictions on the exerciseability of this
Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this
--------------------------------------------
Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt
of an indemnification undertaking (or, in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other communications
------
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street, Suite
1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Chief Executive Officer
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<PAGE>
With copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Facsimile: 312-984-3193
Attention: Michael J. Legamaro
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or at such other address and facsimile as shall be delivered to the Company upon
the issuance or transfer of this Warrant. Each party shall provide five days'
prior written notice to the other party of any change in address or facsimile
number. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
Section 12. Amendments. This Warrant and any term hereof may be
----------
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought.
Section 13. Limitation on Number of Warrant Shares. The Company shall
--------------------------------------
not be obligated to issue any Warrant Shares upon exercise of this Warrant if
the issuance of such shares of Common Stock would cause the Company to exceed
that number of shares of Common Stock which the Company may issue upon exercise
of this Warrant (the "Exchange Cap") without breaching the Company's obligations
under the rules or regulations of Principal Market, except that such limitation
shall not apply in the event that the Company (a) obtains the approval of its
stockholders as required by the Principal Market (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount or (b)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the holders
of Warrants representing a majority of the Warrant Shares then issuable upon
exercise of outstanding Warrants. Until such approval or written opinion is
obtained, the holder of this Warrant shall not be issued, upon exercise of this
Warrant, Warrant Shares in an amount greater than such holder's Cap Allocation
Amount (as defined in the Certificate of Designations). In the event the
Company is prohibited from issuing Warrant Shares as a result of the operation
of this Section 13, the Company shall redeem for cash those Warrant Shares which
can not be issued, at a price equal to the difference between the Market Price
and the Exercise Price of such Warrant Shares as of the date of the attempted
exercise.
Section 14. Date. The date of this Warrant is [May/ ___], 1999. This
----
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue
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<PAGE>
in full force and effect after such date as to any Warrant Shares or other
securities issued upon the exercise of this Warrant.
Section 15. Amendment and Waiver. Except as otherwise provided herein,
--------------------
the provisions of the Preferred Share Warrants may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of Preferred Share Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of the Preferred Share
Warrants then outstanding; provided that no such action may increase the Warrant
Exercise Price of the Preferred Share Warrants or decrease the number of shares
or class of stock obtainable upon exercise of any Preferred Share Warrants
without the written consent of the holder of such Preferred Share Warrant.
Section 16. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Delaware shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Illinois, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Illinois, or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Illinois.
<PAGE>
MEDCARE TECHNOLOGIES, INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
<PAGE>
EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
MEDCARE TECHNOLOGIES, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of Medcare
Technologies, Inc., a Delaware corporation (the "Company"), evidenced by the
attached Warrant (the "Warrant"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of the
Warrant Exercise Price shall be made as:
____________ a "Cash Exercise" with respect to
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____________ Warrant Shares; and/or
____________ a "Cashless Exercise" with respect to ___________
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Warrant Shares (to the extent permitted by the terms
of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________, ______
_____________________________
Name of Registered Holder
By: __________________________
Name:
Title:
<PAGE>
EXHIBIT B TO WARRANT
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FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Medcare Technologies, Inc., a
Delaware corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated: _________, 199_
___________________________________
By: _____________________________
Its: _____________________________
<PAGE>
Exhibit 16
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington DC 20549
Gentlemen:
We have read Item 4 of Form 8-K dated May 17, 1999, of Medcare Technologies,
Inc. and are in agreement with the statements contained in the first two
paragraphs therein. We have no basis to agree or disagree with other statements
of the registrant contained therein.
Very truly yours,
/s/ Clancy and Co., P.L.L.C.
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Clancy and Co., P.L.L.C.
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the inclusion in 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.
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CLANCY AND CO., P.L.L.C.
Certified Public Accountants
May 24, 1999
