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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission file number 000-28790
MEDCARE TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
Delaware 87-0429962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 West 22nd Street, Suite 1210, Oak 60523
Brook, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (630) 472-5300
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value, listed on the NASDAQ SmallCap Market
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Revenues for last fiscal year were $1,687,780
Aggregate market value of Common Stock, $0.001 par value, held by non-
affiliates of the registrant as of March 24, 2000: $18,863,461. Number of
shares of Common Stock, $0.001 par value, outstanding as of March 24, 2000:
10,060,513.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Annual Meeting of Shareholders (to be filed
with the Commission within 120 days after the registrant's fiscal year end) is
hereby incorporated by reference into Part III of this Form 10-KSB.
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ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 12
Item 3. Legal Proceedings............................................... 13
Item 4. Submissions of Matters to a Vote of Security Holders............ 13
PART II
Item 5. Market for the Registrants' Common Equity and Related Stock-
holder Matters.................................................. 13
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
Item 7. Financial Statements............................................ 17
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................ 32
PART III
Item 9. Directors and Executive Officers of the Registrant.............. 32
Item 10. Executive Compensation.......................................... 32
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 32
Item 12. Certain Relationships and Related Transactions.................. 32
PART IV
Item 13. Exhibits and Reports on Form 8-K................................ 32
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PART I
Item 1. Business
Except for the historical information contained herein, the discussion in
this Annual Report on Form 10-KSB contains certain forward-looking statements
that involve risk and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this document should be read as being applicable to all related forward-
looking statements wherever they appear in this document. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause differences include those discussed below in "Risk Factors", as
well as those discussed elsewhere herein.
THE COMPANY
MedCare Technologies, Inc. ("MedCare Technologies", "MedCare" or the
"Company") is a healthcare technology service company that focuses on under-
served high growth markets. The Company was originally incorporated in the
state of Utah in 1986 and changed its domicile to Delaware in 1996 through a
migratory merger.
In 1995, the Company acquired the MedCare Program ("Program"), a proprietary
product of the Company, that is made up of equipment, software and services
developed to provide non-pharmaceutical, non-invasive treatment to individuals
suffering from urinary incontinence and other pelvic disorders. In 1996, the
Company began to offer the Program to doctors and in 1998 the Program was
launched nationally. The Company did not generate any revenues until 1997.
During 1998, the Company's sole business was the offering of the MedCare
Program.
In October 1999, MedCare Technologies launched a new, business-to-business
web site, RxSheets.com (www.rxsheets.com), which is directed exclusively at
the physician and pharmaceutical marketplace. In addition, the Company changed
the name of its wholly-owned subsidiary from Medcareonline.com to
RxSheets.com. The Company believes that RxSheets.com offers a wide array of
compelling and focused information and services that will enable physicians to
more efficiently and effectively manage the sampling of pharmaceutical drugs.
As of December 31, 1999, the Company had not generated any revenues from
RxSheets.com.
DESCRIPTION OF BUSINESS
The MedCare Program
The MedCare Program is a discrete package of equipment, software and
services developed by MedCare to provide non-pharmaceutical, non-invasive
treatment to patients suffering from urinary incontinence and other pelvic
disorders, including pelvic pain, chronic constipation, fecal incontinence and
disordered defecation.
The 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 Program, physicians help patients activate and
strengthen the various sensory response mechanisms that maintain bladder and
bowel control. Technological developments and studies indicate that such
behavioral techniques are effective methods in treating incontinence. The
Company believes that it is the leading source of conservative incontinence
treatment support systems in the United States.
The MedCare Program is sold as a comprehensive continually supported
program. The Company provides the equipment, technology and training to the
treatment site, as well as ongoing support through its clinical and billing
divisions. The training is all-inclusive in order for the site to promote a
successful program, including proven protocols for equipment operation,
community education, billing, managed care and outcomes.
Each treatment site (a "Site") that contracts with MedCare to utilize the
MedCare Program signs a Program Agreement which defines the terms and
conditions of the relationship. The Site has exclusive authority and
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responsibility for professional supervision and judgements required in the
diagnosis of patients and in the selection and performance of procedures for
the benefit of the Site'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 or
sells the equipment to the Site and trains the support personnel to assist the
Site, operate the equipment and educate the patients. The Site must supervise
all activities of any support personnel. The Site agrees to engage MedCare on
an exclusive basis as manager of the Site's programs for the treatment of the
patient conditions using behavioral and biofeedback techniques. The Site is
required to provide, at its own expense, an area of sufficient space for the
performance of the MedCare Program.
During 1999, the Company began to offer its Program under a revised fee
structure and to a new target market. MedCare revised its fee structure to
reflect an initial subscription and set monthly management fee and began to
focus its sales efforts on hospitals and other large healthcare providers
nationwide. The Company believes that this new marketing strategy will allow
MedCare to reach a greater number of healthcare providers.
In addition to signing contracts with hospitals in the second half of 1999,
the Company signed a Strategic Service Partner Agreement with Quorum Health
Resources, LLC, the largest manager of not-for-profit hospitals in the United
States. The agreement designates the MedCare Program as the primary provider
of hospital based programs providing conservative treatment of urinary
incontinence for its affiliated facilities. Quorum Health Resources manages
approximately 215 hospitals and provides consulting services to more than 180
additional hospitals.
Although the sales cycle to hospitals is potentially longer, the Company
believes its new market focus and fee structure should put them in an
excellent position to meet the growing demand and improve their overall
financial profile. Physicians will continue to have the ability to offer an
effective, non-intrusive alternative to their patients and hospitals will have
the opportunity to offer a value-added ancillary program that generates
incremental revenues and new services for their communities.
Governmental Regulation Issues Concerning the Program Management Agreement
Under the Company's Program 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 at the treatment
site. The Company is subject to the Federal Anti-Kickback Statute and the
Federal Self-Referral Statute but does not believe that an applicable
government authority would find the parties' performance of their duties and
obligations under the Program Agreements to violate these statutes.
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.
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
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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.
RxSheets.com
RxSheets.com (www.rxsheets.com) is an innovative business-to-business web
site catering to the pharmaceutical needs of the practicing physician. The
pharmaceutical focused site was launched in October 1999 with a strategy to
revolutionize the process by which physicians obtain pharmaceutical samples
and drug related information. Pharmaceutical companies provide physicians with
free samples of their drugs as the principal part of their marketing
promotions. A trial sample of a drug is often the most effective way to get a
doctor to use a pharmaceutical company's product.
The Company believes that RxSheets.com offers a wide array of compelling and
focused information and services that will enable physicians to more
efficiently and effectively manage the sampling of pharmaceutical drugs. The
Company expects that RxSheets.com will allow physicians to spend more of their
valuable time treating the needs of their patients and more effective time
with the pharmaceutical sales representatives.
RxSheets.com currently offers the following information and services: Drug
Samples Request Center, FDA Approvals Library, Clinical Studies Center, News
Center, Investment Center provided by Morgan Stanley Dean Witter Online,
HealthCare Calendar and Pharmaceutical Newsletter.
As a result of an introductory marketing campaign and ongoing networking
efforts initiated in the fourth quarter, 1999, RxSheets.com has experienced a
strong response from the physician community. As of March 14, 2000,
RxSheets.com had over 20,000 doctors registered for their service.
Marketing of RxSheets.com to the Pharmaceutical Industry
The Company believes that RxSheets.com will begin generating revenue from
the sale of marketing services in 2000. The Company believes its services
could add significant value to the product marketing efforts of pharmaceutical
companies, as well as increase their overall exposure to the physician market.
Based on the Company's research, major pharmaceutical companies spend
approximately 33 cents of every revenue dollar, or approximately $45 billion,
in marketing. More specifically, these companies are spending approximately
$17 billion in promotions directed to the physician. The Company believes
RxSheets.com will be able to participate in and help to facilitate the
aggressive advertising campaigns that pharmaceutical companies are currently
mounting.
The Company further believes that its increasing physician enrollment will
enhance its efforts to develop revenue relationships with the pharmaceutical
companies. Pharmaceutical companies recognize the value of getting samples to
physicians as an effective way to influence their prescribing habits. The
Company believes RxSheets.com provides the pharmaceutical companies with a
new, cost effective and focused marketing alternative.
Competitive Business Conditions for RxSheets.com
The market for Internet services is intensely competitive. The Company
believes there are no substantial barriers to entry in these markets and
expects competition to intensify. The Company believes that the number of
companies relying on fees from Internet based services or 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.
Although the Company believes that RxSheets.com is the only functioning web
site that is focused on the pharmaceutical company-physician sampling
marketing relationship, there are several healthcare related companies that
are serving the marketing needs of pharmaceutical companies and/or deliver
content or other
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services to both pharmaceutical companies and physicians via the Internet.
These healthcare related companies include physician-targeted web sites,
electronic prescription companies, contract marketing organizations,
pharmaceutical supplies wholesalers, healthcare content web sites and medical
information providers. Many of these companies have longer operating histories
in the Internet market, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than
RxSheets.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 RxSheets.com or that achieve greater market acceptance than
RxSheets.com.
Research and Development Activities for RxSheets.com
During 1999, RxSheets.com had no revenues and incurred $305,114 of operating
and start-up expenses related to its online business. RxSheets.com has
developed its site to be used exclusively by physicians. RxSheets.com has
utilized security technology in order to allow only doctors the ability to
utilize the site. The initial site development was completed at the beginning
of 2000 and RxSheets.com expects to continue to make both service and
technical enhancements to the site during the year.
Governmental Regulation Issues for RxSheets.com
In December 1999, the Food and Drug Administration issued its final rule to
set forth procedures and requirements implementing the Prescription Drug
Marketing Act of 1987 ("PDMA") as modified by the Prescription Drug Amendments
of 1992 and the FDA Modernization Act of 1997. The final rule includes
requirements for the distribution of prescription drug samples. The Company
believes that RxSheets.com fully complies with the provisions outlined in the
PDMA.
Employees
At December 31, 1999, the Company employed 31 full time and 8 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.
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.
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RISK FACTORS
Lack of Operating History--Because of our limited operating history and lack
of past profitability, you may lose your investment if we are unable to
successfully market our services and implement our business plan.
Although we organized Medcare in 1986, we did not become active until 1995
and have been continually developing our MedCare Program since that time. As a
result, our business is subject to the risks inherent in the establishment of
a new business. Specifically, in formulating our business plan, we have relied
on the judgment of our officers, directors and consultants but have not
conducted any formal independent market studies concerning the demand for our
services. To achieve significant revenues and profitable operations in the
future, we must successfully develop and market the MedCare Program to
physicians and hospitals. In addition, we are currently expanding operations,
which may or may not provide profits. Further, the business model for
RxSheets.com is evolving and relies substantially upon the sale of services
and advertising on the Internet, which is a developing industry in which we
have no prior experience. We have had limited revenues since inception. In
1999, we had revenues of $1,687,780. We have not been profitable, experiencing
an accumulated loss of $9,616,648 through 1999. Even if we become profitable
in the future, we cannot accurately predict the level of, or our ability to
sustain profitability. Because we have not yet been profitable and cannot
predict any level of future profitability, you bear the risk of a complete
loss of your investment in the event our business plan is unsuccessful.
Inability to Obtain Funding--We may not be able to obtain additional funding
when needed, which could limit future expansion and marketing opportunities
and result in lower than anticipated revenues.
We may require additional financing to expand and market the MedCare Program
and RxSheets.com. If the market price of the common stock declines, some
potential financiers may either refuse to offer us any financing or will offer
financing at unacceptable rates or unfavorable terms. If we are unable to
obtain financing on favorable terms, or at all, this unavailability could
prevent us from expanding and marketing our services, which could result in
lower than anticipated revenues.
Continued Control by Existing Management--You may lack an effective vote on
corporate matters and management may be able to act contrary to your
objectives.
As of December 31, 1999, our officers and board members own 20% of the
9,911,313 shares of our outstanding common stock. If management votes
together, it could influence the outcome of corporate actions requiring
shareholder approval, including the election of directors, mergers and asset
sales. As a result, new stockholders may lack an effective vote with respect
to the election of directors and other corporate matters. Therefore, it is
possible that management may take actions with respect to its ownership
interest which may not be consistent with your objectives or desires.
Dividends--We have not paid and do not currently intend to pay dividends,
which may limit the current return you may receive on your investment in our
common stock.
Since inception, we have paid no dividends to our stockholders. Future
dividends on our common stock, if any, will depend on our future earnings,
capital requirements, financial condition and other factors. We currently
intend to retain earnings, if any, to increase our net worth and reserves.
Therefore, we do not anticipate that any holder of common stock will receive
any cash, stock or other dividends on his shares of common stock at any time
in the near future. You should not expect or rely on the potential payment of
dividends as a source of current income.
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Dependence on Executive Officers and Technical Personnel--The success of our
business plan depends on attracting qualified personnel, and failure to retain
the necessary personnel could adversely affect our business.
We are highly dependent on the services of our executive officers, Jeffrey
S. Aronin, Alan P. Jagiello and Gregory Wujek. Except for an employment
agreement with our President, Jeffrey Aronin, we do not have any employment
agreements with our executive officers. In addition, competition for qualified
technical personnel is intense, and we may need to pay premium wages to
attract and retain personnel. Attracting and retaining qualified personnel is
critical to our business plan. Inability to attract and retain the qualified
personnel necessary would limit our ability to implement our business plan
successfully.
Change of Control--Conversions of shares of Series B preferred stock may
result in new majority stockholders, whose interests may be inconsistent with
yours.
If the market price of the common stock declines significantly, we may issue
a large number of shares of common stock. As a result, our current
stockholders may not have an effective vote in the election of directors and
other corporate matters. In the event of a change in control, it is possible
that the new majority stockholders may take actions which may not be
consistent with your objectives or desires.
Issuances at Less than Market Price--Conversions of shares of Series B
preferred stock may drive down the price of our common stock.
The conversion of the Series B preferred stock is based on a formula that
varies with the market price of our common stock. This variable formula
applies the lesser of (a) 125% of the market price of our common stock at the
time we issued the Series B preferred stock, which was $7.80, and (b) the
approximate market price of our common stock at the time the holders convert
their shares of Series B preferred stock. As a result, if the market price of
our common stock increases after we issue the Series B preferred stock, it is
possible that, upon conversion of the Series B preferred stock, we will issue
shares of common stock at a price that is less than the then-current market
price of the common stock.
In addition, the warrants issued with the Series B preferred stock are
exercisable at a price equal to 125% of the average closing bid prices of our
common stock on the five consecutive trading days preceding the applicable
vesting date of the warrants. If the market price of our common stock
increases above the warrant exercise price, we will have to issue shares of
common stock upon exercise of the warrants at a price that is less than the
then-current market price. Issuances at less than market price pose a risk to
investors because these issuances may drive down the market price of our
common stock.
Redemption of Series B Preferred Stock--If the Series B stockholders redeem
their shares of Series B preferred stock, this could divert funds from our
operations and result in slower growth for our company.
The Series B stockholders may elect to redeem their Series B preferred stock
at a premium upon the occurrence of the following events:
. our consolidation, merger or other business combination with another
entity;
. the sale or transfer of all or substantially all of our assets;
. a purchase, tender or exchange offer made to and accepted by the holders
of more than 50% of the outstanding shares of our common stock;
. our failure to maintain the effectiveness of a registration statement;
. the delisting of our common stock for a period of five consecutive days;
or
. our material breach of any representations, warranties or covenants in
the securities purchase agreement or any related documents.
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The premium payable to the Series B stockholders is equal to 115% of (a)
$10,000, plus (b) any stock dividends that have accrued but have not been
paid, plus (c) default interest, payable at 15% per year, for dividends that
we elected to pay in cash but failed to pay on a timely basis. See
"DESCRIPTION OF SECURITIES." If we do not have sufficient funds to pay this
premium, we may need to borrow the funds on unfavorable terms, which would
divert funds that could be used elsewhere. This would result in slower growth
of our company and lower than expected earnings.
Nasdaq Eligibility and Maintenance--If we do not maintain our Nasdaq SmallCap
Market listing, you may have difficulty selling your shares.
Our common stock is currently listed on the Nasdaq SmallCap Market. Under
the current rules for listing on that market, we must maintain at least
$2,000,000 in net tangible assets, a market capitalization of $35 million or
have net income of $500,000. In addition, we must maintain at least $1,000,000
in market value of public float and a minimum bid price of $1.00 per share.
For the reasons discussed below, it is possible that we may be unable to
maintain these Nasdaq eligibility requirements. In the event of a delisting,
you would be forced to trade our common stock 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, you may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, our common stock. Following are
specific ways in which we may fail to maintain our current listing on the
Nasdaq SmallCap Market:
Ineligibility Resulting from Losses from Operations. If we experience losses
from operations, we may be unable to maintain the standards for continued
listing and Nasdaq may delist our common stock from the SmallCap Market.
Ineligibility Resulting from Failure to Meet the Bid Price Requirement as a
Result of the Issuance and Conversion of the Series B Preferred Stock. Because
the conversion price of the Series B preferred stock is linked to the market
price of our common stock, the conversion of these securities may result in a
decrease in the bid price of our common stock. Specifically, if the market
price of our common stock falls, the conversion price will fall as well. As a
result, we will have to convert each share of Series B preferred stock into
more shares of common stock. Further, if the market price falls and the
holders convert their shares of Series B preferred stock into large amounts of
common stock, the market price may decline further as a result of dilution. In
this event, it is possible that the price may decline to such an extent that
our minimum bid price will be lower than the required $1.00.
Ineligibility Resulting from Failure to Meet Initial Inclusion Requirements
following a Change in Control. The Nasdaq rules require us to qualify under
the initial inclusion standards following a change in control resulting from a
merger or consolidation, if there is also a change in either our business or
our financial structure. If the conversion price is low enough, and if we
issue enough shares to a selling stockholder upon conversion, the conversion
of the Series B preferred stock could result in a change in control in a
deemed merger or consolidation. In addition, Nasdaq may view the large
increase in the number of shares of common stock outstanding following this
conversion as a change in financial structure. If these events occur and if we
fail to meet Nasdaq's initial inclusion requirements, Nasdaq may delist the
common stock.
Ineligibility Resulting from Public Policy Matters. In some cases, Nasdaq
may deny listing or apply more stringent listing criteria to particular
securities if, in its opinion, this treatment is necessary to protect
investors and the public interest. Variable convertible securities, like the
Series B preferred stock, may be subject to this strict treatment because of
factors like their potential impact on our existing capital structure and
their dilutive effect, as well as the other risk factors discussed in this
prospectus. Therefore, it is possible that Nasdaq may require us to delist our
common stock if it feels that this delisting would be necessary to protect
investors.
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Risk of Low Priced Stocks--If our common stock is considered a "penny stock,"
transactions in the common stock will be subject to additional regulations,
decreasing the liquidity of the common stock.
If the Nasdaq SmallCap Market delists our common stock and the common stock
does not fit into any other exclusion from the definition of a "penny stock"
under applicable SEC regulations, our common stock would become subject to the
penny stock rules that impose additional sales practice requirements on
broker-dealers who sell this stock to persons other than established customers
and accredited investors, a group that generally is comprised of 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, making the common stock more difficult to sell.
Adverse Effect of Shares Eligible for Future Sale--Future sales of large
amounts of common stock could adversely effect the market price of our common
stock and our ability to raise capital.
Future sales of our common stock by existing stockholders pursuant to Rule
144 under the Securities Act, or following the exercise of outstanding
preferred stock, options and warrants, including conversion of the Series B
preferred stock and exercise of the related warrants, could adversely affect
the market price of our common stock. Substantially all of the outstanding
shares of our common stock are freely tradable, without restriction or
registration under the Securities Act, other than the sales volume
restrictions of Rule 144 applicable to shares held beneficially by persons who
may be deemed to be affiliates. Our directors and executive officers and their
family members are not under lockup letters or other forms of restriction on
the sale of their common stock. The issuance of any or all of these additional
shares upon exercise of options or warrants or conversion of preferred stock
will dilute the voting power of our current stockholders on corporate matters
and, as a result, may cause the market price of our common stock to decrease.
Further, sales of a large number of shares of common stock in the public
market could adversely affect the market price of the common stock and could
materially impair our future ability to generate funds through sales of common
stock or other equity securities.
Protection of Proprietary Treatment Program--Our ability to effectively
compete depends on protection of our proprietary treatment protocol through
confidentiality and non-compete agreements.
Our ability to compete and expand effectively will depend, in part, on our
ability to develop and maintain the proprietary aspects of our unpatented
treatment protocol. We have developed this protocol through our experiences to
date in the clinical, billing and marketing areas of incontinence treatment.
Others may independently develop the same or a similar program or otherwise
obtain access to this protocol from former employees or former MedCare
physicians.
In addition, third parties have published clinical studies regarding the
benefits of biofeedback treatment of incontinence. Although this is only one
component of our treatment protocol, others may utilize these clinical studies
to begin their own incontinence programs.
We currently protect the treatment protocol from duplication through our
confidentiality and non-compete agreements signed with our employees and
customers. We cannot ensure that these agreements will provide meaningful
protection for our treatment protocol in the event of their expiration or
unauthorized use or disclosure. If our treatment protocol became widely
duplicated, larger, better-capitalized companies could instantly compete with
us in the incontinence treatment market.
Reimbursement and Related Matters--Market acceptance of the MedCare Program,
which is crucial to our success and your investment, depends in part on
whether governments and third-party insurers provide reimbursement.
Our ability to successfully market the MedCare Program will depend, in part,
on whether third parties such as government health administration authorities
and private health coverage insurers reimburse the physicians
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using our program for the costs of the program. In the United States and in
some foreign countries, third-party reimbursement is currently generally
available for our products and services. However, third party reimbursement is
currently generally unavailable for patient management products such as
diapers, pads and urethral plugs. Governments and other third parties are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement. We cannot ensure that adequate third-party
coverage will remain in effect in the future, and if this coverage is not
maintained, market acceptance of the MedCare Program could decline.
Government Regulation--Unfavorable governmental regulation in the future could
threaten our viability.
Our business is heavily regulated. The MedCare Program is subject to
regulation under the Federal Anti-Kickback Statute and the Federal Self-
Referral Statute. RxSheets.com is subject to the Prescription Drug Marketing
Act of 1987. In addition, legislators continually enact new legislation. The
process of obtaining regulatory approvals can be lengthy and expensive, and
the issuance of these approvals is uncertain. Currently, we believe that we
are in compliance with all currently existing regulations that apply to us.
However, if the federal or state government were to enact any new regulations,
we may not be able to obtain the necessary approvals on a timely basis, or at
all. Should legislators enact new legislation that is unfavorable to our
business, this could, among other things, result in fines, suspensions of
regulatory approvals, operating restrictions and criminal prosecution. We
cannot predict whether any new reforms will be enacted, the types of approvals
that will be required, or the effect of any enacted reform on our business.
Potential Fluctuations in Quarterly Results--Significant variations in our
quarterly operating results may adversely affect the market price of our
common stock.
Our operating results have varied on a quarterly basis during our limited
operating history, and we expect to experience significant fluctuations in
future quarterly operating results. These fluctuations have been and may in
the future be caused by numerous factors, many of which are outside of our
control. We believe that period-to-period comparisons of our results of
operations will not necessarily be meaningful and that you should not rely
upon them as an indication of future performance. Also, it is likely that our
operating results could be below the expectations of public market analysts
and investors. This could adversely affect the market price of our common
stock.
RxSheets.com--Because the Internet is a new and rapidly evolving market, we
may not be able to create a market for RxSheets.com's services, and may never
operate profitably.
In October 1999, we announced the launch of our new web site, RxSheets.com
(www.rxsheets.com) which we direct exclusively at the physician and
pharmaceutical marketplace. Many pharmaceutical companies offer physicians
free samples of their drugs as part of their marketing promotions to
physicians. Historically, companies carry out these marketing promotions by
direct contact with physicians and direct mail. RxSheets.com offers focused
marketing services to pharmaceutical companies through the Internet in order
to efficiently and effectively manage the sampling of pharmaceutical drugs.
Our services to the pharmaceutical industry include advertising, forwarding
sample requests from physicians to suppliers and selling data accumulated from
our service. While RxSheets.com is in the developmental stage, we hope to
generate revenues from the fees we charge for those services. However, there
are several risks related to RxSheets.com that may hinder its ultimate
profitability, as discussed below.
RxSheets.com will operate in a new and rapidly evolving market. Continued
increases in the use of the Internet and other online services is crucial to
RxSheets.com's business. The Internet as a marketing medium has not been
available for enough time to gauge its effectiveness as compared with
traditional media. Therefore, the Internet is an unproven medium for marketing
services. As a result, our 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
marketing medium. Our ability to generate significant revenues will also
depend on, among other things, the development of a large base of physicians
online, our ability to
11
<PAGE>
accurately measure our user base and our ability to develop or acquire
effective marketing systems. Many of our potential customers have only limited
experience with the Internet, have not yet devoted a significant portion of
their marketing to the Internet, and may not find the Internet to be effective
for promoting their products and services compared to traditional methods. The
adoption of Internet marketing requires the acceptance of a new way of
conducting business and exchanging information. The market for Internet
services may not continue to emerge. The failure of the market to develop
could materially and adversely affect our business. In addition, there is
intense competition in the sale of services on the Internet, resulting in a
wide range of rates and pricing. This makes it difficult to project future
revenues and rates. Because RxSheets.com recently began operations, it is
difficult to evaluate our business and prospects. Our revenue and income
potential is unproven and our business model is emerging. As a result of these
risks, we may not generate significant future revenues from Internet-based
services and never achieve favorable operating results or profitability.
In addition, our success will depend, in part, on our ability to generate a
high volume of physician traffic to our website. Therefore, the performance of
our website is critical to our reputation and our ability to achieve market
acceptance of RxSheets.com. Any system failure that causes interruptions in
the availability or that increases response time of our services could reduce
user satisfaction and traffic to the website, and if the interruption is
lengthy or repeated, would reduce our attractiveness to advertisers and
pharmaceutical companies.
Legislation relating to consumer privacy may affect our ability to collect
data. The enactment of legislation or industry regulations arising from public
concern over consumer privacy issues could have a material adverse impact on
our business. Legislators may place restrictions upon the collection and use
of information that is currently legally available, which could materially
increase our cost of collecting some kinds of data. It is also possible that
legislation may prohibit us from collecting or disseminating data, which could
in turn materially adversely affect our ability to meet our clients'
requirements.
Data suppliers might withdraw data from us, leading to our inability to
provide products and services. We utilize physician identification data
provided to us by suppliers in order to verify the identity of physicians.
This data is important to our customers, as it ensures that samples and
advertising are provided only to physicians. If owners of the data we use were
to withdraw the data from us, we would not be able to offer physician-only
marketing campaigns which could result in potential customers utilizing
competitors who offer these services. If our data providers were to withdraw
their data, our decreased ability to provide our services to our clients could
result in decreased revenues, net income and earnings per share.
Competition--In the evolving healthcare field, if we do not continually
develop the MedCare Program, it could become uncompetitive or obsolete.
Healthcare is a rapidly evolving field in which other companies may have
greater financial and research and development resources than we do. We
compete directly with a number of small incontinence clinics, offered by
doctors, hospitals or therapists, that use a combination of non-invasive
alternative treatment options to treat urinary incontinence. In addition, we
compete with other alternative treatments to urinary incontinence, including
absorbent products and diapers, surgery, indwelling catheters, implanting
devices, injectable materials, electrical stimulation, mechanical devices and
drugs. Our ability to compete effectively will depend, in part, on our ability
to develop and maintain a treatment program that offers therapeutic or cost
advantages over competitive offerings. Developments by others could render the
MedCare Program uncompetitive or obsolete.
Item 2. Properties
The Company's principal office is located at 1515 West 22nd Street, Suite
1210, Oak Brook, Illinois, 60523. This office is 2900 square feet and is
subleased for $5,500 per month, until January 31, 2003. The Company also
leases 1,500 square feet of office space located in Vancouver, British
Columbia for $2,000 per month, plus operating expenses.
12
<PAGE>
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business. The
Company's management does not believe that any such claims or lawsuits will
have a material adverse effect on its financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders in the
fourth quarter of 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information
The Company's Common Stock is listed on the Nasdaq Small Cap Market under
the symbol "MCAR". The following table sets forth the high and low sale prices
for the periods indicated:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
First Quarter 1998.......................................... $ 9.375 $7.375
Second Quarter 1998......................................... $11.063 $9.000
Third Quarter 1998.......................................... $ 9.313 $6.000
Fourth Quarter 1998......................................... $ 7.438 $4.875
First Quarter 1999.......................................... $ 8.250 $5.250
Second Quarter 1999......................................... $ 7.250 $4.625
Third Quarter 1999.......................................... $ 4.969 $2.438
Fourth Quarter 1999......................................... $ 4.125 $1.375
</TABLE>
(b) Holders
As of December 31, 1999 there were approximately 300 stockholders of record
of the Company's Common Stock.
(c) Dividend Policy
The Company has never paid a dividend and does not anticipate paying any
dividends in the foreseeable future. It is the present policy of the Board of
Directors to retain the Company's earnings, if any, for the development of the
Company's business.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 7 of this Form 10-KSB. Except
for the historical information contained herein, the discussion in this Annual
Report on Form 10-KSB contains certain forward-looking statements that involve
risk and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this document
should be read as being applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could
differ materially from those discussed here. Factors that could cause
differences include those discussed below in "Risk Factors", as well as
discussed elsewhere herein.
13
<PAGE>
Overview
During 1998, the Company engaged in only one type of business, the offering
of the MedCare Program, as described below. In October 1999, the Company
announced the launch of its new web site, RxSheets.com (www.rxsheets.com),
which is directed exclusively at the physician and pharmaceutical marketplace.
The Company believes that RxSheets.com offers a wide array of compelling and
focused information and services that will enable physicians to more
efficiently and effectively manage the sampling of pharmaceutical drugs. In
addition, the Company changed the name of its wholly-owned subsidiary from
Medcareonline.com to RxSheets.com. As of December 31, 1999, the Company has
not generated any revenues from RxSheets.com.
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 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. The MedCare Program is available either in a private office,
clinic, or a hospital setting.
To date, the Company 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, website
development, management and staff recruitment, establishing training systems
and providing ongoing training, development of advertising and marketing
programs, and other costs associated with establishing corporate
infrastructure necessary for expanding on a national basis. Although planned
principal operations have commenced, substantial revenues have yet to be
realized.
Results of Operations
Revenues. The Company experienced a 115% increase in revenues over last
year's results with revenues of $1,687,780 and $786,586 for the years ended
December 31, 1999 and 1998, respectively. As of December 31, 1999 the Company
had deferred recognizing the revenue and related costs on three MedCare
Program sites as performance of the Company's obligations under the contract
was not complete. During the second quarter of 1999, the Company introduced a
new franchise version of the MedCare Program to hospitals and other large
healthcare providers which requires each new site to pay an upfront
subscription fee, the clinician's salary and a set monthly management fee.
Although the sales cycle is longer, the new franchise version allows MedCare
to reach a greater number of healthcare providers. Existing offices that were
unprofitable were closed.
During the next year, 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. In addition, during 2000, the
Company expects to begin generating revenue from the sale of marketing
services from its new wholly-owned subsidiary, RxSheets.com. As of December
31, 1999, there have been no revenues related to RxSheets.com.
General and Administrative Expenses. During 1999, the Company incurred
$4,969,962 in general and administrative expenses, an increase of 6% over 1998
expenses of $4,689,400. The increase is primarily attributable to additional
salary and operating expenses related to the additional MedCare sites open
during 1999 versus 1998 offset by a reduction in advertising expenses. In
addition, the Company incurred $305,114 of operating and start-up expenses in
1999 related to its new subsidiary, RxSheets.com. Also in 1999, the Company
recorded a charge of $89,978, for damaged and obsolete fixed assets related to
the unprofitable MedCare sites that were closed.
14
<PAGE>
Interest Income. Interest income was $157,405 and $162,109 for the years
ended December 31, 1999, and 1998, 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, 1999, the Company's
accumulated deficit was $9,616,648 and as a result, there has been no
provision for income taxes to date. The Company has net operating loss
carryforwards that will expire beginning with the year 2002 in the amount of
$9,131,154 unless utilized by the Company.
Preferred Stock Deemed Dividends. Preferred stock deemed dividends was
$964,987 and $29,248 for the years ended December 31, 1999 and 1998,
respectively. The increase is due to the accretion to its redemption value of
the Series B preferred stock issued in May 1999. See Note 8 of the footnotes
to our financial statements for additional details.
Liquidity and Capital Resources
At December 31, 1999, the Company had a cash balance of $3,218,228, compared
to a cash balance of $2,826,086 at December 31, 1998.
During 1999, the Company used $3,291,406 of net cash from operating
activities as compared to $3,381,600 of net cash used in 1998. The decrease in
the net cash used in operating activities was due mainly to the decrease in
the net loss between years offset by an increase in prepaid expenses and a
decrease in accounts payable and accrued liabilities. The increase in prepaid
expenses was due to the purchase of a subscription for a database of physician
information for RxSheets.com that will be utilized in 2000. The decrease in
accounts payable and accrued liabilities was due mainly to the reduction of
MedCare Program offices at year-end 1999 versus an expansion of MedCare
Program offices at year-end 1998.
Net cash used in investing activities was $218,331 for 1999, compared to net
cash used of $315,335 for 1998. The decrease in the net cash used in investing
activities was due mainly to purchasing fewer and less expensive equipment for
the MedCare Program offices in 1999 versus 1998.
Net cash provided by financing activities was $3,901,879 for 1999 compared
to $3,082,230 for 1998. The Company has financed its operations primarily
through private placements of Common Shares, Preferred Shares and the exercise
of stock options as described below.
On July 8, 1997, pursuant to Rule 506, the Company sold 165 shares of Series
A Preferred Stock for $10,000 per share. The proceeds of $1,650,000 were used
for working capital and expansion of operations. The purchasers of the Series
A preferred stock also received preferred stock warrants to purchase an equal
amount of Series A preferred stock under the same terms as the original
offering. In June of 1998, the Series A preferred stock investors converted
165 preferred warrants into Series A preferred stock. Upon conversion of the
preferred warrants, the investors and the Company deposited into an escrow
account the proceeds of $1,650,000 and the related Series A preferred stock
pending final approval of the Company's registration statement. Of the
original four investors who participated in the escrow agreement, three
withdrew their proceeds of $1,400,000 and forfeited the related Series A
preferred stock and warrants. The forfeited Series A 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 Series A preferred stock and 11,344 warrants exercisable three months
after their issuance date at an exercise price of $7.346 per share. During the
year ended December 31, 1998, 140 shares of preferred stock were converted to
272,736 shares of common stock. During the year ended December 31, 1999, the
remaining 50 shares of Series A preferred stock were converted to 491,111
shares of common stock. As of December 31, 1999, there is no Series A
preferred stock outstanding.
During 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 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
15
<PAGE>
$5.00 per share pursuant to an offering made under Rule 506 promulgated under
the Securities Act 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 May 18, 1999, the Company, pursuant to Regulation D, Rule 506, issued 400
shares of Series B preferred stock and related warrants for $4,000,000
($10,000 per share). The proceeds are designated to be used for working
capital and expansion of operations. During the year ended December 31, 1999,
222 shares of Series B preferred stock were converted into 1,589,097 shares of
common stock. As of December 31, 1999, there were 178 shares of Series B
preferred stock outstanding. See Note 8 of the footnotes to the financial
statements for the key provisions of this offering.
The Company's future funding requirements will depend on numerous factors.
These factors include the Company's ability to establish and profitably
operate current and future MedCare Program locations and RxSheets.com, recruit
and train qualified management and clinical personnel, and the Company's
ability to compete against other, better capitalized corporations who offer
alternative or similar options for urinary incontinence and pharmaceutical
sampling services.
Due to the "start up" nature of the Company's businesses, the Company
expects to incur losses as it expands. The Company expects to raise additional
funds through private or public equity investment in order to expand the range
and scope of its business operations. The Company will seek access to private
or public equity but there is no assurance that such additional funds will be
available for the Company to finance its operations on acceptable terms, if at
all. See "Risk Factors" for additional details.
16
<PAGE>
Item 7. Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
MedCare Technologies, Inc.
We have audited the consolidated balance sheet of MedCare Technologies, Inc.
and Subsidiaries, (a Delaware corporation), as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 auditing standards generally
accepted in the United States. 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 MedCare
Technologies, Inc. and Subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, IL
March 2, 2000
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MedCare Technologies, Inc. and Subsidiaries
Oak Brook, Illinois 60523
We have audited the consolidated balance sheet of MedCare Technologies, Inc.
and Subsidiaries, (the Company), as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year 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 the consolidated results of their operations and
their consolidated cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
March 2, 1999
18
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.......................... $ 3,218,228 $ 2,826,086
Accounts Receivable, net of allowance of $82,000
and $45,200 at December 31, 1999 and 1998,
respectively...................................... 201,700 271,240
Prepaid Expenses................................... 162,140 0
----------- -----------
Total Current Assets............................. 3,582,068 3,097,326
Property and Equipment, net.......................... 312,198 283,630
Intangible Assets--the MedCare Program, net of
Accumulated amortization of $136 and $68............ 864 932
----------- -----------
Total Assets..................................... $ 3,895,130 $ 3,381,888
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable................................... $ 88,522 $ 260,142
Accrued Liabilities................................ 98,715 209,601
Deferred Revenue................................... 18,646 0
----------- -----------
Total Current Liabilities........................ 205,883 469,743
Stockholders' Equity
Preferred Stock (authorized 1,000,000 shares):
Convertible Series A, $.25 Par Value, Issued and
outstanding,
none at December 31, 1999 and 50 at December 31,
1998.............................................. 0 12
Convertible Series B, $.25 Par Value, Issued and
outstanding,
178 at December 31, 1999 and none at December 31,
1998,
at redemption value............................... 2,122,620 0
Common Stock--$0.001 Par Value, Authorized
100,000,000; Issued and outstanding, 9,911,313 and
7,825,105 shares at December 31, 1999 and December
31, 1998, respectively.............................. 9,911 7,825
Warrants............................................. 94,000 0
Additional Paid in Capital........................... 11,079,364 9,396,179
Accumulated Deficit.................................. (9,616,648) (6,491,871)
----------- -----------
Total Stockholders' Equity....................... 3,689,247 2,912,145
----------- -----------
Total Liabilities and Equity..................... $ 3,895,130 $ 3,381,888
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Year Year
Ended Ended
12/31/99 12/31/98
----------- -----------
<S> <C> <C>
Revenues............................................. $ 1,687,780 $ 786,586
General and Administrative Expenses.................. 4,969,962 4,689,400
----------- -----------
Operating Loss....................................... (3,282,182) (3,902,814)
Interest Income...................................... 157,405 162,109
----------- -----------
Net Loss............................................. (3,124,777) (3,740,705)
Less: Preferred Stock Deemed Dividends............... (964,987) (29,248)
----------- -----------
Net Loss Available to Common Stockholders............ $(4,089,764) $(3,769,953)
=========== ===========
Loss Per Share Attributable to Common Stockholders--
Basic and Diluted.................................. $ (0.51) $ (0.52)
Weighted Average of Common Shares Outstanding--
Basic and Diluted.................................. 8,036,245 7,302,387
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
----------------- ------------------ ---------------- Paid In Accumulated
Shares Amount Shares Amount Shares Amount Capital Warrants Deficit Total
------- ------- ------ ----------- --------- ------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1997......... 165 $ 41 0 $ 0 6,993,379 $6,993 $ 6,284,504 $ 0 $(2,721,918) $ 3,569,620
Issuance of Common
Stock for
Consulting
Agreement........ 6,000 6 (6) 0
Issuance of Common
Stock for
Warrants
Exercised........ 200,000 200 1,199,800 1,200,000
Issuance of Common
Stock for
Exercise of
Cashless
Warrants......... 8,990 9 (9) 0
Placement of
Series A
Preferred Stock
in Escrow, net of
costs............ 165 41 1,636,189 1,636,230
Withdrawal of
Funds in Escrow
and Cancellation
of Shares........ (140) (35) (1,399,965) (1,400,000)
Issuance of Common
Stock Under a
506D Offering at
$5.00 per share.. 300,000 300 1,499,700 1,500,000
Issuance of Common
Stock for
Series A
Conversions...... (140) (35) 272,736 273 (238) 0
Issuance of Common
Stock Under Stock
Option Plans..... 44,000 44 146,956 147,000
Preferred Deemed
Dividend......... 29,248 (29,248) 0
Net Loss.......... (3,740,705) (3,740,705)
------- ------- ---- ----------- --------- ------ ----------- ------- ----------- -----------
Balance, December
31, 1998......... 50 $ 12 0 $ 0 7,825,105 $7,825 $ 9,396,179 $ 0 $(6,491,871) $ 2,912,145
Issuance of Series
B Preferred
Stock--net of
issuance costs... 400 3,883,879 3,883,879
Issuance of Common
Stock for
Series A
Conversions...... (50) (12) 491,111 491 (479)
Issuance of Common
Stock for
Series B
Conversions...... (222) (2,632,246) 1,589,097 1,589 2,630,657
Issuance of Common
Stock Under Stock
Option Plans..... 6,000 6 17,994 18,000
Vesting of
Warrants Issued
With Series B
Preferred Stock.. (94,000) 94,000
Preferred Deemed
Dividends........ 964,987 (964,987)
Net Loss for the
Year Ended
December 31,
1999............. (3,124,777) (3,124,777)
------- ------- ---- ----------- --------- ------ ----------- ------- ----------- -----------
0 $ 0 178 $ 2,122,620 9,911,313 $9,911 $11,079,364 $94,000 $(9,616,648) $ 3,689,247
======= ======= ==== =========== ========= ====== =========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
12/31/99 12/31/98
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities--Net Loss....... $(3,124,777) $(3,740,705)
Adjustments to Reconcile Net Loss to Net Cash Used
by Operating Activities:
Depreciation and Amortization.................... 99,853 65,300
Excess and Obsolete Equipment Write-off.......... 89,978 0
(Increase) Decrease in Accounts Receivable....... 69,540 (203,710)
(Increase) Decrease in Prepaid Expenses.......... (162,140) 43,569
Increase (Decrease) in Accounts Payable and
Accrued Liabilities............................. (282,506) 453,946
Increase in Deferred Revenue..................... 18,646 0
----------- -----------
Total Adjustments.............................. (166,629) 359,105
Net Cash Used by Operating Activities................ (3,291,406) (3,381,600)
Cash Flow Used in Investing Activities:
Purchase of Property & Equipment................... (218,331) (315,335)
Cash Flow from Financing Activity
Proceeds from sale of common stock................. 18,000 2,847,000
Proceeds from Series A Preferred Stock Issuance,
net of issuance costs............................. 0 236,230
Proceeds from Series B Preferred Stock Issuance,
net of issuance costs............................. 3,883,879 0
Advances (Repayments) to Officers.................. 0 (1,000)
----------- -----------
Net Cash Provided by Financing Activities............ 3,901,879 3,082,230
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents..... 392,142 (614,705)
Cash and Cash Equivalents at Beginning of Period..... 2,826,086 3,440,791
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 3,218,228 $ 2,826,086
=========== ===========
Supplemental Information
Cash Paid for:
Interest......................................... 0 0
Income taxes..................................... 0 0
Non-Cash Items--Preferred Deemed Dividends........... $ 964,987 $ 29,248
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999 and 1998
Note 1--Organization and Operations
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 Agreement with each Site, which is defined
as a hospital, 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 one to three years, and may be terminated
upon the occurrence of certain conditions as set forth in the agreement. Each
Site also agrees to sign a confidentiality and noncompetition agreement as a
condition precedent to the performance by the Company of its obligations.
During the second quarter of 1999, the Company introduced a franchise
version of the MedCare Program to hospitals and other large healthcare
providers which requires each new site to pay an upfront subscription fee, the
clinician's salary and a set monthly management fee. Although the sales cycle
is longer, the franchise version allows MedCare to reach a greater number of
healthcare providers. Existing offices that were unprofitable were closed.
During the next year, 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.
In October 1999, the Company launched its new web site, RxSheets.com
(www.rxsheets.com), which is directed exclusively at the physician and
pharmaceutical marketplace. The Company believes that RxSheets.com offers
information and services that will enable physicians and pharmaceutical
companies to more efficiently and effectively manage the sampling of
pharmaceutical drugs. In addition, the Company changed the name of its wholly-
owned subsidiary from Medcareonline.com to RxSheets.com. During 2000, the
Company expects to begin generating revenue from the sale of marketing
services from RxSheets.com. As of December 31, 1999, there have been no
revenues related to RxSheets.com.
The Company expects to incur losses as it expands its businesses and will
require additional funding during 2000. The Company is currently seeking
additional equity and expects to raise funds through a private or public
equity investment in order to support existing operations and expand the range
and scope of its business. The Company will seek access to private or public
equity but there is no assurance that such additional funds will be available
for the Company on acceptable terms, if at all.
Note 2--Significant Accounting Policies
A. Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a
maturity of three months or less to be cash and cash equivalents.
B. 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 investments in money market funds and
U.S. government securities that are not insured.
23
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
C. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, MedCare Technologies Corporation and
RxSheets.com, Inc. All intercompany transactions have been eliminated in
consolidation.
D. Property and Equipment
Property and equipment is stated at cost and is depreciated under the
straight-line method over their estimated useful lives ranging from three to
seven years.
E. Revenue Recognition
During 1999, the Company offered two versions of the MedCare Program:
Program Management--Under program management, the Company agrees to provide
equipment, personnel and administrative services to the Site in connection
with the Site's establishment and operation of the Program. Each Site agrees
to pay the Company a management fee for each patient visit to the Site during
which a patient receives services under the Program. Revenues are recognized
as patients receive services.
Program Franchise--Under program franchise, the Company agrees to provide
the equipment, technology and training to start the MedCare Program as well as
ongoing support through its clinical and billing divisions. The Site agrees to
the pay the Company an initial subscription fee and a monthly consulting fee.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 45
"Accounting for Franchise Fee Revenue", the initial subscription fee is
deferred and recognized upon commencement of operations. The monthly
consulting fee is recognized when earned.
The Company did not recognize any revenues related to RxSheets.com in either
1998 or 1999.
F. 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.
G. Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 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.
See Note 10.
H. Earnings per Share
Basic loss per share has been computed based on the weighted average number
of common shares outstanding. All loss per share amounts in the financial
statements are basic loss per share, as defined by SFAS No. 128, "Earnings Per
Share." Diluted loss per share does not differ from basic loss per share for
all periods presented and does not include the effect of common share
equivalents, because the inclusion of such shares would be antidilutive. The
antidilutive common share equivalents related to outstanding warrants,
employee stock options and common stock issuable upon conversion of the
preferred stock totaled 4,335,729 and 2,510,221 at December 31, 1999 and 1998,
respectively.
24
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
I. Stock-Based Compensation
The Company accounts for stock-based compensation to employees 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.
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-only requirements of SFAS No. 123 for stock options
issued to employees. See Note 6.
J. Presentation
Certain accounts from prior years have been reclassified to conform with the
current year's presentation.
K. Pending Accounting Pronouncements
It is anticipated that current pending accounting pronouncements will not
have an adverse impact on the financial statements of the Company.
Note 3--Property and Equipment
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Office Equipment...................................... $ 11,930 $ 11,930
Computer Equipment.................................... 174,562 164,931
Medical Equipment..................................... 99,219 127,315
Computer Software..................................... 130,252 48,832
Building Improvements................................. 11,665 11,695
Furniture............................................. 3,705 1,500
--------- --------
Total............................................... 431,333 366,203
Less Accumulated Depreciation......................... (119,135) (82,573)
--------- --------
Net Book Value........................................ $ 312,198 $283,630
========= ========
</TABLE>
Depreciation charged to expense during the years ended December 31, 1999 and
1998 was $99,785 and $65,231, respectively. Also in 1999, the Company recorded
a charge of $89,978, for damaged and obsolete fixed assets related to the
unprofitable MedCare sites that were closed.
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. Amortization expense
charged to operations during the years ended December 31, 1999 and 1998, was
$68.
25
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 5--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>
Options Outstanding at December 31, 1997........... 1,190,000 $3.00-$6.50
Exercised.......................................... (44,000) 3.00- 4.50
Granted............................................ 653,000 6.50- 9.25
Forfeited.......................................... (5,000) 6.00- 9.25
--------- -----------
Options Outstanding at December 31, 1998........... 1,794,000 3.00- 9.25
Exercised.......................................... (6,000) 3.00
Granted............................................ 816,000 3.00- 6.50
Forfeited.......................................... (293,000) 4.50- 9.25
--------- -----------
Options Outstanding at December 31, 1999........... 2,311,000 $3.00-$9.25
========= ===========
</TABLE>
Had compensation expense for the Company's stock-based compensation plans
been determined under SFAS No. 123, based on the fair market value at the
grant dates, the Company's pro forma net loss and pro forma net loss per share
would have been reflected as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net Loss
As reported...................................... $4,089,764 $3,769,953
Pro forma........................................ $4,688,123 $5,145,919
Net Loss Per Share
As reported...................................... $ (0.51) $ (0.52)
Pro forma........................................ $ (0.58) $ (0.70)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumption used for those options granted in 1999 and 1998, respectively:
dividend yield of 0%, expected volatility of 65% and 58%, risk-free interest
rates of 6.5% and 5%, and expected lives of 4 and 8 years.
26
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Stock options outstanding and exercisable on December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Shares Average Remaining
Exercise Price Under Exercise Price Contractual
per Share Option per Share Life in Years
-------------- --------- -------------- -------------
<S> <C> <C> <C>
Outstanding:
$3.00 to $4.99.................... 1,141,000 $3.43 3.9
$5.00 to $6.99.................... 930,000 $6.45 5.3
$6.99 to $9.25.................... 240,000 $7.66 3.3
---------
2,311,000
=========
Exercisable:
$3.00 to $4.99.................... 701,000 $3.71 --
$5.00 to $6.99.................... 736,250 $6.43 --
$6.99 to $9.25.................... 165,250 $7.41 --
---------
1,602,500
=========
</TABLE>
Note 6--Stock Warrants
In July 1997, the Company issued 300,000 shares of common stock at $6.00
each. The issuance also included warrants to purchase an additional 300,000
shares of common stock 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. As of December 31, 1998 and 1999, there were
100,000 warrants outstanding related to this issuance.
In July 1997, the Company, pursuant to Regulation D, Rule 506, issued Series
A Preferred Stock (see Note 7) and related warrants. This offering granted
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, exercisable at $7.346 per share.
As of December 31, 1998 and 1999, there were 208,251 warrants outstanding
related to this issuance.
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 warrants exercisable at $5.00
until October 14, 2004. As of December 31, 1998 and 1999, there were 300,000
warrants outstanding related to this issuance.
In May 1999, the Company, pursuant to Regulation D, Rule 506, issued Series
B Preferred Stock and related warrants to purchase shares of common stock.
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 (see Note 9). The vesting dates of the warrants are (i)
September 15, 1999 (ii) March 13, 2000 and (iii) September 9, 2000. 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. As of December 31, 1999,
there were 80,000 warrants that had vested at an exercise price of $3.6525 per
share. The value of these warrants totaled $94,000 and resulted in the
recording of additional preferred deemed dividends for the Series B preferred
stock.
27
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 7--Preferred Stock--Series A
On June 20, 1997, the Company began a Regulation D offering under Rule 506.
This offering was for the issuance of Series A Preferred Stock of the Company
and was sold for $10,000 per share. The offering closed on July 8, 1997, with
$1,650,000 placed. The preferred stock was accompanied by warrants as
described in Note 6.
The Series A Preferred Shareholder was entitled to convert, subject to the
Company's right of redemption, if the conversion price is less than the $7.346
at the time of receipt of a notice of conversion. The conversion price was
equal to the lower of $7.346 or a discount, ranging from 10% to 20% over a 12
month 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 and 25 shares of preferred stock
were issued to an investor at $10,000 per share in accordance with the terms
of the original offering.
During the year ended December 31, 1999, the remaining 50 shares of Series A
preferred stock were converted to 491,111 shares of common stock. As of
December 31, 1999, there is no Series A preferred stock outstanding.
Note 8--Preferred Stock--Series B
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 key provisions regarding the issuance and conversion of Series B
Preferred are as follows:
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.
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 $7.80 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 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. 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 above
formula may or may not result in the common stock being issued at a discount
to the current market price. As of December 31, 1999, all of the outstanding
Series B Preferred may be converted into common stock subject to certain
ownership limitations detailed in the agreements.
28
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Adjustment of Conversion Price
The Conversion Price of the Series B Preferred is subject to customary anti-
dilution provisions which take effect upon such events as the issuance by the
Company of Common Stock, options or other convertible securities, the
subdivision or combination of outstanding shares of Common Stock of the
Company, the recapitalization, merger or other reorganization of the Company,
or any other similar events. However, no such adjustment will be made unless
the adjustment would result in a cumulative increase or decrease of at least
1% in the Conversion Price.
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.
Redemption at the Option of Investors
Each outstanding share of the Series B Preferred is redeemable, at the
option of the Investors, in the event of any of the following transactions
(each a "Major Transaction"): (i) the consolidation, merger or other business
combination 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, provided that such Major Transaction shall have occurred or have
been the subject of a public announcement during the period beginning on the
date of issuance and ending on the later of (a) the first anniversary of the
date of issuance and (b) the date which is 270 days after the effective date
of the Registration Statement relating to the applicable shares. In the event
of a Major Transaction, the redemption price per share shall be the greater of
(i) 115% of the Liquidation Amount (as defined below) and (ii) the product of
(a) the applicable Conversion Rate and (b) the closing bid price on the date
of the public announcement of the event. The "Liquidation Amount" is equal to
$10,000 plus any dividends that have accrued but have not been paid out, plus
any default interest (equal to 15% per annum) for dividends which the Company
has elected to pay in cash but has failed to pay on a timely basis.
In addition, in the event of the occurrence of certain events (the
"Triggering Events"), including the failure of the Registration Statement to
be declared effective within 180 days of the date of issuance, the delisting
of the Common Stock for a period of five consecutive days and the Company's
breach of any representations, warranties or covenants in the Documents, the
Investors have the right to require the Company to redeem all or a portion of
such Investor's Series B Preferred. The redemption price per share is the same
as the redemption price per share in the event of a Major Transaction.
Investor Call Option
For every (i) unconverted Series B Preferred share held by the investors on
May 18, 2000 and (ii) preferred share converted at the Fixed Conversion Price
prior to May 18, 2000, 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.
Accounting Treatment
The Company has accounted for these securities as redeemable securities and
accreted to the redemption amount of 115% of the Liquidation Amount as of the
balance sheet date. The accretion reduced income
29
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
applicable to common shareholders and is disclosed separately as preferred
deemed dividends on the face of the income statement. The Company has
classified the Series B Preferred Stock as stockholders equity due to the
receipt of a contingent equity funding commitment. The equity funding
commitment was received from a venture capital fund controlled by the chairman
of the Company and is only valid upon the occurrence of the delisting of the
Common Stock or a Major Transaction to fund a redemption by the Series B
Holders. The commitment is only valid while there are any shares of Series B
Preferred Stock outstanding.
Note 9--Income Taxes
There is no current or deferred tax expense for the years ended December 31,
1999 and 1998, due to the Company's loss position. The Company has fully
reserved for any benefits of these losses.
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 1999 1998
--------------- ----------- -----------
<S> <C> <C>
NOL Carryforwards................................ $ 3,195,904 $ 1,767,643
Organization Costs............................... 116,535 195,563
Accrued Expenses................................. 42,560 93,163
----------- -----------
Total Deferred Tax Assets...................... $ 3,354,999 $ 2,056,369
Deferred Tax Liabilities--Depreciation........... (21,999) (3,519)
----------- -----------
Total.......................................... $ 3,333,000 $ 2,052,850
Valuation Allowance.............................. (3,333,000) (2,052,850)
----------- -----------
Net Deferred Tax Assets.......................... $ 0 $ 0
=========== ===========
</TABLE>
A reconciliation between the statutory federal income tax rate (34%) and the
effective rate of income tax expense for each of the years during the period
ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Statutory Federal Income Tax Rate.......................... (34.0)% (34.0)%
Other...................................................... 0.3 % 0.1 %
Increase in Valuation Allowance............................ 33.7 % 33.9 %
------ ------
Effective Income Tax Rate.................................. 0.0 % 0.0 %
====== ======
</TABLE>
The Company has available net operating loss carryforwards of $9,131,154 for
tax purposes to offset future taxable income which begin to expire in 2002.
Note 10--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. Rental expense charged to operations during the years ended December
31, 1999 and 1998 was approximately $92,000 and $90,000, respectively.
30
<PAGE>
MEDCARE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
2000............................................................ $69,080
2001............................................................ $67,614
2002............................................................ $67,101
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
until January 1, 1999 and 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 a monthly
automobile allowance of $1,000. Under the stock option agreement, the
President and CEO was granted an option to acquire 500,000 shares at an
exercise price per share of $6.50, and an option to acquire 100,000 shares at
an exercise price per share of $6.00.
Note 11--Segment Information
During 1998, the Company engaged in only one type of business, the offering
of the MedCare Program, as described above. In October 1999, the Company
launched its new web site, RxSheets.com (www.rxsheets.com), which is directed
exclusively at the physician and pharmaceutical marketplace. RxSheets.com
offers a wide array of information and services that will enable physicians to
more efficiently and effectively manage the sampling of pharmaceutical drugs
online.
During 1999, the Company was managed as two operating segments, the MedCare
Program and RxSheets.com. During 1998, the Company had only one operating
segment, the MedCare Program. As of December 31, 1999, RxSheets.com had not
generated any revenues and management did not allocate any corporate, selling,
administrative or overhead expenses to RxSheets.com. All corporate, selling,
administrative and overhead expenses are included in the MedCare Program in
both 1998 and 1999.
<TABLE>
<CAPTION>
MedCare
Program RxSheets.com Total
----------- ------------ -----------
<S> <C> <C> <C>
1999
Revenues......................... $ 1,687,780 $ 0 $ 1,687,780
Segment Loss..................... (2,977,068) (305,114) (3,282,182)
Total assets..................... 3,659,594 235,536 3,895,130
Capital expenditures............. 124,500 93,831 218,331
Equipment write-off.............. 89,978 0 89,978
Depreciation and amortization.... 90,058 9,795 99,853
1998
Revenues......................... $ 786,586 $ 0 $ 786,586
Segment Loss..................... (3,902,814) 0 (3,902,814)
Total assets..................... 3,381,888 0 3,381,888
Capital expenditures............. 315,335 0 315,335
Depreciation and amortization.... 65,300 0 65,300
</TABLE>
31
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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 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.
PART III
Item 9. Directors and Executive Officers of the Registrant
The information required by this Item with respect to directors and Section
16 compliance is included in the Company's definitive proxy statement for its
2000 Annual Meeting of Shareholders ("Proxy Statement") and is hereby
incorporated herein by reference.
Item 10. Executive Compensation
The information required by this Item is included in the Company's Proxy
Statement and is hereby incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included in the Company's Proxy
Statement and is hereby incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is included in the Company's Proxy
Statement and is hereby incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
The exhibits listed in the accompanying index to exhibits are filed as part
of this Annual Report on Form 10KSB.
No reports on Form 8-K were filed during the Company's fourth fiscal
quarter.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 27th day
of March, 2000.
MedCare Technologies, Inc.
/s/ Jeff Aronin
By __________________________________
Jeff Aronin
CEO and President
/s/ Alan Jagiello
By __________________________________
Alan Jagiello
CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeff Aronin CEO and President March 27, 2000
______________________________________
Jeff Aronin
/s/ Alan Jagiello CFO March 27, 2000
______________________________________
Alan Jagiello
</TABLE>
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
3. Articles of Incorporation and Bylaws
3a. Articles of Incorporation and Amendments **
3b. Bylaws **
4. Series B Preferred Stock Agreements*
4a. Certificate of Designation*
4b. Securities Purchase Agreement*
4c. Registration Rights Agreement*
4d. Form of Warrant*
4e. Escrow Agreement*
5. Opinion re Legality
5a. Opinion of Counsel regarding Registration****
10. Material Contracts
10a. Certificate of Designation*
10b. Subscription Agreement*
10c. Nine-Month Warrant*
10d. Twelve-Month Warrant*
10e. Fifteen-Month Warrant*
10f. Preferred Warrants*
10g. Registration Rights*
10h. Instructions to Transfer Agent*
10i. Agreement and Amendment*
10j. Agreement and Amendment for Queensway Financial Holdings Limited*
10k. Three-Month Warrant*
10l. Swartz Warrant*
10m. Program Management Agreement with Amendment*
10n. Employment and Stock Agreement, dated as of December 9, 1998
between Medcare Technologies, Inc. and Jeffrey S. Aronin***
10o. Sublease dated as of December 31, 1997 between Medcare
Technologies, Inc. and Delta Dental Association***
10p. Stock Option Plan 1995*
10q. Stock Option Plan 1996*
10r. Stock Option Plan 1997--$4.50 options*
10s. Stock Option Plan 1997--$6.50 options*
10t. Stock Option Plan 1998***
10u. Stock Option Plan 1999***
10v. Stock Option Plan 2000*****
10w. Hartford Capital Commitment Letter
16. Letter from the Former Accountant*
23. Consent of Experts and Counsel
23a. Consent of Independent Auditor
23b. Consent of Independent Auditor
27. Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference to Form SB-2, File number 333-41611
** Incorporated by reference to Form 10-KSB for the year ended December 31,
1997
*** Incorporated by reference to Form 10-KSB for the year ended December 31,
1998
**** Incorporated by reference to Form S-3, File number 333-90729
***** Incorporated by reference to 1999 Proxy Statement
<PAGE>
Hartford Capital Corporation Exhibit 10v.
March 24, 2000
Board of Directors
Medcare Technologies, Inc.
1515 W. 22nd Street
Suite 1210
Oak Brook, IL 60523
Dear Sirs:
This letter is to confirm our understanding of the commitment of funds by
Hartford Capital ("Hartford Capital") to Medcare Technologies, Inc. (the
"Company") if certain events occur. Hartford Capital agrees to purchase common
stock, par value $.001, of the Company from the Company at the then current
stock market price upon the request of the Board of Directors of the Company
following the occurrence of any of the following circumstances, and in the
following amounts:
- In the event of occurrence of an event occurring under Section 3(d)(iii) of
the Series B Preferred Stock Certificate of Designation {the delisting
call} which results in a demand for redemption of the Company's Series B
Preferred Stock the Company may require Hartford Capital purchase enough
common shares to fund any such redemption elected by Series B Preferred
stockholders.
- In the event of certain transactions (each a "Major Transaction"): (i) the
consolidation, merger or other business combination 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,
provided that such Major Transaction shall have occurred or have been the
subject of a public announcement during the period beginning on May 18,
1999 and ending May 18, 2000, the Company may require Hartford Capital to
purchase enough common shares from the Company to fund any such redemption
of the Company's Series B Preferred elected by Series B Preferred
stockholders.
The above commitment is only valid while there are any shares of Series B
Preferred Stock outstanding. This commitment terminates upon the conversion into
common stock of all the outstanding Series B Preferred Stock and is contingent
upon the approval of the Company's Board of Directors.
Sincerely,
HARTFORD CAPITAL CORPORATION
By: /s/ Harmel S. Rayat
------------------------
Harmel S. Rayat
<PAGE>
Exhibit 23a.
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed
Registration Statement File Nos. 333-90729, 333-81219, 333-41611 and 333-95969.
Arthur Andersen LLP
Chicago, IL
March 27, 2000
<PAGE>
Exhibit 23b.
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed
Registration Statement File Nos. 333-90729, 333-81219, 333-41611 and 333-95969.
Clancy and Co., P.L.L.C.
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,218,228
<SECURITIES> 0
<RECEIVABLES> 201,700
<ALLOWANCES> 82,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,582,068
<PP&E> 312,198
<DEPRECIATION> 99,785
<TOTAL-ASSETS> 3,895,130
<CURRENT-LIABILITIES> 205,883
<BONDS> 0
0
2,122,620
<COMMON> 9,911
<OTHER-SE> 1,556,718
<TOTAL-LIABILITY-AND-EQUITY> 3,895,130
<SALES> 1,687,780
<TOTAL-REVENUES> 1,687,780
<CGS> 0
<TOTAL-COSTS> 4,969,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (157,405)
<INCOME-PRETAX> (3,124,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,124,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,089,764)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
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