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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to __________
Commission file number 0-27380
ECHOCATH, INC.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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New Jersey 22-3273101
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. Box 7224, Princeton, NJ 08543
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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ISSUER'S TELEPHONE NUMBER: (609) 987-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
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(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON
WHICH REGISTERED)
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Class A Common Stock, no par value
Redeemable Class A Warrants
Redeemable Class B Warrants
Units {each consisting of one share of Class A
Common Stock, one Redeemable Class A Warrant
and One Redeemable Class B Warrant}
(TITLE OF CLASS)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year (year ended August
31, 1996) were $108,025.
The aggregate market value on December 12, 1996 of the publicly trading
voting stock held by non-affiliates (consisting of Class A Common Stock, no par
value) computed using the last sales price on that date was approximately
$6,842,500. As of December 12, 1996, 1,610,000 shares of Class A Common Stock,
no par value, and 1,500,000 shares of Class B Common Stock, no par value, were
outstanding.
Transitional Small Business Disclosure Format (check one) YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE.
None
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INTRODUCTORY NOTE
Echocath, Inc., a New Jersey Corporation (the "Company") is a development
stage Company engaged in developing, manufacturing and marketing medical devices
which enhance and expand the use of ultrasound technology for medical
applications and procedures.
On January 17, 1996, the Company consummated its initial public offering
(the "Offering"), pursuant to which it sold 1,610,000 Units (including
over-allotments) for gross proceeds of $8,050,000. Each Unit consists of one
share of the Company's Class A Common Stock, no par value (the "Class A Common
Stock"), one Redeemable Class A Warrant (the "Class A Warrants") and one
Redeemable Class B Warrant (the "Class B Warrants," together with the Class A
Warrants, the "Warrants").
Certain statements in this Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding future cash requirements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: delays in product development;
problems or delays with clinical trials; failure to receive or delays in
receiving regulatory approval; lack of enforceability of patents and proprietary
rights; lack of reimbursement; general economic and business conditions;
industry capacity; industry trends; demographic changes; competition; material
costs and availability; the loss of any significant customers; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure comply with,
government regulations; and other factors referenced in this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is a development stage company engaged in developing,
manufacturing and marketing medical devices which enhance and expand the use of
ultrasound technology for medical applications and procedures. The Company's
technologies enable ultrasound imaging to, among other things, identify devices
during interventional procedures such as needle biopsies, catheterizations and
intravascular imaging. Such technologies include a proprietary visualization
system ("ColorMark") which highlights metallic objects, such as needles and
other interventional instruments, in color to permit them to be easily seen on
existing ultrasound imaging screens, and a proprietary catheter positioning
system ("EchoMark") which electronically marks and displays the position of
non-metallic objects, such as catheters, within the body on existing ultrasound
imaging screens.
The Company believes that products incorporating its technologies can
improve and expand the clinical uses of ultrasound imaging for both diagnostic
and therapeutic applications and enable clinicians to perform a wide variety of
procedures less invasively, more safely, more cost-effectively and with greater
precision than is currently possible with conventional x-ray, computed
tomography ("CT"), magnetic resonance imaging ("MRI") or optical imaging
equipment. In some cases, the Company believes that its products may make it
possible to perform on an outpatient basis procedures normally confined to the
hospital, thus improving patient comfort and reducing costs.
The Company is also engaged in ongoing research and development of proposed
products utilizing a proprietary transcutaneous, epivascular, and catheter-based
sensor and electronics system ("EchoFlow") which, if successfully developed,
would provide data on the blood volume flow through internal vessels, and a
proprietary imaging system ("EchoEye") which, if successfully developed, would
allow clinicians to view tissues and organs inside the body in three-dimensional
real-time and provide forward-looking intravascular images and guidance for
minimally invasive ultrasound-guided surgical procedures. The continued
development of these products, the commercialization of any products
incorporating these technologies, as well as any other proposed products
utilizing the Company's technologies, will depend on the Company's ability to
obtain additional financing through joint ventures, licensing agreements or
other collaborative arrangements or otherwise.
The Company's operations have not generated significant revenues to date.
The Company has incurred operating losses in each of its fiscal years, and
expects that operating losses will continue in the foreseeable future. The
Report of the Company's independent auditors contains an explanatory paragraph
as to the Company's ability to continue as a going concern. No assurance can be
given that the Company will successfully commercialize any of its products or
achieve profitable operations.
ULTRASOUND IMAGING BACKGROUND
Imaging systems are necessary because many medical and surgical procedures
cannot be performed without detailed information about conditions in the
interior of the body. Physicians typically scan the body using ultrasound,
optical, X-ray, CT or MRI equipment. In addition, ultrasound and optical imaging
devices may be mounted onto catheters and inserted directly into arteries, veins
or other parts of the body. These imaging catheters may also be used in the
performance of certain therapeutic procedures, such as angioplasty, various
obstetric and gynecological procedures, and minimally invasive surgical
procedures.
Each of the currently available imaging technologies, X-ray, MRI, CT, and
optical technologies have significant limitations. Each of these technologies
are expensive and time consuming to perform. X-ray imaging cannot provide views
of the structure of soft tissue or cross-sectional views of blood vessels or
other body lumens. X-ray procedures are expensive and can expose both patients
and clinicians to potentially dangerous radiation. Catheter-based optical
systems are safer and can provide interior views of body structures, but can
only view the surface of the body tissue. Because of these limitations,
clinicians are increasingly turning to ultrasound imaging. The Company believes
that ultrasound's growth results largely from the fact that ultrasound devices
are cost-effective and allow the clinician to see below the surface of body
tissue.
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Currently available external ultrasound imaging devices, however, also have
certain limitations. These devices are often unable to record the location of a
catheter or other medical device inserted by the clinician into the body.
Because the precise placement of such devices is often essential for therapeutic
use, this difficulty can severely impair the potential usefulness of ultrasound
for guiding interventional procedures.
THE COMPANY'S PRODUCTS AND TECHNOLOGY
The following is a description of the Company's products and proposed
products utilizing the Company's proprietary technologies.
COLORMARK The Company has developed, and is currently marketing, a product
(the "ColorMark Clip") utilizing the ColorMark technology. The ColorMark Clip
consists of a disposable clip and a non-disposable drive box. The clip is
mounted on the needle or other interventional device and the drive box produces
a voltage which is transmitted to a piezoceramic slab mounted in the clip. The
voltage generates vibrations which in turn allows the device to appear in color
on the ultrasound imaging screen which permits clinicians to more effectively
guide needles during therapeutic and diagnostic procedures. The ColorMark Clip
is compatible with a wide variety of needles and guide wires and can operate
with most currently available color ultrasound systems. The non-disposable drive
box has a current selling price of $5,000 and the disposable clips sell for
approximately $50 each. The Company has received market clearance from the
United States Food and Drug Administration ("FDA") for the ColorMark Clip for
needle placements. Management believes that with the ColorMark Clip, needle
biopsies and vascular access procedures are more accurate and faster for
clinicians to administer. The ColorMark Clip has been introduced at major
radiology-oriented medical conventions.
The Company may develop and commercialize additional products utilizing the
ColorMark technology to address specialized procedures such as laparoscopic
instrument guidance. Such products are expected to be subject to regulatory
approval by the FDA and comparable foreign agencies or state health departments
prior to marketing and are expected to require additional financing to
commercialize.
ECHOMARK The Company has developed a catheter utilizing the EchoMark
technology to diagnose fallopian tube blockage (the "EchoMark Salpingography
Catheter"). The Salpingography Catheter consists of a disposable catheter to
which is attached a proprietary sensor connected by wire to a reusable catheter
system interface (the "EchoMark CSI"). The EchoMark CSI, for which the Company
received FDA market clearance in 1992, provides the interface between the
Company's EchoMark products and most commercially available ultrasound imaging
systems. On the EchoMark Salpingography Catheter, the sensor captures ultrasound
signals and relays them back to the EchoMark CSI, which in turn displays the
position of the sensor on the ultrasound imaging screen. The Company believes
that the EchoMark Salpingography Catheter may expand the use of ultrasound for
diagnosing and treating infertility problems in women because of the desire to
avoid x-rays in such patients and the desire to reduce procedure time. The
Company has completed commercial prototypes of the EchoMark Salpingography
Catheter and has received FDA clearance to market the EchoMark Salpingography
Catheter. The Company is currently not selling the EchoMark Salpingography
Catheter. It will continue its selling efforts once it receives FDA clearance on
certain improvements to such catheter. The Company has also developed the
EchoMark EP Catheter which consists of a conventional electro-physiology
catheter augmented by a piezoplastic covered brass sensor connected by wire to
the EchoMark CSI. The sensor captures ultrasound signals and relays them back to
the EchoMark CSI, which in turn displays the position of the sensor in the image
of the cardiac structures on the ultrasound imaging screen. The Company believes
that the EchoMark EP Catheter will increase the speed and ease the diagnosis of
arrhythmias in the heart. The Company recently received FDA clearance to market
the EchoMark EP Catheter to diagnose defective conductive pathways in the heart.
Pursuant to an agreement effective as of September 21, 1992 (the "HRT
Agreement") between the Company and Heart Rhythm Technologies, Inc. ("HRT"), HRT
had the exclusive right to market and sell the EchoMark EP Catheter. HRT did not
market or sell any products incorporating the Company's technology and,
therefore, in January 1996, the Company repurchased the rights granted under the
HRT Agreement.
Additional products which the Company has developed utilizing the EchoMark
technology are an EchoMark peripheral angioplasty catheter ("EchoMark PTA
Catheter") and EchoMark guidewire (the "EchoMark Guidewire"). The Company
received FDA marketing clearance under a 510(k) pre-market notification for the
EchoMark PTA Catheter in 1992 and the EchoMark Guidewire in 1993. The Company
previously experienced resistance from the medical community when it attempted
to introduce the EchoMark PTA Catheter in 1993 because of the conflict over the
administration of such procedures between
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different medical specialties. The Company is currently determining, and
exploring selling channels for, the EchoMark PTA Catheter for performing
peripheral angioplasty under ultrasound guidance.
Currently, the EchoMark CSI may be used with Acuson, Advanced Technology
Laboratories, Inc. ("ATL"), Hewlett-Packard Inc., Siemens Medical Systems Inc.,
Toshiba and other ultrasound systems. The non-disposable EchoMark CSI is
currently being test marketed at a selling price of $15,000 and the disposable
catheters used in the EchoMark disposable products are being test marketed in a
range of unit prices from $125 to $500.
ECHOFLOW The Company is also engaged in ongoing research and development of
the EchoFlow technology and products incorporating the EchoFlow technology
which, if successfully developed, would provide data on the blood volume flow
through internal vessels. Small sensors that can be mounted onto or inside blood
vessels or within the walls of a graft, and that provide crucial data on the
flow of blood, have wide applicability, including for feedback control of
pacemakers and implantable defibrillators. EchoFlow sensors-will be disposable
products, and will connect to an electronics module. The Company has
successfully performed bench tests on EchoFlow sensors, has commenced
preclinical testing and expects to continue preclinical testing during 1997. The
Company cannot predict, when, if ever, such products will be successfully
developed or available for commercial sale.
ECHOEYE The Company is engaged in the research and development of products
incorporating the EchoEye technology which, if successfully developed, would
allow clinicians to view tissues and organs inside the body in three-dimensional
real-time and provide forward looking intravascular images and guidance for
minimally invasive ultrasound guided procedures. One EchoEye product currently
being developed will consist of a small disposable catheter with a miniature
ultrasound transducer mounted at its tip. See "Collaborative Agreements." The
Company has successfully performed preclinical testing on the EchoEye technology
and expects to continue preclinical testing of EchoEye products in 1997.
Any further developments of the Company's proposed products, as well as
other products the Company wishes to pursue, will depend on the Company's
ability to obtain substantial additional financing through joint ventures,
licensing agreements or other collaborative arrangements or otherwise. In
addition, such products are expected to be subject to regulatory approval by the
FDA and comparable foreign agencies or state health departments prior to
marketing.
MARKETS AND APPLICATIONS
Set forth below is a description of the markets and applications for the
Company's products and proposed products.
COLORMARK The Company has commenced establishing clinical reference sites
to begin direct marketing of the ColorMark Clip for needle biopsies to
radiologists and breast surgeons and for vascular access procedures to
interventional radiologists and invasive cardiologists. The Company has had
minimal sales of the ColorMark Clip, however, since the Offering it has begun to
develop a sales and marketing organization to commercialize this product.
Needle Biopsy Biopsies, in which small pieces of tissue are excised and
examined, are performed in order to diagnose the cause of abnormal masses of
tissue. Biopsies are sometimes performed after the entire tissue mass has been
removed surgically, but biopsies can often be performed before surgery using
biopsy needles. To successfully perform a needle biopsy, often an imaging device
is needed to guide the biopsy needle. Biopsy procedures include fine-needle
aspiration biopsy, core biopsy, and surgical biopsy. Based upon Management's
analysis of American Cancer Society statistics, physician interviews and
published clinical reports, the Company believes that a significant portion of
these procedures could require guidance using either ultrasound imaging, CT
scanning, X-ray imaging or MRI. Management believes ultrasound is generally
considered by clinicians to be the preferred guidance imaging method, as it is
less costly and less time-consuming than other alternatives. However, use of
this method is currently hampered by the fact that the biopsy needle is often
difficult to see on the imaging screen. The needle may disappear altogether if
it is not at a favorable reflecting angle for the ultrasound transducer.
Clinicians must master various techniques for getting the needle to appear on
the screen by adjusting the alignment of the needle or "jiggling" it. Textured
needles provide only a limited solution to this problem, although they are less
expensive than the ColorMark clip. As a result, only experienced clinicians
generally attempt ultrasound guided biopsy. The ColorMark Clip is designed to
eliminate this needle invisibility problem in biopsy procedures. The Company
believes that the ColorMark Clip could enable needle biopsies to be performed
faster, easier and more accurately. The FDA has recently cleared for marketing
the use of an ultrasound system manufactured by ATL for diagnosing cancerous
lesions in the breast which are larger than 1cm.
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The use of such ultrasound system may reduce the number of surgical biopsies
performed each year, however, the Company believes, that such FDA approval may
lead to an increase in acceptance and use of ultrasound for detecting breast
cancer.
Vascular Access Procedures A vascular access procedure, a necessary step in
performing any radiology or cardiology catheterization procedure, involves the
insertion of a catheter into the femoral artery, guided by feel. Poor placement
of the needle that is used to puncture the artery can lead to bleeding
complications at the puncture site, particularly where a large-bore catheter is
used or in situations where the patient is obese, hypertensive or using an
anticoagulant agent. Ultrasound imaging potentially can provide guidance for the
exact placement of the puncturing needle quickly and easily, but until now this
potential was limited by the lack of an effective method for viewing the needle.
Physicians suggest that the ColorMark Clip is most likely to be used in
catheterizations where anticoagulants are involved, such as angioplasty and
stenting procedures. Additionally, procedures involving large bore catheters
(such as placement of intra-aortic balloon pumps) also represent potential
opportunities for the ColorMark Clip. Management believes that the ColorMark
Clip is well suited for these patients and that the ColorMark Clip makes this
procedure easier to perform accurately, and allows clinicians to delegate the
procedure to less skilled persons, saving time, and increasing laboratory
volume. A disadvantage to using the ColorMark Clip is the requirement for its
use in conjunction with a colorflow ultrasound imaging system. While these
systems are common in hospital radiology departments, they are currently less
common in offices and surgical suites where biopsies and vascular access
procedures may be performed.
ECHOMARK
Infertility Therapy Infertility therapy generally includes
hysterosalpingography ("HSG") procedures which image the uterus and fallopian
tubes and selective salpingography ("SSG") procedures which image each fallopian
tube individually. Both of these procedures involve X-rays and the injection of
iodinated contrast media into the fallopian tubes and uterine cavity in order to
view the condition of the cavity and determine whether lesions or other
obstructions exist. These examinations are expensive, highly invasive and
uncomfortable for patients, and they must be performed in the hospital. The
procedures involve injection of potentially toxic contrast dyes into the body
and the related risks from exposure to radiation.
Ultrasound technology potentially can address many of these concerns by
providing a less expensive outpatient procedure that eliminates the use of
radiation and removes the risk of irritation caused by the contrast media.
However, ultrasound also has limitations since it is often difficult or
impossible to identify the position of catheters and instruments used during the
procedure. The EchoMark Salpingography Catheter is designed to make the position
of the catheter or other instrument easier to determine, independent of the
angle of the catheter. The Company believes that the EchoMark Salpingography
Catheter should expand the usefulness of ultrasound for diagnosing and treating
infertility problems, reduce procedure time, eliminate the use of radiation to
provide guidance, and also make possible the transfer of the procedure to a less
expensive and more comfortable outpatient setting. However, the EchoMark
procedure will require the medical community to change the traditional methods
of diagnosis and treatment. The Company intends to market and sell the EchoMark
Salpingography Catheter for the diagnosis and treatment of infertility to OB/GYN
doctors. To date no EchoMark Salpingography Catheters have been sold.
Cardiac Electrophysiology The EchoMark EP Catheter was designed for the
diagnosis and treatment of cardiac arrhythmias. The Company believes that the
EchoMark EP Catheter allows more rapid placement of EP catheters than present
X-ray techniques. As such, this product represents a potentially significant
improvement in this procedure.
Peripheral Angioplasty Peripheral angioplasty procedures are currently
performed with X-ray contrast media and in X-ray suites. The Company believes
that ultrasound-guidance using EchoMark PTA Catheter will save significant costs
with as good or superior clinical outcomes. Market resistance from traditional
practitioners was encountered in 1993 when the EchoMark PTA Catheter was
introduced into the United States market. Management believes that increased
cost-consciousness coupled with increased marketing by the Company could lead to
increased acceptance of the EchoMark PTA Catheter in the United States despite
the need to change the imaging procedure from X-ray to ultrasound.
ECHOFLOW
Products utilizing the EchoFlow technology, will, if successfully
developed, provide data on the blood flow in vessels. Early applications are
expected to include cardiac output, displacing an indirect and noncontinuous
method, thermal dilution, with a continuous direct measurement. According to
published reports there are over 1 million thermal-dilution catheters used
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each year in the United States. Management believes that the EchoFlow products
will, if successfully developed, provide accurate beat-to-beat measurement of
cardiac flow, a currently desired and unmet need. Additional potential uses of
EchoFlow include monitoring of bypass grafts (artificial or natural), stent
placement, and measurement of hemodynamic status.
In April 1996, the Company received a $98,000 Phase I Small Business
Innovation Research ("SBIR") grant from the National Institute of Health to
demonstrate the feasibility of EchoFlow technology.
The Company anticipates that, subject to completing its research and
development, obtaining the necessary FDA and other regulatory approvals and
developing a commercial prototype, it will market and sell EchoFlow products to
cardiologists and surgeons for applications in cardiac output, post-operative
cardiac bypass graft monitoring, stents, and potentially for intensive care
monitoring of circulatory status. The commercialization of such products will
depend on the Company's ability to obtain additional financing through joint
ventures, licensing agreements or other collaborative arrangements or otherwise.
ECHOEYE
Intravascular Imaging Intravascular imaging catheters are used to inspect
the condition of blood vessels, allowing clinicians to identify the extent and
locations of vascular lesions and identify the most effective treatment. The two
leading types of intravascular imaging catheters are optical angioscopes and
ultrasound catheters. Currently available intravascular ultrasound catheters
operate by scanning around the catheter's axis as it passes through the imaging
site. The usefulness of optical systems is limited because they cannot see below
the surface of lesions, thus failing to capture important information about
their composition. Current ultrasound systems, on the other hand, are unable to
scan the area ahead of the catheter, and cannot view obstructions that totally
block the artery or otherwise prevent the catheter from passing through. EchoEye
products will combine features of optical angioscopes and existing ultrasound
imaging catheters and will be designed to provide detailed tissue
characterization like any other intravascular ultrasound catheter. Like the
angioscope, EchoEye products will be designed to scan forward, ahead of the
catheter tip. This forward-looking capability also makes possible
ultrasound-guided minimally invasive surgical procedures, giving the surgeon
more information than is available using traditional endoscopes.
Intravascular imaging catheters are primarily used by cardiologists and
radiologists during cardiac and peripheral angioplasty procedures where standard
balloon dilation yields poor results or where alternative recanalization
procedures (using stents, lasers or atherectomy devices) are being considered.
Percutaneous insertion of a vascular stent and or graft is a developing
procedure in which it is imperative that the graft or stent device be guided and
placed with a degree of accuracy beyond the capability of current technology. In
addition, cardiac electrophysiologists could potentially use EchoEye products to
guide therapeutic cardiac ablation procedures.
Minimally Invasive Surgery Minimally invasive (laparoscopic) surgery is
designed to reduce surgical complications and recovery time by reducing the size
of incisions used to access the part of the body being treated. Small incisions
are made and trocars (short tubes through which various instruments and
endoscopes may be introduced) are inserted. The instruments are guided using an
optical endoscope (laparoscope) introduced through another trocar. Laparoscopic
surgery is currently hampered by the fact that the procedure can only be guided
visually. There is no opportunity for tactile feedback to provide information
about details below the tissue surface. Ultrasound imaging offers surgeons the
opportunity to identify these subsurface conditions, expanding the usefulness of
the minimally invasive surgical technique. EchoEye products may be used to
improve laparoscopic surgical procedures. In some procedures, ultrasound imaging
catheters may be used to identify the location of major blood vessels prior to
initiating treatment, or to scan the operating field for cancer lesions or other
small diseased areas at the end of a procedure. In other procedures, ultrasound
visualization is necessary to guide micro-invasive surgical therapy in a complex
anatomical environment.
Other Potential Markets The Company has identified a number of clinical
applications, for which the Company's technologies may be used but which do not
as yet represent markets on which the Company has chosen to concentrate. These
potential applications include central venous pressure catheters, chorionic
villi sampling/amniocentesis, intrauterine ultrasound imaging, percutaneous
drainage, percutaneous transluminal angioplasty, percutaneous umbilical blood
sampling, temporary pacing wires and thermal dilution catheters. The Company may
seek to address these markets through strategic alliances with other entities.
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RESEARCH AND DEVELOPMENT
The Company has incurred an aggregate of approximately $6,432,000
(excluding the value of the technology contributed at inception by Ultramed,
Inc., a privately-held corporation ("Ultramed")) of research and development
expenses from its inception through August 31, 1996, including approximately
$711,000 during the fiscal year ended August 31, 1995 and approximately
$1,052,000 during fiscal year ended August 31, 1996. Substantially all of the
Company's research and development expenditures to date have related to the
development of the ColorMark, EchoMark, EchoEye, and EchoFlow technologies and
the products utilizing such technologies and development of manufacturing
techniques for such products.
In addition, $575,000 was paid to reaquire the technology rights to the
electrophysiology market.
The Company conducts all of its research and development on the premises of
its facility in Princeton, New Jersey. The Company has seven full-time engineers
dedicated to research and development activities and one engineer dedicated to
regulatory activities. Prototype manufacturing is performed by an outside
manufacturing firm with specific expertise in fabricating catheter devices.
COLLABORATIVE AGREEMENTS
Bard Agreement
Pursuant to an agreement dated September 29, 1993 (the "Bard Agreement"),
between the Company and Bard Radiology Division of C.R. Bard, Inc. ("Bard"), the
Company granted Bard (i) the exclusive right to distribute modified needles and
retrofitted biopsy gun devices throughout the world, and (ii) the non-exclusive
right to distribute the Company's driver boxes throughout the world. Bard and
the Company are in negotiations for the repurchase by the Company of its rights
for biopsy gun products from Bard.
In consideration of the license grant, the Company received from Bard: (i)
$25,000 for research and development; (ii) a $540,000 advance on the Company's
future receivables from Bard evidenced by a promissory note in the principal
amount of $540,000 (the "Bard Note"), payable as set forth below and secured by
all of the Company's inventory and equipment; (iii) Bard's agreement to purchase
minimum amounts of the modified needles and retrofitted biopsy guns from the
Company; (iv) Bard's agreement to distribute the Company's drive boxes; and (v)
Bard's agreement to make royalty payments to the Company on sales of modified
needles.
The Bard Note does not bear interest during the four year period commencing
with the first purchase order issued by Bard, which purchase has not yet
occurred. If the Bard Agreement is terminated prior to the full satisfaction of
the Bard Note, the Company has the option to either repay the outstanding
principal balance on the Bard Note within 60 days or to repay the outstanding
principal balance, together with interest at prime plus 1%, within 24 months
following such termination.
The Bard Agreement provides that it will terminate on the later of
September 23,1998 or the date on which the last issued patent included in the
ColorMark technology expires. The Bard Agreement provides that it may be
terminated by the Company if Bard decides to terminate the research and
development program provided for in the Bard Agreement.
HRT Agreement
The Company entered into the HRT Agreement, effective as of September
21,1992, pursuant to which the Company granted HRT (formerly a subsidiary of Eli
Lilly and currently a subsidiary of Guidant Corporation), for the purpose of
mapping cardiac rhythm abnormalities and disorders, (i) the exclusive worldwide
license to all of the Company's technology and know how to cardiac
electrophysiology products and (ii) the right to negotiate for and obtain a
worldwide exclusive license to all future products other than cardiac
electrophysiology products based on such technology for cardiovascular,
peripheral, angioplasty and atherectomy, and laparoscopic applications. HRT did
not market or sell any products incorporating the Company's technology under the
HRT Agreement. Accordingly, in January 1996, the Company entered into an
agreement to repurchase the rights granted under the HRT Agreement for $575,000
($250,000 had previously been paid to the Company under the HRT Agreement) Of
such amount, $500,000 was paid from the proceeds of the Offering and $75,000 was
paid by certain existing stockholders of the Company, which $75,000 is reflected
as a capital contribution. The Company intends to seek a new licensing or
collaborative arrangement with a corporate partner in order to exploit this
technology, although there can be no assurance that any such arrangement will be
entered into.
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MANUFACTURING AND SUPPLIERS
The Company currently manufactures EchoMark sensors, EchoMark CSI systems,
ColorMark disposable clips, and ColorMark drivers at its own facility. Outside
vendors are used to fabricate catheters and to mount sensors. Prototype
manufacturing is performed by an outside manufacturing firm with specific
expertise in fabricating catheter devices. The Company intends to continue to
manufacture certain unique elements of its products. The Company believes that
with its current facilities and vendor arrangements, it can manufacture enough
of its products to meet its anticipated needs through 1997. Thereafter, the
Company will be required to raise significant additional capital, attract and
retain experienced personnel, purchase or lease additional equipment and comply
with extensive government regulations with respect to its facilities. Further,
even if the Company manufactures its products directly, it will continue to
depend upon subcontractors to manufacture and deliver certain components of its
products in a timely and satisfactory manner. The Company has limited
manufacturing capability and depending upon the volume of its products sold, the
Company may determine to enter into arrangements with others for the manufacture
and assembly of its products, in which event it will be substantially dependent
upon such third parties to deliver such products in a timely manner and on a
competitive basis. There can be no assurance that the Company will be successful
in entering into any arrangements with others on acceptable terms or at all.
The Company believes that its products are manufactured in substantial
compliance with FDA Good Manufacturing Practices ("GMP") regulations. At various
assembly stages each component undergoes testing to check compliance with
Company specifications. Third-party manufacturers generally are required to
verify that product fabrication and inspection process steps meet the Company's
specifications and applicable regulatory requirements. Upon successful
completion of these tests, the products are packaged, sterilized, prepared for
shipment and subject to final inspection. If the Company enters into agreements
with contract manufacturers for producing its products, these manufacturers will
be required to operate under FDA GMP regulations and other relevant regulatory
standards and produce materials to the Company's specifications.
MARKETING AND SALES
To date the Company has had minimal sales of its products. The Company is
currently in the process of developing a sales organization to market and sell
its products and has used a portion of the proceeds of the Offering to develop
its in-house marketing staff. Sales and marketing efforts are currently focused
on the ColorMark Clip for guiding needle biopsies and vascular access procedures
and the EchoCath PTA Catheter for peripheral angioplasty. The Company
anticipates that it will, assuming it obtains the requisite regulatory
approvals, begin marketing and selling the EchoMark Salpingography Catheter for
ultrasound-guided procedures involving the female reproductive system.
The Company intends to enter into joint venture, licensing, or other
collaborative arrangements to market and sell its products. When, and if, the
Company enters into these arrangements, these arrangements may result in the
lack of control by the Company over the marketing and selling of the Company's
products.
Because use of the Company's products will require changes from traditional
methods and procedures, their acceptance by the medical community will require a
significant educational effort to be undertaken by or on behalf of the Company.
Educational and promotional materials will be produced to support the sales
effort.
COMPETITION
The Company monitors clinical trial reports and patent applications to
assess its competition and is not aware of any products on the market or under
development that, in management's opinion, can match the ability of the
Company's technologies to guide medical devices using ultrasound.
COLORMARK Management is aware of only two companies that market or have
marketed products that compete with the ColorMark Clip. ATL sold or may in the
future sell Biosponder(TM), a biopsy needle mounted with a flat ultrasound
sensor; its principle of operation is similar to the Company's EchoMark
technology. Management believes that its needle visualization technology has
advantages over the ATL product since Biosponder(TM) is confined to use with one
particular ATL scanhead and is made in only one needle size. It is thus not
usable with other systems already in the field or adaptable for all uses.
Furthermore, the sensor has a limited "angle of acceptance" (meaning the range
of needle positions relative to the ultrasound
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imaging transducer that will produce usable images) relative to the Company's
technology, although its range is broader than that of an ordinary biopsy
needle.
The second competing product is the Smart Needle(TM) marketed by the
Peripheral Systems Group ("PSG") of Advanced Cardiovascular Systems, a
subsidiary of Guidant. The Smart Needle(TM) is a Doppler-guided needle useful
for assisting vascular access. To date, the product has been directed primarily
to interventional radiologists. Unlike the ColorMark Clip, the Smart Needle(TM)
is not guided by ultrasound visualization of the target artery, so it does not
eliminate all of the difficulties of vascular access.
In addition, several biopsy needle manufacturers market needles that have
been specially resurfaced to enhance their echogenicity (and thus their
visibility under ultrasound). Although helpful and less expensive than the
Company's technology, Management believes these modifications do not fully
improve visualization sufficiently during needle biopsy and vascular access
procedures.
ECHOMARK Management believes there are no companies that compete directly
with its EchoMark technology for guiding catheters under ultrasound. ATL's
Biosponder(TM) technology, although in some ways similar to the EchoMark
technology, is not designed to be mounted onto a catheter.
Management believes that several companies are developing alternative
technologies that are designed to address the infertility market both from a
diagnostic and a therapeutic standpoint. These products typically rely on
optical technology. Although these products may not be directly comparable with
the Company's ultrasound technology, they present a potential threat to the
commercial success of the Company's products. For example, several companies are
developing miniature flexible fiber optic endoscopes (falloposcopes) that can
provide direct visualization of the fallopian tubes for diagnostic and
therapeutic purposes. To guide falloposcopes to the fallopian tubes, OvaMed Inc.
and others have initiated development of self-guiding (pre-curved) catheters
that are designed to find the opening of the fallopian tubes without direct or
ultrasound visualization. Other infertility market competitors such as Bard,
Cook Medical Company, and Boston Scientific Corporation ("Boston Scientific")
all have the catheter technology and expertise to develop X-ray guided
catheters. While these catheters have the advantage of using the traditional
method of X-ray guidance, they have the disadvantage of exposing potentially
fertile reproductive systems to radiation.
ECHOFLOW There are other hemodynamic sensing systems that are used in
animal studies, utilizing Doppler or transit-time ultrasound, or electromagnetic
flowmeters, to measure bloodflow. However, Management believes that these
laboratory devices, if successfully developed, may not be feasible for long-term
implantation, unlike the small, flexible, and inert structures of its proposed
products utilizing the EchoFlow technology. However, long-term successful
implantation of EchoFlow devices has also not been determined.
For acute measurements, thermal-dilution is a standard in the operating
room and in the intensive care unit and coronary care unit market. As
thermal-dilution is a non-continuous and intrinsically unreliable method,
Management believes it could be displaced by products incorporating the EchoFlow
technology. Other acute uses include Doppler guide wires, such as those made by
CardioMetrics, Inc. ("CardioMetrics") for use in coronary angioplasty and
diagnostic use. Management believes that more accurate and reliable data will
result from products utilizing the EchoFlow technology units, used either within
the artery, like the CardioMetrics guidewire, or as an epivascular sensor.
ECHOEYE Management believes that several companies including Cardiovascular
Imaging Systems, Inc. ("CVIS"), a subsidiary of Boston Scientific, and
Endosonics Corporation are marketing and developing miniaturized catheters
mounted with ultrasound transducers for visualization and tissue
characterization within peripheral and coronary arteries. Each of the
competitive devices known to Management is a "side-looking" imaging device that
views a doughnut-shaped area perpendicular to the axis of the catheter. With a
side-looking catheter, the scanned area is behind the catheter's tip. These
devices provide useful ultrasound diagnostic information but are limited by
their inability to scan vascular occlusions that prevent the passage of the
catheter as well as the areas beyond such obstructions.
Management is aware of one company, CVIS, that is reportedly pursuing early
stage development of forward-looking catheter designs. Management does not
believe that this competitor has yet produced an operational forward-looking
catheter.
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However, this company has access to substantial resources and is capable of
moving forward rapidly with its development efforts. The products from this
potential competitor would have the advantage of being compatible with its
currently placed ultrasound imaging systems.
Management believes that several companies have developed ultrasound
imaging products for minimally invasive surgery applications. Endomedix Inc. and
Aloka Inc. have imaging systems that are approved for laparoscopic
cholecystectomy. However, unlike EchoEye, if successfully developed, neither of
these systems provide real-time, three-dimensional images of the visualized
area. At least two other manufacturers, Multigon Inc. and Tetrad Inc., are
seeking to develop their own ultrasound imaging systems. Management does not
believe that any competing three-dimensional, real-time ultrasound imaging
systems are currently in development for minimally invasive surgery
applications. However, many of the companies that are undertaking development of
imaging systems that may compete with products utilizing the EchoEye technology
have greater financial, manufacturing, marketing, distribution, and technical
resources than the Company.
GENERAL The health care industry is characterized by extensive research
efforts and rapid technological change. Future innovations could render the
Company's current and proposed products obsolete. Competition in the market for
imaging catheters is intense and is expected to increase. The Company's current
and proposed products are expected to compete against other types of imaging
systems (such as CT, optical scanning, X-ray and MRI) as well as other
ultrasound imaging products. Manufacturers of non-imaging therapeutic catheters
or external ultrasound imaging devices could also enter the market with
competitive products. Such companies may succeed in developing products that are
more effective or less costly than those developed by the Company and may be
more successful than the Company in manufacturing and marketing their products.
Many companies are engaged in research and development of new devices that may
address the same clinical applications as the Company's products. The future
success of the Company will depend, in part, on the degree of clinical
acceptance of ultrasound imaging as opposed to competing technologies as well as
on acceptance of the Company's products for ultrasound imaging applications.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, manufacturing, marketing, distribution,
operating, technical, and other resources than the Company. Academic
institutions, hospitals, governmental agencies, and other public and private
research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies on their own or
through joint ventures. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
and/or less costly than those developed or being developed by the Company,
thereby rendering the Company's technologies not competitive or obsolete.
PATENTS AND PROPRIETARY RIGHTS
PATENTS AND PATENT APPLICATIONS All of the Company's technologies have been
invented by officers and employees of the Company or employees of Ultramed,
which was founded to manufacture ultrasonic duplex vascular imaging systems, and
the rights to such technologies were assigned to the Company.
The Company holds four issued United States patents related to aspects of
the ColorMark technology, has 2 issued United States patents related to aspects
of the EchoMark technology, has received two patents in the United States
covering aspects of the EchoFlow technology and holds one issued United States
patent for the EchoEye technology. The Company is in the process of applying for
foreign patent approvals for all of its technologies.
Two of the Company's ColorMark technology U.S. patents, which expire in
2013, relate to the use of flexural vibration waves on needles to enhance
ultrasound visualization as well as claims on the technology used to create the
vibrations. Applications corresponding to both U.S. patents have also been filed
in Europe and Japan under the Patent Cooperation Treaty ("PCT") provisions.
The Company has received two further U.S. patents, which expire in 2014, on
an extension of the ColorMark technology relating to how to perform needle
guidance from a black and white ultrasound system and relating to the method of
attaching needles to a universal ColorMark Clip system.
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The Company's two EchoMark technology U.S. patents, which expire in 2010
and 2011, are directed to the technology underlying the piezoelectric sensor as
well as the EchoMark CSI used to produce the guidance mark on the ultrasound
imaging console. Applications corresponding to both U.S. patents have also been
filed in Europe and Japan under PCT provisions.
The EchoFlow patents are directed to the use of diffractive transducers and
their use in phase or frequency modulation to measure fluid flow; the two
patents will expire in 2016. Two additional patent applications relating to
EchoFlow technology are currently pending.
The Company's EchoEye technology U.S. patent, which expires in 2012, covers
the forward-looking scanning for the EchoEye technology. The Company also
intends to seek claims on the controls designed for the scanhead, on the
scanning pattern performed by the transducer and to cover the programming used
in the system to control the mechanics and to interpret and manipulate the data
gathered from the transducer.
The Company intends to file other patent applications on inventions
developed in the course of continuing research and development efforts. Such
applications will either be owned by or licensed to the Company.
TRADENAME, TRADEMARK AND SERVICE MARK RIGHTS The Company is the owner of
the registered trademarks ColorMark(R), EchoMark(R) and EchoEye(R) in the United
States and registration is pending for EchoFlow(TM).
GOVERNMENT REGULATION
FDA AND CERTAIN OTHER REGULATORY REQUIREMENTS The Company's research and
development activities and the production and marketing of the Company's
products are subject to regulation for safety, efficacy and compliance with a
wide range of regulatory requirements by numerous governmental authorities in
the United States and in other countries. In the United States, medical devices
are subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act and
other Federal statutes and regulations govern or influence the research,
testing, manufacture, safety, labeling, storage, recordkeeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in civil penalties,
recall, injunction or seizure of products, refusal to permit products to be
imported into the United States, refusal of the government to approve or clear
product approval applications or to allow the Company to enter into government
supply contracts, withdrawal of previously approved applications and criminal
prosecution.
In order to obtain FDA approval of a new device, companies must generally
submit proof of safety and efficacy. In some cases such proof entails extensive
clinical and preclinical laboratory tests. The testing, preparation of necessary
applications and processing of those applications by the FDA is expensive and
may take several years to complete. There is no assurance that the FDA will act
favorably or in a timely manner in reviewing submitted applications, and the
Company may encounter significant difficulties or costs in its efforts to obtain
FDA approvals which could delay or preclude the Company from marketing any
products it may develop. The FDA may also require postmarketing testing and
surveillance of approved products, or place other conditions on the approvals.
These requirements could cause it to be more difficult or expensive to sell the
products, and could therefore restrict the commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
For patented products or technologies, delays imposed by the governmental
approval process may materially reduce the period during which the Company will
have the exclusive right to exploit such technologies; however, an additional
period of up to five years may be added to the term of the patent in such
circumstance.
The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) premarket
notification, and are subject to other general controls. Class II devices may be
subject to additional regulatory controls, including performance standards and
other special controls, such as postmarket surveillance. New Class III devices,
which are either invasive or life-sustaining products, or new products never
before marketed (for example, non- "substantially equivalent" devices), require
clinical testing to assure safety and effectiveness and FDA approval prior to
marketing and distribution. The FDA also has the authority to require clinical
testing of Class I and Class II devices.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a Class I or Class II device that was
legally marketed prior to May 1976, the date on which the Medical Device
Amendments of 1976
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were enacted, or to a device that was legally introduced to the market after the
FDA has found it to be substantially equivalent to a legally marketed device,
the manufacturer may seek clearance from the FDA to market the device by filing
a 510(k) pre-market notification. Substantial equivalence also can be found for
pre-1976 Class III devices for which premarket approval applications ( "PMA" )
have not been required. The 510k) pre-market notification may need to be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA. Following submission of the 510(k) pre-market
notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. The FDA has no
specific time limit by which it must respond to a 510(k) pre-market
notification, however, the FDA currently responds to the submission of a 510(k)
pre-market notification within approximately 130 days. The FDA order may declare
that the device is substantially equivalent to another legally marketed device
and allow the proposed device to be marketed in the United States. The FDA may,
however, determine that the proposed device is not substantially equivalent, or
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must seek pre-market approval of the proposed device through the submission of a
PMA application. A PMA application must be supported by extensive data,
including preclinical and human clinical trial data, to prove the safety and
efficacy of the device. Upon receipt, the FDA conducts a preliminary review of
the PMA application. If sufficiently complete, the submission is declared filed
by the FDA. By regulation, the FDA has 180 days to review a PMA application once
it is filed, although PMA application reviews more often occur over a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to complete.
If human clinical trials of a proposed device are required and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved, human clinical trials may begin at
a specified number of investigational sites with the number of patients approved
by the FDA.
Sales of devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country must generally be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.
The conduct of laboratory studies must be done in conformity with the FDA's
good laboratory practice ("GLP") regulations. Clinical studies must comply with
the FDA's regulations for institutional review board approval and for informed
consent. In addition, a variety of state and local permits are required under
regulations relating to the Company's proposed laboratory activity.
The Company is registered as a medical device manufacturer with the FDA. As
such, the Company and its contract manufacturer will be inspected on a routine
basis by the FDA for compliance with the FDA's GMP regulations. These
regulations require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to manufacturing, testing,
distribution, storage, and control activities. Foreign manufacturing facilities
that produce devices for sale in the United States are also subject to these GMP
requirements and to periodic FDA inspections. On October 7, 1996, the FDA
revised the GMP regulations to include, among other things, design controls and
service. These revised regulations become effective on June 1, 1997. The Medical
Device Reporting regulation requires that the Company provide information to the
FDA on deaths or serious injuries alleged to have been associated with the use
of its devices, as well as product malfunctions that are likely to cause or
contribute to death or serious injury if the malfunction were to recur. In
addition, the FDA prohibits a company from promoting an approved device for
unapproved applications and reviews company labeling for accuracy.
The Company has received 510(k) authorization for the ColorMark Clip and
Driver, the EchoMark EP Catheter, the EchoMark PTA Catheter and the EchoMark
Guidewire and is awaiting FDA clearance on certain improvements to the EchoMark
Salpingography Catheter. It is anticipated that additional 510(k) applications
may be submitted in the near future for other diagnostic and therapeutic
applications of the EchoMark technology.
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The Company will begin animal trials with EchoFlow products in late 1996.
It is anticipated that clinical trials will begin in 1997. EchoEye is still in a
preclinical phase of development. An operational prototype of an EchoEye device
was successfully tested in an animal trial in 1993. Additional in vitro testing
is currently underway. After refining its working prototype of an EchoEye
product, the Company plans to perform several clinical trials and then file a
510(k) application for permission to market such product in peripheral vascular
applications. Coronary vascular applications and minimally invasive surgical
applications for which a PMA or other more extensive regulatory process would be
required may be pursued at a later date.
Currently, the Company may sell its ColorMark and EchoMark products in
Europe; however, to continue to sell such products in Europe, the Company's
products must bear the CE Mark by June 14, 1998. The Company has begun this
registration process. There can be no assurance that any of the Company's
products will receive a CE Mark.
THIRD-PARTY REIMBURSEMENT Successful commercialization of the Company's
products may depend in part on the availability of adequate reimbursement from
third-party health care payors such as Medicare, Medicaid, and private insurance
plans. Reimbursement rules vary from payor to payor, and reimbursement also may
depend upon the setting in which a particular item or service is furnished.
In general, payors exclude payment for items and services that are deemed
to be not medically "reasonable and necessary," or which are considered to be
not safe and effective, experimental or investigative, or not medically
appropriate for the patient. In making these determinations, payors typically
rely on studies published in peer-reviewed medical journals, the opinions of
recognized medical specialty societies, and the practices of physicians in the
local medical community. Some payors are also beginning to consider the cost of
a new item or service in comparison to existing alternatives in determining
whether and how much they will reimburse for a new technology.
FDA clearance or approval to begin marketing a device generally is required
by payors as a condition of coverage, but such clearance or approval alone does
not assure that the payor will reimburse for the device.
Most medical procedures involve payment for the physician service and, in
cases where the service is provided outside of the physician's office, payment
for the facility costs, including supplies, furnished in connection with the
procedure. Medicare, which is a federal government program that primarily
reimburses health care furnished to the elderly and disabled, pays for physician
services based on a physician fee schedule, which assigns a payment weight for
each covered physician procedure. Because there currently is no separate
physician procedure code for the use of the ColorMark Clip physicians now must
use appropriate existing procedure codes for physician services involving the
use of the ColorMark Clip.
Medicare reimburses hospital inpatient services on the basis of a
prospective payment system in which the reimbursement to the hospital for a
particular patient is determined by the particular diagnosis-related group
("DRG") to which the patient is assigned. Generally, such reimbursement will not
depend on the specific items or services furnished to the patient during the
hospital stay. As a result, hospitals have an incentive to provide
cost-effective treatments that will reduce hospital costs and shorten the
patient's length of stay. The Company believes that the ColorMark Clip is, and
the Company's current and proposed products will be, cost-effective and that
hospitals will have an incentive to use the ColorMark Clip and the Company's
other proposed products. Medicare reimburses nonsurgical therapeutic services
furnished in the hospital outpatient setting on the basis of the reasonable
costs of those services. For services that Medicare has determined should be
covered in ambulatory surgery centers, Medicare reimbursement to the ambulatory
surgery center is based on a fee schedule. Medicare has not made any
determination concerning whether use of either the ColorMark Clip or the
Company's current and proposed products will or should be covered in ambulatory
surgery centers and, if so, how much the procedure should be reimbursed.
Generally, Medicare does not separately reimburse physicians for the facility
costs associated with furnishing a therapeutic procedure in their offices; such
reimbursement is considered to be bundled into the physician fee schedule
payment for the physician service. In some cases, however, where expensive
supplies are required for procedures that generally are furnished in hospital or
other facility settings but which can be safely performed in a physician's
office, Medicare will make an additional payment to help defray the cost of the
supplies. Currently, Medicare makes no additional payment to physicians for the
supply costs associated with use of the ColorMark Clip in the physician office
setting.
Medicaid (which is a joint federal-state program to reimburse health care
costs of the poor), Blue Cross and Blue Shield plans, and commercial insurers
have their own reimbursement rules, which can vary substantially from each
other. Some of
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these payors have adopted reimbursement systems that are based on the Medicare
physician fee schedule or Medicare DRG system for hospital inpatients.
Increasingly, payors are instituting reimbursement methodologies that give an
incentive to providers to reduce costs and furnish cost-effective care.
ANTI-REMUNERATION LAWS The Medicare and Medicaid anti-kickback statute
prohibits financial relationships designed to induce the purchase (or arranging
or recommending the purchase) of items or services, or patient referrals to
providers of services, for which payment may be made under Medicare, Medicaid,
or other federally funded health care programs. These provisions have been
broadly interpreted to apply to certain relationships between manufacturers,
such as the Company, and hospitals, physicians, or other potential purchasers or
sources of referral. Under current law, courts and the Office of Inspector
General of the Department of Health and Human Service ("HHS") have stated that
the statute is violated where even one purpose (as opposed to a primary or sole
purpose) of the arrangement is to induce purchases or referrals. However, the
HHS Departmental Appeals Board has stated that some financial inducements (such
as drug samples or recruitment lunches) may not be subject to prosecution
because they are de minimis, and therefore are unlikely to affect referral or
purchase decisions.
The anti-kickback statute contains exceptions for, among other things,
properly reported discounts and compensation of bona fide employees. In
addition, federal regulations establish certain "safe harbors" from liability
under the anti-kickback statute, including further refinements of the exceptions
for discounts and employee compensation, and a safe harbor for personal services
contracts. While failure to satisfy all the criteria for a particular safe
harbor does not necessarily mean that an arrangement is unlawful, practices that
are of the same generic kind as those for which there is a safe harbor available
(for example, discounts, personal services contracts) may be subject to scrutiny
if they do not qualify for the safe harbor. Several states also have statutes or
regulations prohibiting financial relationships with referral sources that are
not limited to services for which Medicare or Medicaid payment may be made.
State laws vary and have been infrequently interpreted by courts or regulatory
agencies. Sanctions under these federal and state anti-remuneration laws may
include civil money penalties, license suspension or revocation, exclusion of
providers or practitioners (but under current law not manufacturers) from
participation in Medicare and Medicaid, and criminal fines or imprisonment.
The Company will compensate its domestic sales representatives (all of whom
will be employees of the Company) with a combination of salary and a commission
based on volume of sales, and offers discounts on certain volume purchases of
the ColorMark Clip. The Company also compensates physicians for certain services
(consulting on the development of the Company's technologies, and participation
as investigators in clinical trials of the Company's products) furnished to the
Company. In addition, the Company from time to time sponsors educational
programs at which Company representatives, or a physician who has used the
ColorMark Clip, may make a presentation to physicians or hospital personnel
concerning the product. A presenting physician may receive travel expenses, and
attending physicians or other personnel may receive a free meal or other
refreshments. These practices may not in all cases meet all of the criteria for
a safe harbor from anti-kickback law liability. Because of the breadth of the
statutory provisions described above, it is possible that these or other of the
Company's business practices could be subject to challenge under one or more
such laws.
While there can be no assurance that the Company's position would be upheld
if challenged, the Company believes that: (i) its compensation of its sales
force satisfies the criteria for the safe harbor for compensation of bona fide
employees; (ii) its discounting practice either meets, or may easily be modified
to meet, the requirements of the discount safe harbor; (iii) its compensation of
physicians for consulting or participation in clinical trials represents
reasonable compensation for legitimate and needed services actually provided to
the Company, and is not intended to induce purchase of the Company's products or
the referral of patients for use thereof; and (iv) any free meals or
refreshments provided to physicians or others in connection with presenting
information concerning the Company's products (and any travel expenses provided
to a speaker at such a presentation) is too de minimis to affect a decision
concerning whether to purchase (or arrange for or recommend the purchase of) the
Company's products, or to refer patients for use thereof, and therefore should
not be viewed as remuneration within the meaning of the anti-kickback law.
PRODUCT LIABILITY AND INSURANCE
The testing, clinical trials, manufacturing, and sale of the Company's
products involves the inherent risks of product liability claims against the
Company. The Company currently maintains product liability insurance coverage of
$6,000,000, however, such insurance is expensive, subject to various exclusions
and may not be obtainable by the Company in the future
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on terms acceptable to the Company. There can be no assurance that the amount
and scope of any coverage will be adequate to protect the Company in the event
that a product liability claim is successfully asserted against the Company. A
product liability claim or judgment against the Company in excess of the
Company's insurance coverage could have a material adverse effect upon the
Company's business, financial condition, and results of operations. If the
Company enters into a joint venture or other arrangement with respect to its
products or if the Company licenses its products to a third party, the Company
intends to require such joint venturer or licensee to maintain product liability
insurance. Conversely, such third party may require, as a condition to the
arrangement, that the Company obtain product liability insurance. However, there
can be no assurance that such joint venturers or licensees will agree or will be
able to obtain or maintain insurance on acceptable terms, or that if such
insurance is obtained, it will be adequate to cover the Company's potential
liability. Products, such as those sold or proposed to be sold by the Company,
may be subject to recall for unforeseen reasons. Such a recall could have a
material adverse effect on the Company and its reputation.
HUMAN RESOURCES
The Company employs 17 full time employees. Eight employees provide
research and development services, five work in production, two provide sales
and marketing services, and two employees provide management and administrative
services. The Company has one part-time clerical employee.
The Company's employees are not a party to any collective bargaining
agreements. The Company believes that it has good relations with its employees.
MEDICAL ADVISORS
The following is a list of the Medical Advisors of the Company and, based
upon information supplied by each of them, the institutions with which they are
affiliated. The affiliations are provided for information purposes only and do
not indicate a relationship between such institution and the Company.
Dr. William Abbott Professor of Surgery, Harvard Medical School,
Boston, Massachusetts, Chief of Vascular Surgery
at the Massachusetts General Hospital, Boston,
Massachusetts.
Dr. Valentin Fuster Professor of Medicine of Mount Sinai School of
Medicine, New York, New York, Director
Cardiovascular Institute, Mount Sinai Medical
Center.
Dr. Kurt Isselbacher Mallinckrodt Professor of Medicine, Harvard
Medical School, Boston, Massachusetts; Director,
MGH Cancer Center, The Massachusetts General
Hospital, Boston, Massachusetts.
Each of the Medical Advisors has entered into a medical advisory agreement
("Medical Advisory Agreements"), pursuant to which the Medical Advisors meet up
to four days annually to advise the Company of advances in their field of
expertise and to consult with the Company and to assess the feasibility of
research and development programs under consideration by the Company in their
field, and to offer guidance for future research and clinical applications of
the Company's technology in their field. The Medical Advisors also meet
individually and in groups to advise the Company on its research, development,
operations and commercialization of its technology and to consult on the
Company's projects and to attend meetings of the Medical Advisors. Generally,
any further activities, if requested, are on an as available basis and at the
agreed upon fee. The agreements with each Medical Advisor contain
confidentiality provisions.
The Medical Advisors are not expected to otherwise actively participate in
the development of the Company's technology. The Medical Advisory Agreements are
for a term of five years. In consideration for the services to be rendered under
the Medical Advisory Agreements, Dr. Abbott and Dr. Isselbacher each receive an
amount of $15,000 per annum, and Dr. Fuster receives an amount of $25,000 per
annum and each is reimbursed for reasonable expenses. In addition, in January
1996, Dr. Abbott and Dr. Isselbacher were each granted options to purchase
10,000 shares of Class A Common Stock under the Company's 1996 Stock Option Plan
(the "Option Plan") at an exercise price of $5.00 per share, which options will
vest in five equal annual installments commencing January 17, 1996 and are
exercisable for a period of five years following the date of vesting. The
Medical Advisory Agreements also provide for indemnification of each Medical
Advisor, his successors, heirs and assigns against any liabilities, damage, loss
and expense (including reasonable attorneys fees and expenses of litigation)
16
<PAGE>
<PAGE>
incurred or imposed upon indemnities or any one of them in connection with any
class action suits, demands or judgments arising from their good faith services
under the Medical Advisory Agreements.
The Company's Medical Advisors are employed on a full-time basis by
employers other than the Company, and certain of such individuals have
consulting or other advisory arrangements with others. Accordingly, they are
expected to devote only a small portion of their time to the Company.
Regulations or policies of the institutions of which they are full-time
employees may adversely affect the rights of the Medical Advisors to own such
options and stock and to serve as Medical Advisors. Generally, any inventions or
processes discovered by the Medical Advisors which are made solely in the
performance of services to the Company will become the property of the Company,
but inventions which relate to the Medical Advisor's research at their
respective hospitals may not become the property of the Company if the rights to
such inventions will become the property of their respective hospitals pursuant
to agreements between the Medical Advisors and their respective hospitals.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an approximately 20,000 square foot facility
on U.S. Route 1 in Monmouth Jct., New Jersey pursuant to a five-year lease
expiring on March 31, 2002. Currently the Company utilizes 15,000 square feet of
such facility, however, the facility contains space appropriate for
approximately 4,000 square feet of offices for planned personnel, and
approximately 16,000 square feet appropriate for manufacturing and laboratory
use. The lease provides for an annual rent of approximately $236,000 for the
fiscal year ending August 31, 1997, 234,000 for the fiscal year ending August
31, 1998 and $299,000 for each fiscal year thereafter through March 2002. Such
lease also provides for payment by the Company of real estate taxes and certain
operating expenses. The Company has an option to purchase the entire facility
for a purchase price of $2,000,000 plus certain CPI adjustments, which expires
on March 31, 2002. The Company believes that these facilities are adequate for
its current administrative and manufacturing needs and that this facility will
be sufficient to meet the Company's anticipated manufacturing needs through
1997.
The Company has recently been informed that the current plan of the New
Jersey Turnpike Authority ("NJTA") is that it will require the Company's
facility to be taken as part of the development of Route 92. This plan could be
implemented as early as the summer of 1997. The Company believes that it will
have adequate time to locate new facilities at a reasonable rental rate and that
any possible action by the NJTA will not have a material adverse effect on the
Company.
In addition, research and development activities are currently conducted on
behalf of the Company in the United States and Europe at various hospitals.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any pending material legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended August 31, 1996.
17
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since January 22, 1996, shares of the Class A Common Stock, have traded on
the Nasdaq SmallCap Market ("Nasdaq"). The following table sets forth, for the
periods indicated and as reported by Nasdaq, the high and low last sales prices
for shares of the Class A Common Stock.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------
<S> <C> <C>
February 29, 1996 4 1/4 4
May 31, 1996 4 1/2 3
August 31, 1996 5 1/2 4
September 1, 1996 through December 12, 1996 5 1/2 4 1/4
</TABLE>
HOLDERS OF COMMON STOCK
Based upon information supplied to the Company by its transfer agent, the
number of stockholders of record of the Class A Common Stock and Class B Common
Stock on December 12, 1996 was approximately 5 and 13, respectively. The Company
believes that there are in excess of 300 beneficial owners of the Class A Common
Stock whose shares are held in "Street Name."
DIVIDENDS
The Company has never paid cash dividends with respect to the Class A
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan, for the foreseeable
future, to pay dividends to holders of the Class A Common Stock. Any decision as
to the future payment of dividends on Class A Common Stock will depend on the
results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Report.
RESULTS OF OPERATIONS
Fiscal Year ended August 31, 1996 compared to fiscal year ended August 31,
1995.
The Company had no significant sales revenue for the fiscal years ended
August 31, 1996 and 1995, but the Company did recognize revenue of $98,000 in
fiscal year 1996 from a phase one SBIR grant.
The Company charged $38,881 to operations for the fiscal year ended August
31, 1996 because it determined that certain inventory should be classified as
development inventory for research and development. The amount was approximately
22% of all inventory. The balance of the cost of sales of $11,433 was inventory
that was classified as demonstration inventory during the fiscal year.
18
<PAGE>
<PAGE>
Research and development expenses increased 48% during the fiscal year
ended August 31, 1996 because of the establishment of the Medical Advisors
Board, the addition of new personnel, SBIR grant related expenses and additional
materials purchased as a result of an increase in activity following the
Offering. Research and Development expenses also included the repurchase of
certain technology rights for $575,000 that is set out in a separate line in the
statement of operations without a comparable expense for August 31, 1995.
Selling, general, and administrative expenses increased 104% during the
fiscal year ended August 31, 1996 because of a significant increase in legal
expense relating to various corporate matters, the addition of the Co-Chairman
of the Board of Directors, an increase in insurance expenses because of the
addition of directors and officers insurance coverage, and an increase in
consultant expenses because of various corporate matters. Following the
Offering, expenses for the payment of salaries to officers and employees, and
consulting fees increased and are expected to continue to increase. In addition,
the Company plans to increase its expenditures in the sales and marketing areas.
The Company anticipates that revenues will be insufficient to meet all
operating expenses for the foreseeable future even if there is market acceptance
of its products, and accordingly, it expects to incur substantially increased
operating losses for the foreseeable future. There can be no assurance that the
Company will ever achieve profitable operations.
In connection with the Offering, certain of the existing stockholders of
the Company, primarily officers, directors and other employees, agreed to
transfer a portion of their shares of the Company's Class B Common Stock (the
"Forfeitable Shares") to the Company if the Company does not attain certain
minimum earnings thresholds or if the Company's Class A Common Stock does not
meet certain minimum bid prices. The Company believes that the release of the
restrictions on the Forfeitable Shares held by officers, directors, employees
and consultants will be treated, for financial reporting purposes, as
compensation expense to the Company. Accordingly, the Company will, in the event
of the release of the restrictions, recognize during the period in which the
earnings thresholds are met or probable of being met or the Company's Class A
Common Stock meets or is probable of meeting the minimum bid prices, what could
be a substantial charge which would have the effect of substantially increasing
the Company's loss or reducing or eliminating earnings, if any, at such time.
The amount of compensation expense recognized by the Company will not affect the
Company's total stockholders' equity. See Note 7 of Notes to Financial
Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's efforts have been principally devoted to
research and development and raising capital, and the Company has sustained
cumulative losses of approximately $(11,395,000) through August 31, 1996. These
losses resulted primarily from research and development expenses aggregating
approximately $6,432,000 relating to the Company's technologies and products,
and expenses aggregating approximately $4,495,000 incurred in connection with
marketing, and general and administrative activities, including legal and
professional activities relating thereto, which are continuing. The Company has
funded its activities through private placements of equity and debt securities,
borrowings and the Offering. As of August 31, 1996, the Company had working
capital of approximately $2,263,000, an accumulated deficit of approximately
$(8,192,000) and a stockholders' equity of approximately 1,368,000.
Since the date of inception (February 14, 1990) through August 31, 1996,
net cash provided by financing activities totalled approximately $13,889,000
which consists of the following: (i) approximately $2,700,000 from the sale to
several investors of 752,600 shares of Class B Common Stock; (ii) approximately
$2,191,000 from the sale of 95,400 shares of Class B Common Stock; (iii)
approximately $593,000 from the sale of 32,250 shares of Series A Convertible
Preferred Stock and 32,250 warrants to purchase Series A Convertible Preferred
Stock to three investors which were subsequently exchanged for 127,000 shares of
Class B Common Stock; (iv) approximately $ 1,725,000, including $750,000 of
capital contributed by Alliance Partners ("Alliance"); (v) $540,000, evidenced
by the Bard Note; (vi) $250,000 evidenced by a note which has been repaid; (vii)
net proceeds of approximately $838,000 from a bridge financing; (viii) a
$100,000 loan which has been repaid and (ix) net proceeds of approximately
$6,212,000 from the Offering. The Company had cash and cash equivalents of
$2,387,691 as of August 31, 1996.
In January 1996, the Company entered into an agreement to repurchase, for
$575,000, the rights previously granted under the HRT Agreement. Of such amount
$500,000 was paid from the proceeds of the Offering and $75,000 was paid by
certain
19
<PAGE>
<PAGE>
existing stockholders of the Company, which $75,000 is reflected as a capital
contribution. The Company recognized a $575,000 charge to operations relating to
this agreement.
Since the date of inception through August 31, 1996, expenditures for
investing activities, including patents costs and purchases of equipment, were
approximately $582,000. The Company expects to continue to incur costs in
connection with such activities.
At August 31, 1996, the Company had a net operating loss carryforward for
state and Federal income tax purposes of approximately $7,716,000 which expire
through 2003 and 2011, respectively. See Note 9 of Notes to the Financial
Statements.
During the 12-month period following the date of this Report, the Company
intends to focus its efforts on marketing and sales of the ColorMark Clip and
the EchoMark PTA Catheter in the United States and certain countries in Europe
and on commencing marketing and sales of the EchoMark Salpingography Catheter in
the United States and in foreign countries. During such 12-month period, the
Company intends to continue preclinical testing of EchoFlow, and if the results
of such testing are successful, commence clinical testing of EchoFlow products.
During such period, the Company will also continue preclinical testing of
EchoEye. The Company may also commence research and development of other
products utilizing ColorMark and EchoMark technologies. The Company also intends
to seek the requisite regulatory approvals for certain of the Company's proposed
products during such time period.
The Company anticipates that its current cash, together with revenues
expected to be derived from sales of certain of its products, should be
sufficient to fund research, development, testing, regulatory requirements,
operating and other capital needs through December 1997. The Company also
believes that additional cash resources should be available either through
financing provided by the completion of license agreements and strategic
alliances or, if necessary, by reducing the level of its operating expenses by
deferring certain research and development or marketing expenses. There can be
no assurance that the Company will be able to complete the aforementioned
license agreements and strategic alliances on acceptable terms. Following
December 31, 1997, the Company may well need substantial additional
financing in order to continue development of and commercialize certain of its
proposed products and other potential products. The Company has no binding
commitments from any third parties to provide funds to the Company. There can be
no assurance that the Company will be able to obtain financing from any other
sources on acceptable terms.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
which established financial accounting and reporting standards for stock-based
employee compensation plans. Companies are encouraged, but not required, to
adopt a new method that accounts for stock compensation awards based on their
fair value using an option pricing model. Companies that do not adopt this new
standard are required to make pro forma disclosures of net income as if the fair
value-based method of accounting required by this standard had been applied. The
requirements of this standard are effective for fiscal year 1997. The Company
expects to adopt the pro forma disclosure requirements. The Company cannot at
this time predict the impact of the adoption of such requirements.
20
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors...........................................................................F-2
Balance Sheet at August 31, 1996.........................................................................F-3
Statements of Operations for the years ended August 31, 1995 and 1996 and the period from
February 14, 1990 (date of inception) to August 31, 1996..............................................F-4
Statements of Stockholders' Equity for the period from February 14, 1990 (date
of inception) to August 31, 1996F-5
Statements of Cash Flows for the years ended August 31, 1995 and 1996 and the period from
February 14, 1990 (date of inception) to August 31, 1996..............................................F-6
Notes to Financial Statements............................................................................F-7
</TABLE>
All schedules are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the financial statements on
notes thereto.
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
EchoCath, Inc.:
We have audited the accompanying balance sheet of EchoCath, Inc. (formerly
EchoCath, Ltd.) (a development stage enterprise) as of August 31, 1996 and the
related statements of operations, stockholders' equity and cash flows for each
of the years in the two-year period ended August 31, 1996 and for the period
from February 14, 1990 (date of inception) to August 31, 1996. 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 audits. The cumulative statements of operations, stockholders' equity, and
cash flows for the period February 14, 1990 (date of inception) to August 31,
1996 include amounts for the period from February 14, 1990 (date of inception)
to August 31, 1990 and for each of the years in the two-year period ended August
31, 1992, which were audited by other auditors whose report dated February 15,
1993 has been furnished to us, and our opinion, insofar as it relates to the
amounts included for the period from February 14, 1990 (date of inception) to
August 31, 1992 is based solely on the report of the other auditors which report
expressed an unqualified opinion.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for the effect on the period from
February 14, 1990 (date of inception) to August 31, 1996 of the amounts for the
period from February 14, 1990 (date of inception) to August 31, 1992 on the
report of the other auditors, the financial statements referred to above present
fairly, in all material respects, the financial position of EchoCath, Inc.
(formerly EchoCath, Ltd.) (a development stage enterprise) as of August 31,
1996, and the results of its operations and its cash flows for each of the years
in the two-year period ended August 31, 1996 and for the period from February
14, 1990 (date of inception) to August 31, 1996 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Princeton, New Jersey
October 4, 1996, except as to the last
paragraph of note 7, which is as of
November 25, 1996
F-2
<PAGE>
<PAGE>
ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
AUGUST 31, 1996
<TABLE>
<S> <C>
Assets (note 5)
Current assets:
Cash .............................................................. $ 2,387,691
Trade accounts receivable ......................................... 6,125
Shareholder advance (note 7) ...................................... 101,899
Inventory (notes 2 and 5) ......................................... 141,903
Prepaid expenses .................................................. 150,288
-----------
Total current assets .......................................... 2,787,906
Furniture, equipment and leasehold improvements, net (notes 3
and 5) ......................................................... 254,604
Intangible assets, net (note 4) ................................... 228,912
Other assets ...................................................... 29,862
-----------
$ 3,301,284
-----------
-----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................. 149,178
Accrued expenses (note 14) ........................................ 352,286
Obligations under capital leases, current portion (note 6) ........ 23,015
-----------
Total current liabilities ..................................... 524,479
Obligations under capital leases, less current portion (note 6) ... 55,191
Note payable (notes 5 and 8) ...................................... 540,000
Other liabilities ................................................. 63,594
-----------
Total liabilities ............................................. 1,183,264
-----------
Capital contribution subject to repayment (note 15) .................. 750,000
-----------
Stockholders' equity (notes 7, 15 and 17):
Preferred stock, no par value, 5,000,000 shares authoriized; no
shares issued and outstanding ..................................... --
Class A common stock, no par value, 18,500,000 shares
authorized; 1,610,000 shares issued and outstanding ............. 6,211,661
Class B common stock, no par value, 1,500,000 shares
authorized; 1,500,000 shares issued and outstanding;
convertible into one share of Class A common stock .............. 3,348,470
Deficit accumulated during the development stage .................. (8,192,111)
-----------
Total stockholders' equity .................................... 1,368,020
-----------
Commitments and contingencies (notes 12, 15 and 16) .................. 3,301,284
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<PAGE>
ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1995 AND 1996 AND
THE PERIOD FROM FEBRUARY 14, 1990 (DATE
INCEPTION) TO AUGUST 31, 1996
<TABLE>
<CAPTION>
FEBRUARY 14, 1990
(DATE OF INCEPTION)
TO AUGUST 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
SBIR grant income ................................ $ -- 98,000 98,000
License and development fees ..................... -- -- 275,000
Product sales (including related party amount of
$40,250 since inception) ....................... 31,097 10,025 87,872
------------ ------------ ------------
31,097 108,025 460,872
------------ ------------ ------------
Operating expenses:
Repurchase of technology rights (note 8) ......... -- 575,000 575,000
Research and development (including related party
amount of $960,680 since inception) (note 10) .. 711,082 1,051,942 6,432,261
Cost of sales (including related party amount of
$14,650 since inception) (note 10) ............. 76,366 50,314 254,297
Marketing, general and administrative (including
related party amounts of $70,426, $31,500 and
$506,270, respectively note 10) ................ 661,893 1,352,344 4,495,361
------------ ------------ ------------
1,449,341 3,029,600 11,756,919
------------ ------------ ------------
Loss from operations ........................... (1,418,244) (2,921,575) (11,296,047)
Other income (expense):
Interest income .................................. 202 88,535 149,145
Interest expense (including related party amounts
none, of $1,899 and $26,527, respectively)
(notes 5 and 6) ................................ (82,558) (83,751) (248,475)
------------ ------------ ------------
(82,356) 4,784 (99,330)
------------ ------------ ------------
Net loss ....................................... $ (1,500,600) $ (2,916,791) $(11,395,377)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common and common equivalent share ... $ (2.88) $ (1.72)
============ ============
Shares used in computing net loss per share amounts 521,000 1,698,129
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<PAGE>
ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 14, 1990 (DATE OF INCEPTION) TO AUGUST 31, 1996
<TABLE>
<CAPTION>
CLASS B
COMMON
CLASS A CLASS B STOCK PARTNER'S
COMMON COMMON TO BE CONTRIBUTED
STOCK STOCK ISSUED CAPITAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Balance, February 14, 1990
(date of inception .......... $ -- -- -- --
Initial capital contribution -- -- -- 525,100
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance (deficit), August 31,
1990 -- -- -- 525,100
Capital contributions ....... -- -- -- 1,305,000
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance August 31, 1991 ...... -- -- -- 1,830,100
Capital contributions ....... -- -- -- 870,000
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance (deficit), August 31,
1992 -- -- -- 2,700,100
Net loss - September 1, 1992
through September 21, 1992
(date of incorporation) ..... -- -- -- --
Incorporation of Echocath, Inc. --
issuance of 752,600 shares of Class B
common stock to former partners and
proceeds from sale of 95,400 shares
of Class B common stock, net of
issuance costs (including related
party issuance costs of $21,800)
(notes 7 and 10) ........... -- 1,688,102 -- (2,700,100)
Net loss - September 22, 1992
through August 31, 1993 .... -- -- -- --
---------- --------- --------- ----------
Balance (deficit), August 31, 1993 -- 1,688,102 -- --
Issuance of 127,000 shares of
Class B common stock, net of
issuance costs (including related
party issuance costs of $10,000)
(notes 7 and 10) ........... -- 592,800 -- --
Capital contributed by Alliance
(note 15) .................. -- -- 50,000 --
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance (deficit), August 31,
1995 -- 2,280,902 50,000 --
Capital contributed by Alliance
(note 15) .................. -- -- 925,368 --
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance, (deficit), August 31, 1995 -- 2,280,902 975,368 --
Issuance of 525,000 shares of Class B
common stock to the partners
of Alliance and certain other
entities and individuals ... -- 975,368 (975,368) --
Capital contributed by Alliance
(note 8) ................... -- 75,000 -- --
Adjustment to issuance costs
of Class B common stock .... -- 17,200 -- --
Warrants issued (note 17) ... 25,000 -- -- --
Issuance of 1,610,000 shares
of Class A common stock at $5.00
per share in February 1996,
net of offering cost ....... 6,186,661 -- -- --
Net loss .................... -- -- -- --
---------- --------- --------- ----------
Balance (deficit), August 31,
1996 $6,211,661 3,348,470 -- --
---------- --------- --------- ----------
---------- --------- --------- ----------
<CAPTION>
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE
---------------------------
PARTNERSHIP CORPORATION TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Balance, February 14, 1990
(date of inception .......... -- -- --
Initial capital contribution -- -- 525,100
Net loss .................... (545,902) -- (545,902)
---------- ---------- ----------
Balance (deficit), August 31,
1990 (545,902) -- (20,802)
Capital contributions ....... -- -- 1,305,000
Net loss .................... (1,054,526) -- (1,054,526)
----------
Balance August 31, 1991 ...... (1,600,428) -- 229,672
Capital contributions ....... -- 870,000
Net loss .................... (1,521,924) -- (1,521,924)
---------- ---------- ----------
Balance (deficit), August 31,
1992 (3,122,352) -- (422,252)
Net loss - September 1, 1992
through September 21, 1992
(date of incorporation) ..... (80,914) -- (80,914)
Incorporation of Echocath, Inc. --
issuance of 752,600 shares of Class B
common stock to former partners and
proceeds from sale of 95,400 shares
of Class B common stock, net of
issuance costs (including related
party issuance costs of $21,800)
(notes 7 and 10) ........... 3,203,266 -- 2,191,268
Net loss - September 22, 1992
through August 31, 1993 .... -- (1,729,624) (1,729,624)
---------- ---------- ----------
Balance (deficit), August 31, 1993 -- (1,729,624) (41,522)
Issuance of 127,000 shares of
Class B common stock, net of
issuance costs (including related
party issuance costs of $10,000)
(notes 7 and 10) ........... -- -- 592,800
Capital contributed by Alliance
(note 15) .................. -- -- 50,000
Net loss .................... -- (2,045,096) (2,045,096)
---------- ---------- ----------
Balance (deficit), August 31,
1995 -- (3,774,720) (1,443,818)
Capital contributed by Alliance
(note 15) .................. -- -- 925,368
Net loss .................... -- (1,500,600) (1,500,600)
---------- ---------- ----------
Balance, (deficit), August 31, 1995 -- (5,275,320) (2,019,050)
Issuance of 525,000 shares of Class B
common stock to the partners
of Alliance and certain other
entities and individuals ... -- -- --
Capital contributed by Alliance
(note 8) ................... -- -- 75,000
Adjustment to issuance costs
of Class B common stock .... -- -- 17,200
Warrants issued (note 17) ... -- -- 25,000
Issuance of 1,610,000 shares
of Class A common stock at $5.00
per share in February 1996,
net of offering cost ....... -- -- 6,186,661
Net loss .................... -- (2,916,791) (2,916,791)
---------- ---------- ----------
Balance (deficit), August 31,
1996 -- (8,192,111) 1,368,020
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------------
See accompanying notes to financial statements.
F-5
<PAGE>
<PAGE>
ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1995 AND 1996 AND THE PERIOD
FROM FEBRUARY 14, 1990 (DATE OF INCEPTION) TO AUGUST 31, 1996
<TABLE>
<CAPTION>
FEBRUARY 14,
1990 (DATE
OF INCEPTION)
TO AUGUST 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (1,500,600) $ (2,916,791) $(11,395,377)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 49,192 77,950 260,623
Loss on write-off of intangible assets ...................................... -- -- 2,000
Change in operating assets and liabilities:
Increase in trade accounts receivable ..................................... -- (6,125) (6,125)
(Increase) decrease in inventory .......................................... 35,232 3,023 (103,268)
Increase in prepaid expenses .............................................. (10,657) (80,608) (150,288)
(Increase) decrease in deferred offering costs ............................ (287,992) 328,236 --
Increase in other assets .................................................. -- (18,600) (29,862)
Increase (decrease) in accounts payable .................................. 46,167 (144,055) 149,178
Increase in accrued expenses and due to (from) related parties ............ 446,141 (561,257) 290,553
Increase in other liabilities ............................................. -- 63,594 63,594
------------ ------------ ------------
Net cash used in operating activities ....................................... (1,222,517) (3,254,633) (10,918,972)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements .................. -- (165,916) (326,551)
Purchases of intangible assets ................................................ (48,815) (23,371) (255,856)
------------ ------------ ------------
Net cash used in investing activities ...................................... (48,815) (189,287) (582,407)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from partner borrowings .............................................. -- -- 840,000
Principal payments on partner borrowings ...................................... -- -- (840,000)
Proceeds from borrowings of notes payable ..................................... 370,000 1,000,000 2,925,000
Principal payments on borrowings of note payable .............................. (750,000) (1,370,000) (2,385,000)
Advance to shareholder ........................................................ -- (101,899) (101,899)
Principal payments on capital lease obligations ............................... (11,663) (14,537) (62,428)
Proceeds from obligation to issue common stock ................................ 925,368 -- 975,368
Net proceeds from issuance of capital stock ................................... -- 92,200 2,876,268
Proceeds from partner capital contributions ................................... -- -- 2,700,100
Net proceeds from initial public offering and over-allotment option ........... -- 6,211,661 6,211,661
Capital contribution subject to repayment ..................................... 750,000 -- 750,000
------------ ------------ ------------
Net cash provided by financing activities .................................. 1,283,705 5,817,425 13,889,070
------------ ------------ ------------
Net increase in cash ........................................................... $ 12,373 2,373,505 2,387,691
Cash, beginning of period ...................................................... 1,813 14,186 --
------------ ------------ ------------
Cash, end of period ............................................................ $ 14,186 2,387,691 2,387,691
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ..................................................................... $ 71,505 83,650 221,239
============ ============ ============
Supplemental disclosure of noncash transaction:
Equipment transferred from partner ............................................ $ -- $ -- $ 48,604
============ ============ ============
Inventory transferred from partner ............................................ $ $ -- $ 38,635
============ ============ ============
Capital lease obligation transferred from partner ............................. $ $ -- $ 25,506
============ ============ ============
Equipment acquired under capital lease ........................................ $ -- $ 50,000 $ 115,128
============ ============ ============
</TABLE>
- ---------------
See accompanying notes to financial statements.
F-6
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements August 31, 1996
(1) Organization and Summary of Significant Accounting Policies
Organization:
EchoCath, Inc. (the "Company") was initially organized as a general
partnership on February 14, 1990 in the State of New Jersey under
the name of Catheter Technology Company, which name was subsequently
changed to EchoCath, Ltd. (the "Partnership"), to develop and market
medical devices using ultrasound imaging technology. On September
21, 1992, the partners of the Partnership exchanged their
partnership interests for equivalent ownership interest in the
common stock of the Company. Since inception, the Company has been
engaged primarily in research and development activities. There have
been no significant product sales from inception of the partnership
through August 31, 1996.
The Company has accumulated net losses for the period from February 14,
1990 (date of inception) to August 31, 1996 of $11,395,377 and
anticipates it will continue to incur substantial losses in the
future. The Company has those risks associated with companies in the
development stage, including but not limited to, its dependence on
key management and the continuing need for additional financing to
fund research and development and commercialization activities.
There can be no assurance that commercially successful products will
be developed or that the Company will achieve profitability at all
or on a sustained basis. See note 16 for discussion of liquidity
and operating matters.
Cash and cash equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash
equivalents. All cash and cash equivalents are held in United States
financial institutions and commercial paper. A total of $109,000 is
restricted as collateral for long-term obligations but not
reclassified to long-term assets. The carrying amount of cash and
cash equivalents approximates its fair value due to its short-term
nature.
Research and development:
All research and development costs are expensed as incurred.
Revenue recognition:
Revenue from product sales is recognized upon shipment and passage of
title to the customer.
Revenue from license and development fees is recognized when earned.
Revenue from SBIR Grants is recognized when earned.
(Continued)
F-7
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Intangibles:
Costs incurred in filing for patents and trademarks are capitalized.
Capitalized costs related to unsuccessful patent applications are
expensed when it becomes determinable that such applications will be
rejected. Capitalized costs related to successful patent
applications and trademarks are amortized on a straight line basis
over a period not to exceed twenty years or the remaining life of
the patent or trademark, whichever is shorter.
Inventory:
Inventory is valued at the lower of cost or market, cost being
determined under the first-in, first-out method.
Furniture, equipment and leasehold improvements:
Major additions and replacements of assets are capitalized at cost.
Maintenance, repairs and minor replacements are expensed as
incurred. Equipment acquired under capital leases is recorded at the
present value of minimum lease payments at the inception of the
lease. Furniture and equipment are depreciated using the
straight-line method over five years. Leasehold improvements and
equipment acquired under capital leases are amortized using the
straight-line method over the estimated useful life of the asset or
the lease term, whichever is shorter. Upon retirement or sale, the
cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or
loss is credited or charged to operations.
Accounting for income taxes:
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The measurement of deferred income tax assets
is reduced, if necessary, by a valuation allowance for any tax
benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are enacted.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
(Continued)
F-8
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Stock-based compensation:
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 presents companies with the
alternative of retaining the current accounting for stock-based
compensation or adopting a new accounting method based on the
estimated fair value of equity instruments granted to employees
during the year. Companies that do not adopt the fair value based
method of accounting will be required to adopt the disclosure
provisions of SFAS 123 commencing in fiscal 1997. The Company will
continue applying its current accounting principles and upon
adoption in fiscal 1997 will present the required footnote
disclosures.
Concentration of credit risk:
The Company invests its excess cash in deposits with major U.S.
financial institutions and money market funds. The Company has
established guidelines relative to diversification and maturities
that maintain safety and liquidity. To date, the Company has not
realized any significant gains or losses on its investments.
Net loss per share:
Net loss per common and common equivalent share is computed based upon
the weighted average number of shares of common stock outstanding
during the periods and gives effect to certain adjustments described
below. Pursuant to the requirements of the Securities and Exchange
Commission, all stock and warrants issued within the twelve months
immediately preceding the initial filing of the registration
statement for the Company's initial public offering at a price below
the offering price, totaling 525,000 shares of Class B common stock,
and 500,000 warrants, have been included in the calculation for 1995
utilizing the "treasury stock method". Pursuant to the policy of the
SEC staff, the calculation of shares used in computing net loss per
share in 1996, the fiscal year the initial public offering became
effective, also includes stock options and warrants as if they were
outstanding throughout the interim period contained in the
prospectus (November 1995), utilizing the treasury stock method.
Subsequent to the public offering, such options and warrants are not
included in the calculation as they are dilutive to net loss per
share. The 833,000 shares of forfeitable Class B common stock are
not considered outstanding for purposes of calculating the net loss
per share for any period (note 7).
(2) Inventory
Inventory consists of the following components as of August 31, 1996:
<TABLE>
<S> <C>
Raw materials $ 83,393
Finished goods 58,510
----------
$ 141,903
==========
</TABLE>
(Continued)
F-9
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(3) Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist of the following
components as of August 31, 1996:
<TABLE>
<S> <C>
Laboratory and production equipment $308,635
Office equipment 171,421
Leasehold improvements 10,146
--------
490,202
Less accumulated deprecation and
amortization 235,598
--------
Furniture, equipment and leasehold
improvements, net $254,604
========
</TABLE>
As of August 31, 1996, equipment acquired under capital leases (note 6)
amounted to $134,830 and related accumulated amortization was $62,869.
(4) Intangible Assets
Intangible assets consist of the following components as of August 31,
1996:
<TABLE>
<S> <C>
Patents and trademarks $227,442
Patent application costs 38,127
--------
265,569
Less accumulated amortization 36,657
--------
$228,912
========
</TABLE>
(5) Notes Payable
On September 24, 1993, the Company entered into an exclusive worldwide
development, supply and license agreement with Bard Radiology, C.R.
Bard, Inc., (Bard) (note 8). As part of this agreement, Bard provided
to the Company an advance of $540,000 in order to assist the Company
with its manufacturing obligations. This advance was evidenced by a
note
(Continued)
F-10
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(5) Notes Payable, cont.
payable issued by the Company to Bard, which note is secured by
virtually all of the Company's inventory, furniture and equipment. In
accordance with the agreement with Bard, the note is repayable by the
Company offsetting future receivables from Bard arising from the sale
of certain products to Bard against the principal amount of the note.
There have been no sales made to Bard by the Company through August 31,
1996 under this agreement.
The note does not bear interest during the four years commencing with the
first purchase order issued by Bard. However, if the Bard agreement is
terminated prior to full satisfaction of the note, then the remaining
principal balance of the note will become payable within sixty days or,
at the option of the Company, within twenty-four months, including
interest at the prime rate plus 1%. The carrying amount of this note
approximates its fair value due to the variable nature of interest
rates.
On May 23, 1995, the Company received $250,000 from an unaffiliated
company in exchange for issuing a six-month promissory note bearing
interest at 8%. The obligation was paid in full in February, 1996.
(6) Obligations under Capital Leases
Equipment under capital leases are capitalized using interest rates
(ranging from 7.3% to 25.26%) in effect at the inception of the
lease.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net
minimum lease payments as of August 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31:
-----------------------------------------
<S> <C>
1997 ............................................. $29,734
1998 ............................................. 27,615
1999 ............................................. 14,322
2000 ............................................. 11,976
2001 ............................................. 8,982
-------
Total minimum lease payments ................. 92,629
Less amount representing interest ................ 14,423
-------
Present value of net minimum lease payments ...... 78,206
Less current portion of obligations under capital
lease .......................................... 23,015
Long-term portion of obligations under capital
lease .......................................... $55,191
=======
</TABLE>
(Continued)
F-11
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(7) Stockholders' Equity
Recapitalization and stock split:
On August 24, 1995, the Board of Directors of the Company approved a
.848 for 1 reverse stock split of its common stock. In addition, on
August 24, 1995, the Board of Directors authorized an amendment to
the Company's certificate of incorporation. Under such amendment,
the Company was authorized to issue 20,000,000 shares of common
stock, of which 18,500,000 shares will be designated Class A common
stock and 1,500,000 shares will be designated Class B common stock,
and 5,000,000 shares of preferred stock, all of which will have no
par value. The Class A and B common stock are identical in all
respects except each share of Class A common stock is entitled to
one vote per share while each share of Class B common stock is
entitled to five votes per share. All shares of common stock
previously outstanding have been converted to an equivalent number
of Class B common stock shares on this date. In addition, in
September 1995, all outstanding shares of Series A convertible
preferred stock and all Series A preferred stockholders warrants
were exchanged for 127,000 shares of Class B common stock.
Series A convertible preferred stock:
In December 1993, the Company amended its certificate of incorporation
to authorize 250,000 shares of convertible preferred stock with no
par value. Holders of Series A convertible preferred stock were
entitled to one vote per common share as if the Series A convertible
preferred stock were converted into common stock shares on the date
of the vote. The Series A convertible preferred shares were
convertible initially into common stock at $20 per share. Each share
of Series A convertible preferred stock was convertible at any time
at the option of the stockholder. Each share was to automatically
convert upon the effectiveness of a registration statement of the
Company with respect to a public offering of securities which
results in aggregate gross proceeds to the Company of not less than
$10,000,000 or if the Company merges or consolidates with another
entity if such entity has, on such date, securities registered under
the Securities Exchange Act of 1934, as amended, with a market
capitalization in excess of $10,000,000. During 1994, the Company
sold to three investors in a private placement, an aggregate of
32,250 shares of Series A convertible preferred stock at $20 per
share, resulting in net proceeds to the Company of $610,000 (net of
issuance costs of $35,000) (note 10). All shares of Series A
convertible preferred stock and Series A preferred stockholders
warrants described below were cancelled and exchanged for 127,000
shares of Class B common stock in September 1995.
Initial public offering:
In January 1996, the Company completed its initial public offering
consisting of 1,610,000 units at a price of $5.00 per unit providing
approximately $6,200,000 in net proceeds. A unit consists of one
share of Class A Common Stock, one Class A Redeemable Warrant, and
one Class B Redeemable Warrant.
(Continued)
F-12
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, cont.
Common stock:
On September 21, 1992, the Company was incorporated and issued 752,600
shares of its Class B common stock in exchange for the net assets of
the Partnership. In conjunction with this exchange, the Company also
issued 95,400 shares of Class B common stock at $23.58 per share to
Eli Lilly and Company ("Eli Lilly") resulting in net proceeds to the
Company of $2,191,268. The funds the Company received were initially
restricted in that they were not to be used for any costs related to
any potential environmental conditions at the Company's former
facility. In April 1993, the Company received a negative declaration
from the State of New Jersey Department of Environmental Protection
and Energy for the former facility. The Company believes that it has
no liability with respect to any environmental damage found at its
former facility (note 12).
Warrants:
In connection with the private placement of Series A convertible
preferred stock in 1994, the Company issued an aggregate of 32,250
warrants ("Series A preferred stockholders warrants") to three
investors which give the holders the right to purchase shares of
Series A convertible preferred stock at an exercise price of $25 per
share, which price was subject to certain anti-dilution adjustments,
for a period of three years from the date of the Series A preferred
stockholders' warrants issuance. The Series A preferred stockholders
warrants did not entitle the holders to any voting rights or other
rights as a stockholder of the Company and could not be transferred
by the holders without the prior written consent of the Company.
These warrants were cancelled upon the exchange of Series A
Convertible Preferred Stock for Class B Common Stock in September
1995.
In connection with the Company's initial public offering, the Company
issued one Class A warrant and one Class B warrant. Each Class A
warrant entitles the holder to purchase, at an exercise price of
$7.00 (subject to adjustment) one share of Class A common stock and
one Class B warrant. Each Class B warrant entitles the holder to
purchase, at an exercise price of $9.15 (subject to adjustment) one
share of Class A common stock. The Class A warrants and Class B
warrants are exercisable through January 2001.
Forfeitable shares:
In connection with the initial public offering, the underwriter has
required that certain stockholders agree to contribute an aggregate
of 833,000 shares of Class B common stock to the Company without
consideration if specified earnings levels or market price targets
are not met (the "Forfeitable Shares"). The Forfeitable Shares are
not assignable or transferable. The restrictions on the Forfeitable
Shares will be released only if any of the following occur:
a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (the "Minimum Pretax
Income") amounts to at least $3.4 million during the fiscal
year ending on August 31, 1998; or
(Continued)
F-13
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, cont.
b) the minimum pretax income amounts to at least $5.0 million during
the fiscal year ending on August 31, 1999; or
c) the minimum pretax income amounts to at least $6.6 million during
the fiscal year ending on August 31, 2000; or
d) the minimum pretax income amounts to at least $8.5 million during
the fiscal year ending on August 31, 2001; or
e) commencing at the effective date and ending 42 months after the
effective date, the bid price of the Company's Class A common
stock shall average in excess of $12.50 per share (subject to
adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
f) commencing 42 months from the effective date and ending 60
months after the effective date, the bid price shall average in
excess of $16.75 per share (subject to adjustment in the event
of any reverse stock splits or other similar events) for 30
consecutive business days.
If none of the foregoing targets are met, on November 30, 2001 the
Forfeitable Shares will be placed in the Company's treasury and
cancelled. In the event that the restrictions on the Forfeitable
Shares are released, the Company would be required to record
compensation expense equal to the fair market value of the stock at
the date the restrictions were released.
In January 1996, the Company advanced $101,899 to a certain
shareholder. This amount was repaid in full on November 25, 1996.
(8) Development and License Agreements
On September 21, 1992, the Company entered into an exclusive worldwide
development and license agreement with Heart Rhythm Technologies, Inc.
(formerly a wholly-owned subsidiary of Eli Lilly) ("HRT") to design and
develop the Company's EchoMark and EchoEye systems for use with
HRT's Cardiac Electrophysiology Products. As part of this agreement,
HRT paid the Company a $250,000 nonrefundable license fee. The
development and license agreement requires HRT to pay royalties based
upon net sales of these products developed by the Company in the
future, if any. There were no royalties required to be paid to the
Company through January, 1996 in accordance with the terms of this
agreement. In January 1996, the Company entered into an agreement to
repurchase, for $575,000, certain technology rights. Of such amount,
$500,000 was paid from proceeds of the initial public offering and
$75,000 was reflected as a capital contribution. The Company recognized
a $575,000 charge to operations relating to this agreement to
repurchase.
(Continued)
F-14
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(8) Development and License Agreements, cont.
On September 24, 1993, the Company entered into an exclusive worldwide
development, supply and license agreement with Bard to develop the
Company's Colormark(R) system for use with Bard's automated core biopsy
products and supply Bard with the developed products based upon Bard
purchase orders subject to minimum purchase requirements. The agreement
requires Bard to pay royalties based upon royalty sales, as defined, of
these products developed by the Company in the future, if any.
The agreement also provides for a nonexclusive worldwide right by Bard to
distribute a certain electronic driver box manufactured by the Company
which would be used in conjunction with the developed products.
Bard funded $25,000 of the research and development program for the
purpose of developing prototypes of the developed products in order for
Bard to conduct clinical studies of the developed product. In addition,
Bard provided the Company $540,000 of cash in exchange for a secured
note in order to assist the Company in its manufacturing obligations
(note 5).
This development, supply and license agreement terminates upon the later
of five years or the last expiration of all the Company's patent rights
covering the developed products.
(9) Income Taxes
As of August 31, 1996, the Company has available net operating loss
carryforwards of approximately $7,716,000 for income tax reporting
purposes, which are available to offset future Federal and state
taxable income, if any, through 2011 and 2003, respectively. The
Company also has research and development tax credit carryforwards of
approximately $207,000 for Federal income tax purposes which are
available to reduce Federal income taxes, if any, through 2010. As a
result of the initial public offering and private placements of stock
in 1996, the Company experienced an ownership change as defined by
rules enacted with the Tax Reform Act of 1986. Accordingly, the
Company's ability to use its net operating loss carryforwards may be
subject to certain limitations.
(Continued)
F-15
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(9) Income Taxes, cont.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
August 31, 1996 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,086,502
Tax credit carryforward 206,913
Accrued expenses 23,475
Inventory 30,381
Technology rights 221,056
-----------
Total gross deferred tax assets 3,568,327
Less valuation allowance (3,559,046)
-----------
Net deferred tax assets 9,281
Deferred tax liabilities:
Furniture, equipment and leasehold improvement,
primarily due to differences in depreciation 9,281
-----------
Total gross deferred tax liabilities 9,281
Net deferred tax liability $ --
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1995
was $2,233,203. The net change in the total valuation allowance for the
year ended August 31, 1996 was an increase of $1,325,843.
(Continued)
F-16
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(10) Related Party Transactions
During each of the years ended August 31, 1995 and 1996, the Company
incurred $25,000 and $46,500, respectively of management and
administrative services from the parent company of a common
stockholder. These services relate to the Series A convertible
preferred stock sale (note 7), deferred offering costs and period
expenses and amounted to none, $10,000 and $15,000, respectively in
1995 and $15,000, none and $31,500, respectively in 1996. Management
believes that the expenses charged approximate those that would have
been charged by unrelated parties performing similar services.
The Company also had several transactions with two of its partners while
the Company was in its partnership form. These transactions included
acquisition of equipment, assumption of capital lease obligations and
marketing, general and administrative and research and development
expenses. There were no such transactions during the years ended August
31, 1995 and 1996.
Since June 1991, the President of one of the Company's common
stockholders has been performing accounting services for the Company.
The cost of such services has been billed from the common stockholder
to the Company and aggregated $60,426, none and $266,476 during the
years ended August 31, 1995 and 1996 and the period February 14, 1990
(date of inception) through August 31, 1996, respectively.
Since February 14, 1990 (date of inception) and through August 31, 1996,
related party charges for marketing, general and administrative and
research and development expenses amounted to $1,466,950. Management
believes that the expenses charged approximate those that would have
been charged by unrelated parties performing similar services.
(11) Profit Sharing 401(k) Plan
In February, 1996, the Company established its own 401(k) Plan. All
eligible employees may elect to contribute a portion of their wages to
the 401(k) Plan, subject to certain limitations. The Company is
required to contribute 25% of the employee contributions subject to a
maximum equal to 6% of the employees compensation. The Company
contributed $5,950 to the plan in 1996.
(Continued)
F-17
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(11) Profit Sharing 401(k) Plan, cont.
The Company previously participated in a 401(k) Plan of the parent
company of a common stockholder which covered substantially all
employees. All eligible employees could elect to contribute a portion
of their wages to the 401(k) Plan, subject to certain limitations.
Prior to October 1, 1991, the Company contributed 15% of the employee
contributions. Effective October 1, 1991, the parent company of a
common stockholder amended the 401(k) Plan which required the Company
to contribute 25% of the employee contributions subject to a maximum
equal to 6% of the employees compensation. The Company contributed
$7,165, $1,574 and $31,127 to the 401 (k) Plan in 1994, 1995 and the
period from February 14, 1990 (date of inception) to August 31, 1996,
respectively.
During 1995, the Company discontinued participation in the 401(k) Plan of
the parent company after having satisfied its contribution obligation
to the aforementioned Plan.
(12) Commitments and Contingencies
The Company leases office and laboratory facilities, equipment and
vehicles under various noncancellable operating lease arrangements.
Future minimum rental commitments required by such leases as of August
31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 235,856
1998 233,695
1999 299,146
2000 299,146
2001 299,146
-----------
$ 1,366,989
</TABLE>
Rental expense aggregated $216,356 in 1995, $280,732 in 1996 and $901,711
during the period February 14, 1990 (date of inception) to August 31,
1996.
The Company is currently involved in litigation pertaining to the payment
of a finders fee in the amount of $125,000 related to the Eli Lilly
stock sale (note 7). The Company is planning to defend this case
vigorously and believes that the resolution of this matter will not
have a significant adverse impact upon the financial position of the
Company.
(Continued)
F-18
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(12) Commitments and Contingencies, cont.
In March 1992, the Company ceased operations at a leased facility in
North Brunswick, New Jersey that it shared with one of its
stockholders, Ultramed, Inc. Based on a site inspection by an
environmental consultant, it appears that the only areas of significant
environmental concern which may have existed were associated with a
septic system and underground storage tank utilized by the Company and
other tenants at the site. The Company was advised by counsel that, at
the time of such cessation, notice to the State of New Jersey
Department of Environmental Protection and Energy of this cessation of
operations should have been filed and potential areas of environmental
concern, if any, addressed pursuant to the New Jersey Industrial Site
Recovery Act. The Company subsequently filed such a notice, and, in
April 1993, the Company received a negative declaration from the New
Jersey Department of Environmental Protection and Energy for its former
facility. Under the relevant environmental statute, the owner of the
property also was obligated to notify the New Jersey Department of
Environmental Protection and Energy and to take such further action as
may be required.
The Company believes that it has no liability with respect to any
environmental damage found at its former facility.
(13) Stock Option Plan
On August 24, 1995, the Company adopted a stock option plan (the 1995
Option Plan) which provides for the grant of incentive stock options,
nonqualified stock options and stock appreciation rights. The total
number of Class A common stock shares eligible for grant under the new
stock option plan is 220,000 shares.
A summary of activity under the 1995 Option Plan for the years ending
August 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
COMMON STOCK
OPTIONS OUTSTANDING
------------------------------------
SHARES PRICE PER SHARE
------------ -----------------
<S> <C> <C>
Balance, August 31, 1995 --
Granted 150,000 5.00
Exercised -- --
Cancelled -- --
-------
Balance, August 31, 1996 150,000 5.00
=======
Shares exercisable at August 31, 1996 42,000 5.00
=======
</TABLE>
(Continued)
F-19
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(14) Accrued Expenses
Accrued expenses consist of the following components as of August 31,
1996:
<TABLE>
<S> <C>
Professional fees $184,422
Payroll and benefits 82,220
Rent 60,464
Interest 25,180
---------
$352,286
=========
(Continued)
</TABLE>
(15) Alliance Agreement
On August 10, 1994, the Company entered into an agreement with Alliance
Partners ("Alliance") which provided for the sale of between 15% and
45% of the Company's Class B common stock to Alliance in exchange for
$425,000 in cash to be paid in installments, the assumption by Alliance
of a guarantee of outstanding borrowings under a bank demand note
payable in the amount of $750,000, and Alliance's undertaking to invest
or cause to be invested an additional $5,750,000 through a private
placement or public offering of not greater than 40% of the Company's
Class A common stock plus Alliance arranging unsecured bridge loan
financing for the Company to be provided through an underwriter in an
amount of not less than $1,000,000. In the event that the total
financing provided by and arranged by Alliance was less than $7,000,000
at the end of the six-month period after the closing of the private
placement or public offering, then Alliance was obligated to return to
the Company a pro rata portion of the Company's common stock owned by
Alliance equal to the difference between $7,000,000 and the amount of
financing actually invested in the Company. However, in no event shall
Alliance receive less than 10% of the outstanding common stock of the
Company.
As of January, 1996, the Company had received $1,050,368 in cash from
Alliance under this agreement. The agreement included an additional
capital contribution of $75,000 as the result of a repurchase agreement
for certain technology rights for $575,000 of which $500,000 was paid
from the proceeds of the offering and $75,000 was paid by the Alliance.
The Company charged $575,000 to operations relating to the agreement.
Amendment to Alliance agreement:
On July 7, 1995, the Company entered into an agreement to amend its
previously existing agreement with Alliance. In accordance with the
new agreement, the partners of Alliance and certain other entities
and individuals became entitled to receive a 35% equity interest in
the Company in exchange for Alliance's repayment of the Company's
$750,000 of outstanding borrowings under the Company's bank demand
note payable, which was paid in full August 1995. The payment of
such indebtedness is to be treated as a capital contribution;
however, if 75% of the Class B warrants to be issued in connection
with the initial public offering are subsequently exercised
providing the Company with $23,040,000 in proceeds, then $750,000 of
such proceeds will be repaid to Alliance. In addition, the new
agreement provides that funds previously advanced to the Company by
the partners of Alliance (aggregating $1,050,368 as of January,
1996) are to be treated as permanent capital. On September 7, 1995,
the Partners of Alliance and certain other entities and individuals
received 525,000 shares of Class B common stock pursuant to this
agreement.
(Continued)
F-20
<PAGE>
<PAGE>
ECHOCATH, INC.
(formerly EchoCath, Ltd.)
(A Development Stage Enterprise)
Notes to Financial Statements, Continued
(15) Alliance Agreement, cont.
On July 14, 1995, Alliance and the Company entered into another agreement
whereby Alliance agreed to advance the Company up to an additional
$200,000 if certain events had not occurred by certain dates. Such
advances are treated as loans and aggregated $120,000 as of August 31,
1995. These loans were repaid in September 1995.
One partner of Alliance is also a partner in a law firm that assisted the
Company with its bridge financing and initial public offering. Such
partner became a director of the Company in August 1995.
(16) Liquidity and operating matters
The Company's operations have not generated significant revenues to date.
The Company has incurred substantial losses since inception in 1990 and
expects that losses will continue in the foreseeable future. Also since
inception, the Company's efforts have been principally devoted to
research and development activities and raising capital. The Company is
attempting to reduce operating losses in the future by obtaining
contractual business arrangements to license the Company's currently
developed technology to outside third parties and intends to focus its
efforts on marketing and sales of various products in fiscal 1997. The
Company will also continue preclinical testing, and if successful,
begin clinical testing of proposed products in fiscal 1997. The Company
also intends to seek the requisite regulatory approvals for certain of
the proposed products during fiscal 1997. The Company anticipates
that its current cash, together with revenues expected to be derived
from sales of certain products, should be sufficient to fund
research, development, testing, regulatory requirements, operating and
other capital needs through December 1997. The Company also believes
that additional cash resources should be available either through
financing provided by the completion of license agreements and
strategic alliances or, if necessary, by reducing the level of its
operating expenses by deferring certain research and development or
marketing expenses. There can be no assurance that the Company will
be able to complete the aforementioned license agreements and
strategic alliances on acceptable terms or realize profitable sales
following December 31, 1997. The Company may well need substantial
additional financing in order to continue development of and
commercialize certain of its proposed products and other potential
products. The Company has no binding commitments from any third
parties to provide funds to the company. There can be no assurance
that the Company will be able to obtain financing from other
sources on acceptable terms.
(17) Bridge Financing
In September 1995, the Company completed a private placement of
$1,000,000 principal amount of promissory notes and 500,000 warrants
which raised gross proceeds of $1,000,000 (the Bridge financing). The
promissory notes bear interest at 10% per annum, the Bridge Loan and
the accrued interest were paid from the proceeds of the initial public
offering. The warrants allow their holders to purchase an aggregate of
500,000 shares of Class A common stock at an exercise price of $3.00
per share and converted upon the closing of the Offering into warrants
identical to the Class A warrants issued in the Offering.
The proceeds from the Bridge financing were allocated between the
promissory notes and the warrants. The difference of $25,000 between
the principal amount of the promissory notes and the amount allocated
was charged to operations during the year ending August 31, 1996.
F-21
<PAGE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
Frank A. DeBernardis(1).................... 54 Chief Executive Officer, President and Director
Executive Vice President, Director of Research and
David Vilkomerson.......................... 55 Development, Assistant Secretary and Director
Terence D. Wall(1)......................... 54 Co-Chairman of the Board of Directors
Daniel M. Mulvena(1)(3).................... 48 Co-Chairman of the Board of Directors
Anthony J. Dimun(2)........................ 53 Director
Irwin M. Rosenthal(3)...................... 68 Secretary and Director
Herbert Moskowitz(1)(2).................... 54 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
Frank A. DeBernardis has served as Chief Executive Officer, President and a
director of the Company since its inception. From 1989 to 1992, Mr. DeBernardis
served as President and was the sole stockholder of Implemed, Inc., a
privately-held corporation which provided consulting services in the area of
medical device manufacturing ("Implemed"). From July 1984 to December 1988, Mr.
DeBernardis served as Executive Vice President of ElectroCatheter Corporation, a
publicly-traded corporation which is an electrophysiology catheter supplier. Mr.
DeBernardis was honored in June 1993 as the Entrepreneur of the Year in Life
Sciences for the New Jersey region by Merrill Lynch, Inc. Magazine and Ernst &
Young for his work with the Company. Mr. DeBernardis is a founder of the
American College of Physician Inventors.
David Vilkomerson, PhD., has served as Executive Vice President, Vice
President Research and Development, Assistant Secretary and a director of the
Company since its inception. Dr. Vilkomerson is a founder of Ultramed and served
as President and Chairman of the Board of Ultramed from March 1982 to September
1992. From September 1977 to February 1982, Dr. Vilkomerson served in various
capacities including as the Research Director and the Managing Director of the
Special Research Group of Technicare Corporation, a subsidiary of Johnson &
Johnson Incorporated, where he guided the development and manufacturing of an
ultrasonic breast imaging system. Dr. Vilkomerson has authored or coauthored
approximately 30 technical papers and received over 25 United States patents.
Terence D. Wall served as Chairman of the Board of Directors of the Company
from inception to August 1995, and currently serves as Co-Chairman of the Board.
Mr. Wall is the founder of, and since 1972 has served as the President, Chief
Executive Officer and a director of, Vital Signs, Inc., a publicly traded
corporation ("Vital Signs"). Vital Signs and its subsidiaries design,
manufacture and market single-patient use medical products for anesthesia and
respiratory purposes and disposable medical products used in critical patient
care. Mr. Wall serves on the board of directors of certain other privately-held
health care businesses, and he is a director of Exogen, Inc., a publicly-traded
corporation.
Daniel M. Mulvena has served as Co-Chairman of the Board of Directors since
August 1995. Mr. Mulvena is President of Commodore Associates, a private firm
providing consulting services. Mr. Mulvena served as Vice-President and General
23
<PAGE>
<PAGE>
Manager of the Mansfield Division of Boston Scientific Corporation, a
publicly-traded corporation which manufactures and sells minimally invasive
medical products ("BSC"), beginning in February 1992. Mr. Mulvena left BSC in
April 1995 as Group Vice President Cardio/Cardiology responsible for Mansfield,
Cardiac Assist and Mansfield Electrophysiology Divisions of BSC. From August
1989 through October 1991, Mr. Mulvena was Chairman, President and Chief
Executive Officer of Lithox Systems, Inc., a developer and manufacturer of
medical devices and from October 1991 through February 1992 was a consultant to
Lithox Systems, Inc. On January 20, 1992, Lithox System, Inc. filed a petition
under Chapter 7 of the United States Bankruptcy Code. From 1980 to August 1989,
Mr. Mulvena served in various executive capacities with Bard Implants and Bard
Cardiosurgery, all divisions of Bard a leading worldwide manufacture of medical
devices. Mr. Mulvena formerly served as Vice Chairman of the Board of Directors
of Life Medical Sciences, Inc. ("Life Medical"), a corporation engaged in the
research and development of technologies for use in medical applications, from
July 1992 to May 1995. Mr. Mulvena serves on the boards of several
privately-held companies.
Anthony J. Dimun has served as a director of the Company since inception,
served as Secretary of the Company until August 1995 and served as a Vice
President and Treasurer of the Company until November 1996. Mr. Dimun has been
a certified public accountant since 1968. Mr. Dimun has served as the Chief
Financial Officer and Executive Vice President of Vital Signs since March 1991,
its Secretary and Treasurer since December 1991, and as a director since August
1987. From July 1989 through February 1991, he served as Senior Vice President
of First Atlantic Capital Ltd., a United States affiliate of an international
merchant banking group. Since January 1988, he has been a principal of Strategic
Concepts, Inc., a financial and acquisition advisory firm. From 1978 until
August 1987, he was a partner in the accounting firm of Goldstein Golub Kessler
& Company, P.C.
Irwin M. Rosenthal has served as a director of the Company since August
1995 and as Secretary of the Company since September 1995. Mr. Rosenthal is a
co-founder of Life Medical, and has served as Secretary, Treasurer and a
director of Life Medical since its inception in 1990. Mr. Rosenthal is an
attorney and since 1960 has specialized in securities law. He is currently a
senior partner at Rubin Baum Levin Constant & Friedman. From January 1990 to
November 1991, Mr. Rosenthal was a senior partner at Baer, Marks and Upham and
prior thereto he was an attorney at various other law firms. Mr. Rosenthal
serves as Secretary and as a director of Magar Inc. a private investment firm
("Magar"), of which he is a principal stockholder. He is also a director of
Magna-Lab, Inc., a publicly-traded medical technology company ("Magna-Lab"), and
Symbollon Corporation, a publicly-traded chemical and medical technology company
("Symbollon"), and is a general partner of Alliance which is a partnership which
invests in companies and may take on a management role in such companies. See
"Certain Transactions."
Dr. Herbert Moskowitz has served as a director of the Company since August
1995. Dr. Moskowitz, a former practicing dentist, has been the Chairman of the
Board of Life Medical since August 1990, and served as its Chief Executive
Officer from August 1990 to March 1993 and from December 1994 to May 1996. From
1986 to June 1990, he served in various capacities, including Chairman of the
Board, Chief Executive Officer and President of Advanced Tissue Sciences, Inc.,
a publicly-traded company engaged in the growth of human organ tissue for
potential therapeutic and laboratory applications. Dr. Moskowitz is also
President and a director of Magar. Dr. Moskowitz is a general partner of
Alliance. See "Certain Transactions."
Messrs. DeBernardis, Wall and Dimun, Dr. Vilkomerson, Cathtech Corp., a
privately-held corporation and wholly-owned subsidiary of Vital Signs (
"Cathtech"), Implemed and Ultramed, may be deemed founders or promoters of the
Company.
All directors of the Company are elected by the stockholders, or in the
case of a vacancy, by the directors then in office, to hold office until the
next annual meeting of stockholders of the Company and until their successors
are elected and qualified or until their earlier resignation or removal.
The Company has obtained key-person life insurance coverage in the face
amount of $2,000,000 for each of Messrs. DeBernardis and Dr. Vilkomerson naming
the Company as beneficiary under such policies. The Company has agreed to
maintain such policies in force for a minimum period of three years from the
date of the Offering or the respective terms of the employment agreements
between the Company and such officers, whichever period is longer.
24
<PAGE>
<PAGE>
BOARD COMMITTEES
The Company has established an Executive Committee, a Compensation and
Stock Option Committee, and an Audit Committee. The Executive Committee,
consisting of Messrs. DeBernardis, Wall, Mulvena, and Moskowitz, exercises all
the power and authority of the Board of Directors in the management and affairs
of the Company between meetings of the Board of Directors, to the extent
permitted by law.
The Compensation and Stock Option Committee, consisting of Anthony Dimun
and Dr. Herbert Moskowitz, makes recommendations to the Board of Directors
concerning compensation, including incentive arrangements, of the Company's
officers and key employees and others, administers the Company's Option Plan and
determines the officers, key employees and others to be granted options under
the Option Plan and the number of shares subject to such options.
The Audit Committee, consisting of Daniel Mulvena and Irwin Rosenthal,
reviews the engagement of the Company's independent accountants and the
independence of the accounting firm, the audit and non-audit fees of the
independent accountants and the adequacy of the Company's internal control
procedures.
KEY PERSONNEL
The Company's Key Personnel are as follows:
Bayard Gardineer, (66), Vice-President of Engineering--Mr. Gardineer has
been Vice-President of Engineering at the Company since September 1992. Prior to
that he was a Vice President of Ultramed from 1982 to 1992. Mr. Gardineer, a
graduate of Massachusetts Institute of Technology, has over 40 years experience
in mechanical design and production, primarily with International Business
Machine and Johnson & Johnson. He has been granted numerous patents.
David Lyons, (48), Manager, Electronic R&D--Since 1991, Mr. Lyon has been
responsible for the Company's design and development of electronics and software
related to real-time three dimensional ultrasound imaging, ultrasound beacon
systems, Doppler blood flow velocity measurement, and Doppler DSP methods. Prior
to that time, since 1988, Mr. Lyons worked for Ultramed where he conducted
similar design and development research.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation contains provisions to indemnify
its directors and officers to the fullest extent permitted by New Jersey law,
and also includes provisions to eliminate the personal liability of its
directors and officers to the Company and its stockholders to the fullest extent
permitted by New Jersey law. Under current law, such exculpation would extend to
an officer's or director's breaches of fiduciary duty, except for (i) breaches
of such person's duty of loyalty, (ii) those instances where such person is
found not to have acted in good faith and (iii) those instances where such
person received an improper personal benefit as the result of such breach.
The Company's bylaws provide that the Company may indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under New Jersey law.
The Company has entered into Indemnification Agreements ("Indemnification
Agreements") with each of its directors and officers. Each Indemnification
Agreement provides that the Company will indemnify the indemnitee against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with any civil or criminal action or administrative proceeding
arising out of his or her performance of his or her duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful. Each
Indemnification Agreement also requires that the Company indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law.
Each Indemnification Agreement permits the director or officer that is
party thereto to bring suit to seek recovery of amounts due under such
Indemnification Agreement and require that the Company indemnify the director or
other party thereto in all cases to the fullest extent permitted by applicable
law. The Company has directors' and officers' liability insurance.
25
<PAGE>
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Certain officers, directors and/or principal stockholders of the Company
filed their Form 3 filings several days late following the effective date of the
Offering. The Company is not aware of any other late filings pursuant to Section
16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company for the fiscal years ended August
31, 1996, 1995 and 1994 to Frank A. DeBernardis, the Company's Chief Executive
Officer, and to David Vilkomerson, the Company's Executive Vice President (the
"Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for the fiscal years ended August 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL CAPACITIES IN WHICH SERVED YEAR ANNUAL SALARY BONUS
- ---------------------------------------------- ---- ------------- ---------
<S> <C> <C> <C>
Frank A. DeBernardis............................ 1996 $151,000(1) $ 0
Chief Executive Officer 1995 76,000 25,000
1994 98,854 25,000
David Vilkomerson............................... 1996 $151,000(1) $ 0
Executive Vice President 1995 76,000 25,000
1994 98,854 25,000
</TABLE>
- ---------------
(1) Includes $26,000 of back pay.
STOCK OPTION TABLES
STOCK OPTIONS GRANTED IN FISCAL 1996 The following table sets forth
information concerning individual grants of stock options made by the Company
during the fiscal year ended August 31, 1996, to each of the Named Executive
Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO EMPLOYEES IN
UNDERLYING FISCAL YEAR EXERCISE OR BASE
NAME OPTIONS GRANTED 1996(1) PRICE (PER SHARE) EXPIRATION DATE
- ---- --------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Frank A. DeBernardis..................... 20,000 13.4 $5.00 January 2001
Chief Executive Officer
David Vilkomerson........................ 90,000 60.0 $5.00 January 2001
Executive Vice President
</TABLE>
- ---------------
(1) In fiscal 1996, the Company granted a total of 150,000 options under the
Option Plan. Such number was used in calculating the percentages above.
AGGREGATED OPTION EXERCISES The following table sets forth information (on
an aggregate basis) concerning each exercise of stock options during the fiscal
year ended August 31, 1996 by each of the Named Executive Officers and the final
year-end value of unexercised options.
26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED "IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY" OPTIONS AT FISCAL YEAR-
YEAR-END END(2)
SHARES ACQUIRED VALUE ------------------------------ ------------------------------
ON EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank DeBernardis............ 0 0 4,000 16,000 0 0
Chief Executive Officer
David Vilkomerson............ 0 0 30,000 60,000 0 0
Executive Vice President
</TABLE>
- ---------------
(1) As of the date of this Report, none of the Named Executive Officers have
exercised any of their options.
(2) Options are "in-the-money" at the fiscal year-end if the fair market vale
of the underlying securities on such date exceeds the exercise or base
price of the option. The last sales price of the securities underlying
the options on August 31, 1996, was $4.25 per share, and the exercise
price of the applicable options is $5.00 per share.
COMPENSATION OF DIRECTORS
The Company pays all outside directors $500 for each board or committee
meeting attended. Outside directors may also be reimbursed for expenses incurred
by them in acting as a director or as a member of any committee of the Board of
Directors.
In January 1996, the Company granted to each of Dr. Vilkomerson and Messrs.
DeBernardis and Mulvena options under the Option Plan to acquire up to 90,000,
20,000, and 20,000 shares of Class A Common Stock, respectively, at an exercise
price of $5.00 per share. Dr. Vilkomerson's options vest in three equal annual
installments commencing on the date of grant. Messrs. DeBernardis' and Mulvena's
options vest in five equal annual installments commencing on the date of grant.
All of such options are exercisable for a period of five years following the
date of vesting.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Frank
DeBernardis, to serve as President and Chief Executive Officer of the Company,
and Dr. David Vilkomerson, to serve as Executive Vice President and Director of
Research and Development of the Company. Each agreement is for a 13 month
period, and each expires on January 23, 1997. Under the agreements, Mr.
DeBernardis and Dr. Vilkomerson each receive a base salary of $125,000.
The employment agreements with each of Mr. DeBernardis and Dr. Vilkomerson
provide that each such agreement may be terminated by the Company only if such
executive officer has materially breached his obligations under the agreement,
engaged in willful misconduct against the Company or is found guilty of a felony
by a court of competent jurisdiction which, in the discretion of the Board of
Directors, will interfere with the performance of such executive officer's
duties and responsibilities or will materially adversely affect the Company. The
agreements also contain confidentiality and non-competition provisions. Upon
expiration of their current employment agreements, it is anticipated that each
of Mr. DeBernardis and Dr. Vilkomerson will enter into new employment agreements
with the Company.
The Company and Mr. Mulvena have entered into a consulting agreement
pursuant to which Mr. Mulvena provides consulting services to the Company from
July 1, 1995 through June 30, 1997 for, up to 27 days per quarter at a rate of
$1,000 per day. The agreement also provides for Mr. Mulvena to be reimbursed for
his reasonable expenses, to be provided with Company benefits and also contains
confidentiality and non-compete provisions.
OPTION PLAN
In August 1995, the Board of Directors adopted and the stockholders
approved the Option Plan. The Option Plan provides for the grant of incentive
stock Option ("ISOs") (within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and non-qualified stock options ( "NQSOs")
to certain directors, officers and employees of the Company. The Option Plan
further provides for the grant of NQSOs and stock appreciation rights ("SARs")
to directors, agents of, and consultants to, the Company, whether or not
employees of the Company. The purpose of the Option Plan is to attract and
retain employees, agents, consultants and directors. Options and SARs granted
under the Plan may not
27
<PAGE>
<PAGE>
be exercisable for terms in excess of 10 years from the date of grant. In
addition, no options or SARs may be granted under the Option Plan later than 10
years after the Option Plan's effective date. The total number of shares of
Class A Common Stock with respect to which options and SARs will be granted
under the Option Plan is 220,000. The shares subject to and available under the
Option Plan may consist, in whole or in part, of authorized but unissued stock
or treasury stock not reserved for any other purpose. Any shares subject to an
option or SAR that terminates, expires or lapses for any reason, and any shares
purchased pursuant to an option and subsequently repurchased by the Company
pursuant to the terms of the option, shall again be available for grant under
the Option Plan.
The Option Plan is administered by the Board of Directors of the Company
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, NQSOs or SARs, or a combination
thereof, and the number of shares of Class A Common Stock to be subject to such
options or SARs. The Board of Directors of the Company may, in its discretion,
delegate its power, duties and responsibilities under the Option Plan to a
committee consisting of two or more directors who are "disinterested persons"
within the meaning of Rule 16b-3 promulgated under the Exchange Act. The
Compensation and Stock Option Committee, which is responsible for administering
the Option Plan, is composed of Anthony Dimun and Dr. Herbert Moskowitz. The
exercise price of options granted under the Plan shall not be less than the fair
market value per share on the date of grant, as determined by the Board of
Directors.
The Option Plan contains certain limitations applicable only to ISOs
granted thereunder. To the extent that the aggregate fair market value, as of
the date of grant, of the shares to which ISOs become exercisable for the first
time by an optionee during the calendar year exceeds $ 100,000, the ISO will be
treated as a NQSO. In addition, if an optionee owns more than 10% of the
Company's stock at the time the individual is granted an ISO, the option price
per share cannot be less than 110% of the fair market value per share and the
term of the option cannot exceed five years.
In January 1996, the Company granted to each of Dr. Vilkomerson, Frank
DeBernardis, and Daniel Mulvena, directors of the Company, and Dr. Abbott, and
Dr. Isselbacher, Medical Advisors of the Company, options to purchase, up to
90,000, 20,000, 20,000, 10,000, and 10,000 shares of Class A Common Stock,
respectively, at an exercise price of $5.00 per share.
PROFIT SHARING 401(K) PLAN
In February 1996, the Company established a 401(k) plan. All eligible
employees may elect to contribute a portion of their wages to the 401(k) plan,
subject to certain limitations. The Company is required to contribute 25% of the
employee contributions subject to a maximum equal to 6% of the employees
compensation. The Company contributed approximately $6,000 to the plan in 1996.
The Company previously participated in a 401(k) Plan of the parent company
of a common stockholder which covered substantially all employees. The Company
contributed $1,574 and $31,127 to such plan in 1995 and the period from February
14, 1990 (date of inception) to August 31, 1995, respectively. During 1995, the
Company discontinued participation in such plan after having satisfied its
contribution obligation such plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 12, 1996, certain
information as to the stock ownership of (i) each of the Company's directors and
executive officers, (ii) directors and executive officers as a group and (iii)
all persons known by the Company to be the beneficial owner of more than five
percent of the outstanding common stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE OWNERSHIP OF ALL PERCENT OF VOTING
BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2)(3) COMMON STOCK OUTSTANDING POWER
- ------------------------------------- --------------------------- --------------------------- -----------------
<S> <C> <C> <C>
Terence D. Wall(4)...................... 451,560 15.6% 25.4%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Vital Signs, Inc.(5).................... 311,953 10.8% 17.5%
20 Campus Road
Totowa, New Jersey 07512
</TABLE>
28
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE OWNERSHIP OF ALL PERCENT OF VOTING
BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2)(3) COMMON STOCK OUTSTANDING POWER
- ------------------------------------- --------------------------- --------------------------- -----------------
<S> <C> <C> <C>
Cathtech Corp.(5) ...................... 311,953 10.8% 17.5%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Anthony Dimun(6) ....................... 4,366 .2% .2%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Ultramed, Inc.(7) ...................... 239,784 8.3% 13.5%
c/o Frank Joworisak
Echocath, Inc.
P.O. Box 7224
Princeton, New Jersey 08543
David Vilkomerson(8) ................... 44,068 1.5% 1.1%
c/o Echocath, Inc.
P.O. Box 7224
Princeton, New Jersey 08543
Frank DeBernardis(9) ................... 44,342 1.5% 2.3%
c/o Echocath, Inc.
P.O. Box 7224
Princeton, New Jersey 08543
Guidant Corporation .................... 95,400 3.3% 5.4%
111 Monument Circle
Suite 2900
Indianapolis, IN 46204
Attn: General Counsel
Herbert Moskowitz(10) .................. 78,750 2.7% 4.4%
c/o Irwin Rosenthal
30 Rockefeller Plaza
29th Floor
New York, New York 10112
Irwin M. Rosenthal(10) ................. 78,750 2.7% 4.4%
c/o Irwin Rosenthal
30 Rockefeller Plaza
29th Floor
New York, New York 10112
Marathon Investments, L.L.C ............ 187,778 6.5% 10.5%
c/o Cindy May
Saginaw Control and Engineering
95 Midland Road
Saginaw, MI 48603
Daniel M. Mulvena(11) .................. 4,000 .1% .04%
6 Fuller Lane
Marblehead, Mass 01945
Bradley Resources Corporation .......... 95,810 3.3% 5.4%
107 John Street
Southport, Ct. 06490
All executive officers and directors as
a group (including nominees)
(7 persons)(12) ...................... 705,836 24.0% 37.8%
</TABLE>
* Denotes less than 1%.
29
<PAGE>
<PAGE>
(1) Unless otherwise set forth herein, all shares set forth are shares of the
Company's Class B Common Stock. The Class A Common Stock has one vote per
share and the Class B Common Stock has five votes per share. All shares
are beneficially owned and sole voting and investment power is held by
the persons named, except as otherwise noted.
(2) Certain holders have agreed that up to a portion of his or its shares of
the Class B Common Stock are subject to transfer to the Company for no
consideration upon the failure of certain conditions to occur by certain
dates. So long as such shares are subject to such conditions, the holder
may vote but not dispose of such shares.
(3) Does not include shares of Class A Common Stock underlying options not
exercisable within 60 days following the date of this Prospectus.
(4) Mr. Wall is an officer, a director and a principal stockholder of Vital
Signs and an officer and director of Cathtech. These shares include the
311,953 shares of Class B Common Stock owned by Cathtech.
(5) Cathtech, a wholly owned subsidiary of Vital Signs, is the beneficial
owner of approximately 13% of the common stock of Ultramed. Vital Signs
may be deemed to be a beneficial owner of the 311,953 shares of Class B
Common Stock owned by Cathtech.
(6) Mr. Dimun is an officer and a director of Vital Signs and Cathtech. These
shares do not include the 311,953 shares of Class B Common Stock owned by
Cathtech, as to which Mr. Dimun disclaims beneficial ownership, since Mr.
Dimun is not a principal stockholder of Vital Signs.
(7) A portion of the shares have been pledged to Vital Signs and a law firm
as collateral for a loan and accounts payable, respectively. The pledgees
disclaim beneficial ownership of such shares.
(8) Includes (i) options granted by Ultramed to Dr. Vilkomerson to purchase
from Ultramed 7,526 shares of Class B Common Stock, which options are
exercisable within 60 days following the date of this Prospectus, and
(ii) an option granted by the Company to Dr. Vilkomerson to purchase
60,000 shares of Class A Common Stock, which option is exercisable within
60 days following the date of this Prospectus. Excludes (i) options
granted by Ultramed to Dr. Vilkomerson to purchase from Ultramed 1,882
shares of Class B Common Stock of the Company, which options are not
exercisable within 60 days following the date of this Prospectus, (ii)
239,784 shares of Class B Common Stock owned by Ultramed (of which he is
an officer, director and approximately 13% stockholder), as to which Dr.
Vilkomerson disclaims beneficial ownership and (iii) options to purchase
30,000 shares of Class A Common Stock which are not yet vested.
(9) Includes options granted by the Company to Mr. DeBernardis to purchase
8,000 shares of Class A Common Stock, which options are exercisable
within 60 days following the date of this Prospectus. Excludes (i) 10,006
shares of Class B Common Stock held in a trust for the benefit of Mr.
DeBernardis' children, as to which Mr. DeBernardis disclaims beneficial
ownership and (ii) options to purchase 12,000 shares of Class A Common
Stock which are not yet vested.
(10) Dr. Moskowitz and Mr. Rosenthal are each partners of Alliance, each
holding a 50% ownership interest in such partnership.
(11) Includes options granted by the Company to Mr. Mulvena to purchase 8,000
shares of Class A Common Stock, which options are exercisable within 60
days following the date of this prospectus and excludes options to
purchase 12,000 shares of Class A Common Stock which are not yet vested.
(12) Includes 76,000 Shares of Class A Common Stock and 7,526 shares of Class
B Common Stock issuable upon exercise of options exercisable within 60
days from the date of this Prospectus. Excludes (i) 1,882 shares of Class
B Common Stock underlying options that are not exercisable within 60 days
from the date of this Prospectus and (ii) options to purchase 54,000
shares of Class A Common Stock which are not yet vested.
Messrs. DeBernardis and Wall, Dr. Vilkomerson, Ultramed, Implemed and
Cathtech may be deemed to be founders or promoters of the Company as that term
is defined under the Securities Act.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since October 1, 1992, Vital Signs has provided certain management services
to the Company and incurred certain out-of- pocket expenses on behalf of the
Company. In January 1996, the Company paid Vital Signs approximately $82,000 for
such services and costs incurred. Management believes that the fees incurred by
the Company did not exceed fees that would have been charged by unrelated
parties for similar services.
In September 1992, the Company sold 95,400 shares of Class B Common Stock
of the Company to Eli Lilly for $2,250,000. The investment was part of a
strategic alliance between the Company and HRT, pursuant to which HRT and the
Company entered into the HRT Agreement. In August 1995, Eli Lilly transferred
its Class B Common Stock to Guidant Corporation. In January 1996, the Company
entered into an agreement to repurchase its rights under the HRT Agreement from
Guidant Corporation for $575,000. Of such amount, $75,000 was paid by Alliance.
Pursuant to an agreement, dated July 7,1995, between Alliance and the
Company (the "Alliance Agreement"), Alliance satisfied a bank loan of the
Company in the principal amount of $750,000 and in exchange the Company agreed
to repay Alliance if the Company receives at least $23,040,000 in gross proceeds
from the exercise of the Class B Warrants.
In November 1995, Alliance loaned the Company $100,000, which loan bore
interest at a rate of 9% per annum and was repaid in January 1996.
30
<PAGE>
<PAGE>
In January 1996, Alliance agreed to arrange for the payment of $75,000 by
certain of the Company's existing stockholders in connection with the Company's
repurchase of rights under the HRT Agreement. A portion of such payment was made
by Alliance.
Irwin M. Rosenthal and Herbert Moskowitz, directors of the Company, are
partners of Alliance. Irwin M. Rosenthal is also a partner of Rubin Baum Levin
Constant & Friedman, counsel to the Company. Other than Mr. Rosenthal, certain
attorneys associated with such firm or their relatives own approximately 16,168
shares of Class B Common Stock of the Company and 50,000 Class A Warrants, which
are exercisable into 50,000 shares of Class A Common Stock and 50,000 Class B
Warrants which are exercisable into 50,000 shares of Class A Common Stock.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 By-Laws of the Company.(1)
10.1 1995 Stock Option Plan of the Company.(1)
10.2 Form of Indemnification Agreement to be entered into between the Company
and each officer and Director of the Company.(1)
10.3 Employment Agreement, dated as of June 11, 1991 between the Company and
Frank DeBernardis, as extended and amended.(1)
10.4 Employment Agreement, dated as of June 11, 1991 between the Company and
David Vilkomerson, as extended and amended.(1)
10.5 Letter Agreement, dated as of May 12,1995, between the Company and Daniel
Mulvena.(1)
10.6 Form of Medical Advisory Agreement between the Company and Dr. Kurt
Isselbacher.(1)
10.7 Form of Consulting Agreement between the Company and Daniel Mulvena(1)
10.8 Patent Assignment dated as of 10/30/92 from Catheter Technology to the
EchoCath, Ltd.(1)
10.9 Patent Assignment dated as of 10/30/92 from EchoCath Ltd to the
Company.(1)
10.10 Patent Assignment dated as of 11/17/92 from EchoCath Ltd. to the
Company.(1)
10.11 Development and Licensing Agreement between Heart Rhythm Technologies,
Inc. and the Company effective as of September 21, 1992.(1)
10.12 Stock Purchase Agreement effective as of September 21,1992 between the
Company and Eli Lilly and Company.(1)
10.13 Development, Supply and License Agreement dated September 24, 1993
between the Company and Bard Radiology, C.R. Bard, Inc., as amended.(1)
10.14 Lease Agreement dated as of November 22, 1991 between BGS Realty and
EchoCath Ltd.(1)
10.15 Agreement dated as of July 7, 1995 between the Company and Alliance
Partners.(1)
10.16 Agreement dated as of July 14, 1995 between the Company and Alliance
Partners.(1)
10.17 Agreement dated as of November 30, 1995 among Echocath, Inc. Guidant
Corporation and Heart Rhythm Technologies, Inc.(1)
10.18 Agreement dated as of January 3,1996 among the Company, Guidant
Corporation and Heart Rhythm Technologies, Inc.(1)
10.19 Form of Warrant Agreement among the Company, the Underwriter and American
Stock Transfer & Trust Company, including forms of Class A and Class B
Warrant Certificates.(1)
10.20 Form of Stock Restriction Agreement among the Company, certain holders of
the Class B Common Stock and D.H. Blair Investment Banking Corp.(1)
10.21 Second Amendment to Lease effective April 1, 1996 between the Company and
BGS Realty.
21 Subsidaries of the Company.(1)
24 Power of Attorney (included in signature page hereto).
27 Financial Data Schedule.
- ---------------
(1) Incorporated by reference to Registrant's Registration Statement on form
SB-2 (Reg. No. 33-97688) which was declared effective by the Securities
and Exchange Commission on January 17, 1996.
(b) Reports on Form 8-K
None.
31
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ECHOCATH, INC.
By: /s/ Frank A. DeBernardis
_______________________________________________
Frank A. DeBernardis, Chief Executive Officer
and President (principal executive officer and
principal financial and accounting officer)
December 12, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Frank A. DeBernardis and David
Vilkomerson, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report and all documents relating thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Exchange Act, this Report has
been signed by the following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frank A. DeBernardis Chief Executive Officer and President December 12, 1996
- -------------------------------- (principal executive officer and principal
Frank A. DeBernardis financial and accounting officer)
/s/ David Vilkomerson Executive Vice President and Director December 12, 1996
- --------------------------------
David Vilkomerson
Co-Chairman of the Board December 12, 1996
- --------------------------------
Terence D. Wall
Treasurer and Director December 12, 1996
- --------------------------------
Anthony J. Dimun
/s/ Herbert Moskowitz Director December 12, 1996
- --------------------------------
Herbert Moskowitz
/s/ Irwin M. Rosenthal Secretary and Director December 12, 1996
- --------------------------------
Irwin M. Rosenthal
/s/ Daniel M. Mulvena Co-Chairman of the Board December 12, 1996
- --------------------------------
Daniel M. Mulvena
</TABLE>
32
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as......................(TM)
The registered trademark symbol shall be expressed as...........(R)
The division symbol shall be expressed as.......................[div]
<PAGE>
<PAGE>
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") dated this
3rd day of May, 1996 (effective as of April 1, 1996), by and between BGS REALTY,
a New Jersey partnership, having an address at 530 South Avenue East, Cranford,
New Jersey 07016 (hereinafter the "Landlord"); and ECHOCATH, INC., a New Jersey
corporation, having an address at 4326 Route 1, South Brunswick, New Jersey
08852 (hereinafter the "Tenant").
W I T N E S S E T H:
WHEREAS, the Landlord is the owner of certain lands and premises
located at 4326 Route 1, South Brunswick, New Jersey, upon which lands and
premises there is erected an office/research building containing approximately
20,000 square feet (hereinafter the "Building"); and
WHEREAS, the Landlord and Tenant have previously entered into a
Lease Agreement dated November 22, 1991 (hereinafter the "Lease Agreement"), in
connection with the leasing of approximately 9,570 square feet in the Building
identified as Section "A" on Schedule "C" to the Lease Agreement; and
WHEREAS, the Landlord and Tenant have previously entered into a
First Amendment to Lease Agreement dated March 18, 1994 (hereinafter the "First
Amendment"), pursuant to which Tenant leased the remaining portions of the
Building, identified as Sections B and C on Schedule C to the Lease Agreement,
such that the Tenant has leased the entire Building (hereinafter the "Leased
Premises"); and
WHEREAS, the Lease Agreement, the First Amendment, and this
Second Amendment shall collectively be hereinafter referred to as the "Lease";
and
WHEREAS, the Lease Term (as such term is defined in the Lease)
expires on March 31, 1997; and
WHEREAS, the Tenant wishes to exercise its option to extend the
Lease Term for one (1) five (5) year period to commence on April 1, 1997; and
WHEREAS, the Landlord has agreed to the renewal of the Lease Term
through March 31, 2002; and
<PAGE>
<PAGE>
WHEREAS, Landlord and Tenant wish to modify and amend certain
terms and conditions of the Lease, including, but not limited to, the schedule
and amounts of installment payments of Basic Rent and Additional Rent due under
the Lease.
NOW, THEREFORE, in consideration of the sum of $1.00 and other
good and valuable consideration, the parties hereto covenant and agree as
follows:
1. The Lease Term is extended for one (1) five (5) year period
commencing on April 1, 1997, such that the Termination Date (as such term is
defined in the Lease) is March 31, 2002.
2. On or before May 10, 1996, Tenant shall pay to Landlord the
sum of $11,041.00 representing balance of Security Deposit due and owing under
and pursuant to the terms and conditions of Article 27 of the Lease Agreement.
3. Landlord and Tenant acknowledge and confirm Basic and
Additional Rent past due and owing under the Lease, plus late charges and
interest accrued, in the amount of $83,249.70, hereinafter referred to as the
"Outstanding Rent".
4. Commencing as of April 1, 1996 (hereinafter referred to as the
"Effective Date"), and thereafter on the first day of each consecutive calendar
month during the Term, Tenant shall pay Basic Rent and the Outstanding Rent as
set forth below, payable in advance. Tenant shall pay, in addition to the Basic
Rent and the Outstanding Rent hereinbelow provided, all Additional Rent and
other charges as in the Lease required.
<TABLE>
<CAPTION>
MONTHLY
MONTHLY INSTALLMENT TOTAL
INSTALLMENT OF MONTHLY
OF BASIC OUTSTANDING INSTALLMENT
PERIOD RENT RENT OF RENT
------ ---- ---- -------
<S> <C> <C> <C>
APR 1 1996-MAR 31 1997 $16,666.67 $1,156.25 $17,822.92
APR 1 1997-MAR 31 1998 $16,666.67 $1,156.25 $17,822.92
APR 1 1998-MAR 31 1999 $18,333.33 $1,156.25 $19,489.58
APR 1 1999-MAR 31 2000 $23,333.33 $1,156.25 $24,489.58
APR 1 2000-MAR 31 2001 $23,333.33 $1,156.25 $24,489.58
APR 1 2001-MAR 31 2002 $23,333.33 $1,156.25 $24,489.50
</TABLE>
The Outstanding Rent as set forth above is reflected on Exhibit A attached
hereto.
5. (a) Simultaneously with the execution of this Second
Amendment, Tenant shall deposit with Landlord a letter of credit (the "Letter of
Credit") in the amount of
-2-
<PAGE>
<PAGE>
the Outstanding Rent (as such amount may be reduced as hereinafter provided, the
"L/C Amount") as security for the full payment by Tenant of the Outstanding Rent
pursuant to the terms and conditions of this Second Amendment. The Letter of
Credit shall be unconditional and irrevocable, payable to Landlord solely upon
presentation of a sight draft indicating default of Tenant's obligation to pay
the Outstanding Rent. The Letter of Credit shall be for a term of not less than
one (1) year and expressly provide that the Letter of Credit shall automatically
be renewed for successive one (1) year periods unless the issuer shall have
provided the Landlord with written notice of such non-renewal at least thirty
(30) days prior to the then expiration date of the Letter of Credit, and at
least thirty (30) days prior to the expiration of said Letter of Credit, Tenant
shall deliver to Landlord a supplemental or new letter of credit meeting the
same requirements set forth herein. The failure of Tenant to timely deliver a
new or supplemental letter of credit in accordance with the provisions of this
paragraph 5, or Landlord's receipt of notice from the issuing bank that the
Letter of Credit will not be renewed, shall entitle Landlord to draw down the
Letter of Credit and apply such proceeds on the terms and conditions of this
paragraph 5. In the event Tenant defaults in its payment obligation of the
Outstanding Rent, Landlord may, at its option, draw upon the Letter of Credit,
in whole or in part, and use, apply or retain all or any portion of such money
to the extent required for the payment of the Outstanding Rent. Upon full
payment by Tenant of the Outstanding Rent, the Letter of Credit shall be
returned to Tenant within five (5) business days thereafter.
(b) Notwithstanding anything to the contrary contained in
this paragraph 5, provided Tenant shall not, on the applicable anniversary of
the date of signature hereof by the parties (the "Effective Date"), be in
default of its obligation to pay monthly installments of the Outstanding Rent
Balance, Landlord hereby consents to the L/C Amount being reduced by $13,875.00
on each of the first, second, third, fourth, and fifth anniversaries of the
Effective Date. Following each anniversary of the Effective Date for which
Tenant shall be entitled to have the LJC Amount reduced, Tenant may deliver to
Landlord an amendment to the Letter of Credit (which amendment must be
reasonably acceptable to Landlord in all respects) reducing the amount of the
Letter of Credit to the new L/C Amount.
-3-
<PAGE>
<PAGE>
(c) Tenant shall not assign or encumber or attempt to
assign or encumber the Letter of Credit or any monies drawn from such Letter of
Credit and Landlord shall not be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance. In the event that any bankruptcy,
insolvency, reorganization or other debtor-creditor proceedings shall be
instituted by or against Tenant, its successors or assigns, Landlord may draw
upon the Letter of Credit, in whole or in part, and use, apply or retain all or
a portion of such money for the payment of any Outstanding Rent.
(d) In consideration of Tenant depositing the Letter of
Credit with Landlord, Landlord agrees to annually reimburse Tenant 1 % of the
L/C Amount. Said amount shall be paid to Tenant by Landlord by way of a credit
against the annual amount of Outstanding Rent for the twelve (12) month period
covered by the Letter of Credit, amortized over said twelve (12) month period
(e.g. if the L/C Amount is $80,000.00, 1 % thereof equals $800.00, spread
equally over twelve (12) months, reducing the monthly installment of Outstanding
Rent for that particular year by $66.67), or, at Landlord's option, by the
payment of a 1 % lump sum at the time the Letter of Credit, or amendment
thereto, is delivered to Landlord.
6. Anything contained therein to the contrary notwithstanding, in
the event of termination of the Lease prior to the Termination Date pursuant to
the terms and conditions of Articles 15, 16, 17, or 19 of the Lease Agreement,
or upon the occurrence of an Event of Default under the Lease, Tenant shall pay
to Landlord the Outstanding Rent (as of the date of such early termination or
occurrence of an Event of Default). Such payment shall be made in full on the
first day of the calendar month next following the date of early termination or
the occurrence of an Event of Default. Tenant expressly agrees that its
obligation to Landlord to pay the Outstanding Rent shall survive termination of
the Lease prior to the Termination Date.
7. Article 17.1 of the Lease Agreement is deleted in its entirety
and the following substituted in its stead:
17.1 If a part or all of the Demised Premises be taken or
condemned for a public or quasi-public use, all compensation
awarded upon such condemnation or taking shall go to Lessor and
Lessee shall have no claim thereto; and Lessee hereby expressly
waives, relinquishes and releases to Lessor any claim
-4-
<PAGE>
<PAGE>
for damages or other compensation to which Lessee might otherwise
be entitled because of any such taking or limitation of the
leasehold estate hereby created, and irrevocably assigns and
transfers to Lessor any right to compensation or damages to which
Lessee may be entitled by reason of the condemnation of all or a
part of the Demised Premises or the leasehold estate. Without
diminishing Lessor's award, the Lessee shall have the right to
make a claim against the condemning authority for such
independent claim which it may have and as may be allowed by law,
and nothing in this paragraph shall be deemed to give Lessor an
interest in or require Lessee to assign to Lessor any separate
award made to Lessee for (i) the taking of Lessee's personal
property, (ii) cost of interruption or damage of Lessee's
business, or (iii) costs and reimbursements awarded to Lessee for
relocation.
8. In the event of termination of the Lease prior to the
Termination Date pursuant to the terms and conditions of Article 17
(Condemnation) of the Lease Agreement, Landlord shall waive the payment of Basic
Rent for the last one and one half (1 1/2) months of the Lease Term prior to
termination.
9. Anything in Article 15 of the Lease Agreement to the contrary
notwithstanding, Landlord's consent to a proposed sublet of the Demised Premises
or any part thereof shall not be unreasonably withheld by Landlord. All other
terms and conditions of Article 15 of the Lease Agreement shall remain in full
force and effect, unmodified and unimpaired.
10. Anything contained in the Lease Agreement to the contrary
notwithstanding, as of April 1, 1996, Tenant shall promptly pay, when the same
shall be due and payable, all Operating Expenses and Taxes (as such terms are
defined in Section l.l(ac) and (as) of the Lease Agreement, respectively). It is
the intent of Landlord and Tenant that, as of the April 1, 1996, Landlord shall
no longer project or estimate Taxes and Operating Expenses, as contemplated by
Articles 4 and 5 of the Lease Agreement, but that Tenant shall make direct
payment of same as and when due and payable. The Tenant agrees that it shall,
within ten (10) days after demand by Landlord, furnish in writing to Landlord
evidence of payment of the then current Taxes, water and/or sewer charges
required to be paid by Tenant as herein provided.
11. Except as in this Second Amendment provided, all of the terms
and conditions of the Lease shall remain in full force and effect.
-5-
<PAGE>
<PAGE>
12. This Second Amendment shall be binding upon the parties
hereto, their heirs, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused these presents
to be executed by their proper authorized parties the day and year first above
written.
BGS REALTY, a New Jersey partnership
BY:
_______________________________________________
ROBERT J. BAUER, Partner
ECHOCATH, INC., a New Jersey corporation
BY:
_______________________________________________
Name:
Title: President
-6-
<PAGE>
<PAGE>
STATE OF NEW JERSEY )
) SS.
COUNTY OF UNION )
BE IT REMEMBERED, that on this ___ day of May, 1996, before me,
the subscriber, , personally appeared ROBERT J. BAUER,
who, I am satisfied, is the person who signed the within Instrument as Partner
of BGS REALTY, a New Jersey Partnership, the Landlord named therein, and
thereupon he acknowledged that he signed, sealed and delivered the same as the
act and deed of BGS REALTY, for the uses and purposes therein expressed.
_______________________________________________
SHIRLEY M. VELLA
NOTARY PUBLIC OF NEW JERSEY
My Commission Expires May 26,1997
Qualified in Union County
STATE OF NEW JERSEY )
) SS.
COUNTY OF )
BE IT REMEMBERED, that on this ___ day of May, 1996 before me,
the subscriber, , personally appeared
, the President of ECHOCATH, INC., a New Jersey
Corporation, who, I am satisfied is the Tenant mentioned in the within
instrument, and thereupon he acknowledged that the said instrument made by the
corporation and sealed with its corporate seal, was signed, sealed with the
corporate seal and delivered by him as such officer and is the voluntary act and
deed of the corporation, made by virtue of authority from its Board of
Directors.
_______________________________________________
-7-
<PAGE>
<PAGE>
EXHIBIT A
<TABLE>
<C> <S>
$81,054.75 BASIC RENT
$36,588.42 ADDITIONAL RENT
$16.400.60 INTEREST (10% on all payments in arrears to 1/1/96)
----------
$4,705.73 LATE CHARGE (4% on delinquent payments)
$138,749.50 OUTSTANDING RENT
($30,000.00) LESS PAYMENT MADE ON 2/28/96
($25 499.80) LESS PAYMENT MADE ON EXECUTION OF SECOND
----------- AMENDMENT
$83,249.70 OUTSTANDING RENT
[div]72 months (4/96 - 3/2002)
$1.156.25 (0% on balance carried forward)
</TABLE>
-8-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-1-1995
<PERIOD-END> AUG-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 2,387,691
<SECURITIES> 0
<RECEIVABLES> 108,024
<ALLOWANCES> 0
<INVENTORY> 141,903
<CURRENT-ASSETS> 2,787,906
<PP&E> 254,604
<DEPRECIATION> 61,994
<TOTAL-ASSETS> 3,301,284
<CURRENT-LIABILITIES> 524,479
<BONDS> 0
<COMMON> 9,560,131
0
0
<OTHER-SE> (8,192,111)
<TOTAL-LIABILITY-AND-EQUITY> 3,301,284
<SALES> 10,025
<TOTAL-REVENUES> 108,025
<CGS> 50,314
<TOTAL-COSTS> 50,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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