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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 28, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission File Number : 0-27380
ECHOCATH, INC.
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(Exact Name of Small Business Issuer as specified in its charter)
New Jersey 22-3273101
- --------------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
P.O. Box 7224, Princeton, NJ 08543
- ---------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code. . . (609) 987-8400
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Check whether 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
------ ------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
CLASS OF COMMON EQUITY OUTSTANDING AT APRIL 14, 1997
- ---------------------- -----------------------------
Class A Common Stock (No Par Value) 1,610,000
Class B Common Stock (No Par Value) 1,500,000
Transitional Small Business Disclosure Format (check one)
YES NO X
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PART 1: FINANCIAL INFORMATION
PART 2: OTHER INFORMATION
ECHOCATH, INC.
INDEX
Item 1: Financial Statements Page
----
Balance Sheets,
August 31, 1996 and February 28, 1997 (Unaudited) 3
Statements of Operations for the three months ended
February 29, 1996 (Unaudited), and February 28, 1997 (Unaudited) 4
Statements of Operations for the six months ended
February 29, 1996 (Unaudited) and for the period from
February 14, 1990 (date of inception) to February 28, 1997 (Unaudited) 5
Statements of Cash Flows for the three months ended February 29, 1996
(Unaudited), and February 28, 1997 (Unaudited) and for the period
from February 14, 1990 (date of inception) to
February 28, 1997 (Unaudited) 6 & 7
Notes to Financial Statements and Exhibits 8 & 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 9, 10 & 11
Part II: Other Information 11 & 12
Signatures 13
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ECHOCATH, INC.
(FORMERLY ECHOCATH, LTD.)
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, 1996 February 28, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,387,691 $ 2,360,427
Trade receivable 6,125 --
Shareholder advance 101,899 --
Inventory 141,903 208,716
Prepaid expenses 150,288 109,618
----------- ------------
Total current assets 2,787,906 2,678,761
Furniture, equipment and leasehold improvements, net 254,604 342,434
Intangible assets, net 228,912 233,752
Other assets 29,862 29,686
----------- ------------
$ 3,301,284 $ 3,284,633
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 149,175 $ 135,923
Accrued expenses 352,286 346,632
Obligations under capital leases, current portion 23,015 22,447
----------- -----------
Total current liabilities 524,476 505,002
Obligations under capital leases 55,191 42,817
Note payable 540,000 540,000
Other liabilities 63,594 62,198
----------- -----------
Total liabilities 1,183,261 1,150,017
----------- -----------
Capital contribution subject to repayment 750,000 750,000
----------- -----------
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; 280,000 shares
of Series B Cumulative Convertible issued and outstanding, senior in
liquidation to Class A and Class B Common Stock, (liquidation value
$1,400,000) -- 1,400,000
Class A Common Stock, no par value, 18,500,000 shares
authorized; 1,610,000 issued and outstanding 6,211,661 6,197,388
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 3,348,470
Deficit accumulated during the development stage (8,192,108) (9,561,242)
----------- -----------
Total stockholders' equity 1,368,023 1,384,616
----------- -----------
$ 3,301,284 $ 3,284,633
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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ECHOCATH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
REVENUE:
LICENSE FEES $ -- $ 150,000
COST OF SALES -- --
----------- -----------
GROSS PROFIT -- 150,000
OPERATING EXPENSES:
R&D 274,113 381,414
REPURCHASE OF TECHNOLOGY RIGHTS (SEE NOTE C) 575,000 --
MARKETING AND G&A 349,610 439,724
----------- -----------
TOTAL OPERATING EXPENSES 1,198,723 821,138
----------- -----------
LOSS FROM OPERATIONS (1,198,723) (671,138)
NET INTEREST INCOME (EXPENSE) (2,418) 8,108
----------- -----------
NET LOSS $(1,201,141) $ (633,030)
=========== ===========
NET LOSS PER SHARE $ (.93) $ (.28)
SHARES AND COMMON SHARE EQUIVALENT 1,287,270 2,277,000
</TABLE>
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ECHOCATH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997 FEBRUARY 14,
1990 (DATE OF
INCEPTION) TO
FEBRUARY 28,
1997
<S> <C> <C> <C>
REVENUE:
SBIR GRANT INCOME $ -- $ -- $ 98,000
LICENSE FEES -- 150,000 425,000
PRODUCT SALES 12,580 100,452
--------- ------------ ------------
TOTAL REVENUE -- 162,580 623,452
COST OF SALES 4,303 258,600
--------- ----------- ------------
GROSS PROFIT -- 158,277 364,852
OPERATING EXPENSES:
R&D 437,487 738,041 7,170,302
REPURCHASE OF TECHNOLOGY RIGHTS
(SEE NOTE C) 575,000 -- 575,000
MARKETING AND G&A 560,152 805,430 5,300,791
---------- ----------- ------------
TOTAL OPERATING EXPENSES 1,572,639 1,543,471 13,046,093
LOSS FROM OPERATIONS (1,572,639) (1,385,194) (12,681,241)
NET INTEREST INCOME (EXPENSE) (32,690) 16,060 (83,270)
----------- ------------ ------------
NET LOSS $(1,605,329) $(1,369,134) $(12,764,511)
=========== ============ ============
NET LOSS PER SHARE $ (1.50) $ (.60)
SHARES AND COMMON SHARE EQUIVALENT 1,069,530 2,277,000
</TABLE>
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EchoCath, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
Six Months ended February 29, 1996,
February 28, 1997 and the period from
February 14, 1990 (date of inception)
to February 28, 1997
(unaudited)
<TABLE>
<CAPTION>
1996 1997 February 14, 1990
(date of inception) to
February 28, 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,605,329) $(1,369,134) $ (12,764,511)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 32,247 57,046 317,669
Loss on write-off of intangible assets -- -- 2,000
Change in operating assets & liabilities:
(Increase) decrease in accounts receivable -- 7,192 (1,933)
(Increase) decrease in inventory (8,396) (66,813) (170,079)
(Increase) decrease in prepaid expenses (65,719) 39,603 (107,686)
(Increase) decrease in other assets -- (8,343) (29,686)
(Increase) decrease in deferred offering costs 328,236 -- --
Increase (decrease) in accounts payable (172,657) 30,594 137,775
Increase (decrease) in accrued
expenses and due to (from) related parties (605,515) (42,376) 303,048
---------- ----------- ----------
Net cash used in operating activities (2,097,133) (1,352,231) (12,313,403)
========== =========== ==========
Cash flows from investing activities:
Purchase of furniture, equipment and
leasehold improvements (60,000) (136,135) (512,687)
Purchase of intangible assets 13,473 (13,581) (269,437)
---------- ----------- ----------
Net cash used in investing activities (46,527) (149,716) (782,124)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from partner borrowings -- -- 840,000
Principal payments on partner borrowings -- -- (840,000)
Proceeds from borrowings of notes payable -- -- 1,925,000
Principal payments on borrowings of notes payable (370,000) -- (1,385,000)
Advance to shareholder (101,899) -- (101,899)
Repayment from shareholder -- 101,899 101,899
Additions to capital lease obligations -- -- 50,000
Principal payment on capital lease obligations (5,623) (12,943) (75,370)
Capital contribution for repurchase
of technology rights 75,000 -- 75,000
Proceeds from obligation to issue common stock -- -- 1,725,368
Net proceeds from issuance of capital stock -- -- 2,826,268
Capital increase from settlement of
prior obligations -- -- 17,200
Proceeds from partner capital contributions -- -- 2,700,100
Net proceeds from initial public
offering and over-allotment option 6,219,878 (14,273) 6,197,388
Proceeds from issuance of preferred stock -- 1,400,000 1,400,000
---------- ----------- ----------
Net cash provided by financing activities 5,817,356 1,474,683 15,455,954
---------- ----------- ----------
Net increase (decrease) in cash 3,673,696 (27,264) 2,360,427
Cash, beginning of period 14,186 2,387,691 --
---------- ----------- ----------
Cash, end of period $ 3,687,882 $ 2,360,427 $ 2,360,427
---------- ----------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 32,690 $ 31,712 $ 252,951
------------ ----------- ----------
6
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( continued)
Supplemental disclosure of noncash transactions:
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 $ -- $ -- $ 115,128
------------ ---------- ------------
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ECHOCATH, INC. (A DEVELOPMENT STAGE ENTERPRISE)
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NOTE A: GENERAL AND BUSINESS
The summary financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although EchoCath, Inc. (the "Company") management believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these summary financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-KSB for the fiscal year ending August 31, 1997.
In the opinion of Management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position,
results of operation and cash flows at February 29, 1996 and February 28, 1997
have been made.
NOTE B:
In January 1996, the Company completed its initial public offering consisting of
1,400,000 units. Each unit consists of one share of Class A Common Stock, one
Class A Redeemable Warrant, and one Class B Redeemable Warrant. The proceeds
from the offering before expenses were $7,000,000.
In February 1996, the over-allotment option to purchase 210,000 units was
exercised by the underwriter and this resulted in additional proceeds of
$1,050,000 before expenses.
NOTE C:
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.
NOTE D:
Inventories are summarized as follows:
February 28, 1997
Raw Materials 76,316
Finished Goods 132,400
--------
208,716
========
NOTE E:
On July 7, 1995, the Company entered into an agreement to amend its previously
existing agreement with Alliance Partners (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 in August 1995.
The payment of such indebtedness is to be treated as a capital contribution;
however, if a portion 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. Accordingly, the $750,000 received from Alliance is reflected as
"Capital contribution subject to repayment" in the accompanying balance sheet.
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NOTE F:
The Company entered into an agrement dated December 30, 1996 with Medtronic,
Inc. for the licensing of EchoMark'r' and ColorMark'r' proprietary technologies
for certain medical procedures. Under the agreement the Company will receive a
series of payments totaling $950,000 after the completion of certain milestones.
When commercially available the Company will receive royalties under the terms
of the agreement.
NOTE G:
LICENSE AGREEMENT
The Company entered into an agreement dated February 27, 1997 for an exclusive
license agreement with EP MedSystems, Inc. (EP MedSystems). The agreement
provides that certain products can be incorporated into the EP MedSystems'
diagnostic catheter line. The Company expects to receive development milestone
payments totaling $700,000. The milestones include the testing of a limited
series of patients, system capability demonstration, and the sale of a limited
quantity of product. When commercially available the Company will receive
royalties under the terms of the agreement. The agreement provides that any
royalty payment can be offset by an amount equal to the amount of any dividends
under the Series B Cumulative Convertible Preferred Stock which are accrued but
not paid as of a certain date.
PREFERRED STOCK SUBSCRIPTION AGREEMENT
The Company entered into a subscription agreement dated February 27, 1997, EP
MedSystems purchased 280,000 shares of Series B Cumulative Convertible Preferred
Stock for $1,400,000. The agreement provides for an annual dividend of $.27 per
share. The Company can redeem the Preferred Stock if certain performance goals
of the Class A Common Stock are achieved. The Series B Preferred Stock is
convertible into Class A Common Stock. The conversion of Series B Cumulative
Convertible Preferred Stock to Class A Common Stock will be at the conversion
rate of 1 share of Class A Common Stock for each 1.2 shares of Series B
Cumulative Preferred Stock through 1999. Thereafter, the conversion rate shall
be 1 share of Class A Common Stock issuable for each 1.3 shares of Series B
Cumulative Convertible Preferred Stock.
NOTE H:
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the respective periods. The Company's common stock
equivalents (preferred stock, warrants and stock options) outstanding have not
been included, as the computation would not be diluted.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Certain statements in this quarterly Report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
constitute "forward-looking statements" within the meaning of 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
9
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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 to comply with, government regulations; and other factors referenced
in this Report.
RESULTS OF OPERATION
Six Months Ended February 28, 1997 and February 29, 1996
REVENUE:
The Company had revenue of $162,580 for the six months ended February 28, 1997
and no revenue for the six months ended February 29, 1996. License fees
represented 92.3% of the revenue and the balance of 7.7% was product sales. Cost
of sales represents 2.7% of total revenue.
RESEARCH AND DEVELOPMENT:
Research and Development (R&D) expenses increased 68.7% during the six months
ended February 28, 1997 because of Food and Drug Administration compliance
reviews, new hires, additional material purchases, and increased rent as a
result of an extended lease agreement for the building that the Company
occupies. R & D expenses for 1996 were net of the repurchase of certain
technology rights for $575,000 that is set out in a separate line in the
Statement of Operations when making the comparisons.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, General and Administative (S,G, & A) expenses increased 43.8% during
the six months ended February 28, 1997 because of salary and related cost
as a result of a new hire, employment contracts with senior management and
classification of more management time to administration. Other factors of less
significance were increases in insurance expenses, a new building lease
agreement, an increase in consultant expenses, and costs associated with the
Company's first meeting of shareholders since its initial public offering.
RESULTS OF OPERATION
Three Months Ended February 28, 1997 and February 29, 1996
REVENUE:
The Company had revenue of $150,000 for the three months ended February 28, 1997
and no revenue for the three months ended February 29, 1996. License fees
represented 100% of such revenue.
RESEARCH AND DEVELOPMENT:
R & D expenses increased 39.1% during the three months ending February 28, 1997
because of Food and Drug Administration compliance reviews, new hires,
additional material purchases, and increased rent as a result of an extended
lease agreement for the building that the Company occupies. R & D expenses for
1996 were net of the repurchase of certain technology rights for $575,000 that
is set out in a separate line in the Statement of Operations when making the
comparisons.
SELLING, GENERAL AND ADMINISTRATIVE:
S, G & A expenses increased 25.8% during the three months ended February 28,
1997 because of salary and related cost as a result of a new hire, employment
contracts with senior management and classification of more management time to
administration. Other factors of less significance were increases in insurance
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expenses, a new building lease agreement, an increase in consultant expenses,
and costs associated with the Company's first meeting of shareholders since its
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its current cash, together with revenues expected
to be derived from sales of certain of its products and license fees, should be
sufficient to fund research, development, testing, regulatory requirements,
operating and other capital needs through the next twelve months. The Company
may need substantial additional financing in order to continue development of
and commercialize certain of its proposed products and other potential products
after March 1998. The Company has no binding commitments from any third parties
to provide funds to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128 establishes standards for computing and presenting earnings per share. In
accordance with the effective date of SFAS 128, the Company will adopt SFAS 128
as of February 28, 1998. This statement is not expected to have a material
impact on the Company's financial statements.
PART II: OTHER INFORMATION
Item 2: Changes in Securities
AI) The most significant effect of the issuance of Series B Preferred
Stock on the registered Class A Common Stock is as follows:
1) An annual dividend of $.27 per share is provided for the
Series B Preferred Shareholder.
2) The holder of Series B Preferred Stock is entitled to vote the
number of votes equal to the number of Class A Common Stock
into which such shares of Series B Preferred Stock is
convertible.
3) The holder of Series B Preferred Stock has certain optional
conversion rights to Class A Common Stock. The conversion rate
is 1 share of Class A Common Stock for each 1.2 shares of
Series B Preferred Stock through 1999 and 1.3 shares of
Series B Preferred Stock to 1 share of Class A Common Stock
thereafter.
4) Series B Preferred Stock precedes any Common Stock in
liquidation.
Copy of Certificate of Amendment to the Certificate of
Incorporation of the Company attached as Exhibit 3.
AII) Copy of Subscription Agreement to purchase Series B Cumulative
Convertible Preferred Stock attached as Exhibit 4 (see
description in Note G).
Item 4: Submission of Matters to a Vote of Security Holders
A) The Company held its annual meeting of shareholders on February 7, 1997.
B) The shareholders elected a board of seven directors to serve until the
next annual meeting of shareholders. The following directors were
elected:
</TABLE>
<TABLE>
<S> <C>
Frank A. DeBernardis................ Chief Executive Officer, President and Director
David Vilkomerson................... Executive Vice President, Director of Research
and Development, Assistant Secretary and Director
Terence D. Wall..................... Co-Chairman of the Board of Directors
Daniel M. Mulvena................... Co-Chairman of the Board of Directors
Anthony J. Dimun.................... Director
Irwin M. Rosenthal.................. Secretary and Director
Herbert Moskowitz................... Director
</TABLE>
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C) The following matters were voted upon by the stockholders:
1) The election of seven directors as follows:
6,356,595 votes were cast in favor of and 1,300 abstained for
Frank A. DeBernardis, David Vilkomerson, Terence D. Wall, Daniel
M. Mulvena, and Anthony J. Dimun. 5,417,705 votes were cast in
favor of and 940,190 abstained for Irwin M. Rosenthal and Herbert
Moskowitz.
2) The Company's 1995 Stock Option Plan was amended to increase the
number of shares of Class A Common Stock for which options may be
granted from 220,000 to 620,000. The vote was 5,406,605 for and
951,290 votes against.
3) The Company's Investment Plan was approved by a vote of 5,414,505
for and 943,390 against.
4) KPMG Peat Marwick was selected as independent public accountants
for the fiscal year 1997 by a vote of 5,417,805 for, 1,200
against and 938,890 abstained.
Item 6: Exhibits and Reports on Form 8-K
A) Exhibits
3 Certificate of Amendment of Incorporation
4 Subscription Agreement to Purchase Series B Preferred Stock
27 Financial Data Schedule
B) There were no reports on Form 8-K filed during the quarter ended
February 28, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 14, 1997
EchoCath, Inc.
----------------------------------------
(Registrant)
By: /s/ Frank DeBernardis
--------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
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Exhibit A
---------
CERTIFICATE OF AMENDMENT
OF
ECHOCATH, INC.
Pursuant to Title 14 A:9-4
Corporations, General
of the New Jersey Statutes
Echocath, Inc., a corporation organized and existing under and by
virtue of the laws of the State of New Jersey (the "Corporation"), DOES HEREBY
CERTIFY that:
First: The name of the Corporation is: Echocath, Inc.
Second: The amendment to the Certificate of Incorporation effected
hereby is as follows:
By adding a new Article IX to the Certificate of Incorporation in its
present form in the following form:
Article IX
Series B Cumulative Convertible
Preferred Stock
1. Designation. There is hereby established a series of Preferred Stock
which is designated as "Series B Cumulative Convertible Preferred Stock"
(referred to herein as the "Series B Cumulative Convertible Preferred Stock").
2. Authorized Number. The number of shares constituting Series B
Cumulative Convertible Preferred Stock shall be 280,000.
3. Dividends. Holders of shares of Series B Cumulative Convertible
Preferred Stock shall be entitled to dividends equal to $ .0675 per share per
quarter. Said dividend shall be payable on May 1, August 1, November 1 and
February 1 to the extent that the Corporation has earnings and funds legally
available to pay such dividend. To the extent that the Company does not have
earnings or funds are not legally available to pay a dividend, then such amount
shall be accrued as a liability on the books of the Corporation and be
cumulative for the benefit of the shareholder. If a dividend on the Common Stock
is declared by the Board of Directors, the Board of Directors shall
simultaneously declare a dividend on the Series B Cumulative Convertible
Preferred Stock in an amount per share equal to (a) the product of (i) the
dividend per share of Common Stock, multiplied by (ii) the number of shares of
Common Stock into which all of the outstanding Series B Cumulative Convertible
Preferred Stock could then be converted, divided by (b) the number of Series B
Cumulative Convertible Preferred Stock then outstanding, and rounded to the
nearest cent, each such determination to be made as of the record date for the
determination of the dividend. If a dividend is declared by the Board of
Directors on any other class or series of stock, the Board of Directors shall
simultaneously declare a dividend on the Series B Cumulative Convertible
Preferred Stock in an amount per share equal to the dividend per share of such
other class or series of stock. The term "dividend," when used in this Section
3, shall refer to any dividend which is not a stock dividend described in
Section 8 (d) hereof.
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4. Liquidation. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Cumulative Convertible Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock or any other class or
series of stock ranking junior to the Series B Cumulative Convertible Preferred
Stock as to distribution of assets upon liquidation, to be paid an amount equal
to $5.00 per share (the "Original Purchase Price"), plus an amount equal to all
unpaid dividends, without interest, which have been declared on such outstanding
shares of Series B Cumulative Convertible Preferred Stock prior to the date of
the liquidation payment, such amounts being sometimes referred to as the
"Liquidation Payment." If upon such liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Cumulative Convertible Preferred Stock of the
Corporation shall be insufficient to permit payment to the holders of Series B
Cumulative Convertible Preferred Stock of the entire amount of the Liquidation
Payment, then the entire assets of the Corporation available for distribution to
the stockholders shall be distributed ratably among the holders of Series B
Cumulative Convertible Preferred Stock in proportion to the full amounts to
which they are respectively entitled, and the holders of the Common Stock shall
in no event be entitled to participate in the distribution of said assets in
respect of their shares. Upon any such liquidation, dissolution or winding up of
the Corporation, after the holders of Series B Cumulative Convertible Preferred
Stock shall have been paid in full the amounts to which they shall be entitled,
the remaining net assets of the Corporation shall be distributed pro rata among
the holders of Common Stock based on the number of shares of Common Stock held
by each such holder. Written notice of such liquidation, dissolution or winding
up, stating a payment date, the amount of the Liquidation Payment and the place
where said Liquidation Payment shall be payable, shall be given by mail, postage
prepaid, not less then thirty (30) days prior to the payment date stated
therein, to the holders of record of Series B Cumulative Convertible Preferred
Stock, such notice to be addressed to each such holder at his post office
address as shown by the records of the Corporation.
A consolidation or merger of the Corporation with or into any other
entity or entities, or a sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Corporation, shall not be deemed, for the
purposes of this Section 4, to be a liquidation, dissolution, or winding up of
the Corporation and such holders shall deliver their shares of Series B
Cumulative Convertible Preferred Stock to the Corporation in exchange for the
distribution to be made.
5. Optional Conversion. Any or all of the shares of Series B Cumulative
Convertible Preferred Stock shall be convertible at any time and from time to
time, at the option of each holder of record thereof, into fully paid and
nonassessable shares of Class A Common Stock of the Corporation upon surrender
to the Corporation of the certificate or certificates representing the Series B
Cumulative Convertible Preferred Stock to be converted; and, upon receipt by the
Corporation of such surrendered certificate or certificates with any appropriate
endorsement thereon as may be prescribed by the Board of Directors, such holder
shall be entitled to receive a certificate or certificates representing the
shares of Class A Common Stock into which such shares of Series B Cumulative
Convertible Preferred Stock are convertible. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series B Cumulative Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Class A
Common Stock issuable upon such conversion shall be treated for all purposed as
the record holder or holders of such shares of Class A Common Stock as of such
date. The basis for such conversion shall be the "conversion rate" in effect at
the time of conversion, which for the purposes hereof shall mean the number of
shares of Class A Common Stock issuable for each share of Series B Cumulative
Convertible Preferred Stock surrendered for conversion. For the calendar years
1997 through 1999, the conversion rate shall be 1 share of Class A Common Stock
for each 1.2 shares of Series B Cumulative Convertible Preferred Stock being
converted; Thereafter, the conversion rate shall be 1 share of Class A Common
Stock issuable for each 1.3 shares of
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Series B Cumulative Convertible Preferred Stock and such conversion rate shall
be subject to adjustment as provided in Section 8 below. In connection with
effecting any transfer to the Corporation for cancellation of any Series B
Cumulative Convertible Preferred Stock upon conversion of the same into Class A
Common Stock, if any fractional interest in a share of Class A Common Stock
would be deliverable upon such conversion of Series B Cumulative Convertible
Preferred Stock, the Corporation shall pay in lieu of such fractional share an
amount equal to the "conversion price" (as defined in the following sentence) of
such fractional share (computed to the nearest one thousandth of a share) in
effect at the close of business on the date of conversion. As used herein, the
term "conversion price" shall be an amount computed by dividing $5.00 by the
conversion rate then in effect. During the calendar years 1997 through 1999, the
conversion price shall be $6.00 per share; thereafter the conversion price shall
be $6.50 per share. The Board of Directors of the Corporation shall at all times
reserve a sufficient number of authorized but unissued shares of Class A Common
Stock, which shall be issued only in satisfaction of the conversion rights and
privileges aforesaid. Any shares of Series B Cumulative Convertible Preferred
Stock which have been converted shall be canceled and not reissued.
6. Issue Taxes. The Corporation shall pay all issue taxes (other than
any taxes measured by the income of any person or entity other than the
Corporation), if any, incurred in respect of the issue of shares of Class A
Common Stock on conversion. If a holder of shares surrendered for conversion
specifies that the shares of Class A Common Stock to be issued on conversion are
to be issued in a name or names other than the name or names in which such
surrendered shares stand, the Corporation shall not be required to pay any
transfer or other taxes incurred by reason of the issuance of such shares of
Class A Common Stock to the name of another, and if the appropriate transfer
taxes shall not have been paid to the Corporation or the transfer agent for the
Series B Cumulative Convertible Preferred Stock at the time of surrender of the
shares involved, the shares of Class A Common Stock issued upon conversion
thereof may be registered in the name or names in which the surrendered shares
were registered, despite the instructions to the contrary.
7. Redemption at the Option of Corporation. (a) If the Class A Common
Stock of the Corporation trades for 30 consecutive trading days at a price of
$9.00 per share or more and the average daily trading volume of the shares is at
least 5,000 shares, the Corporation may, upon written Notice of Redemption as
provided below, redeem shares of Series B Cumulative Convertible Preferred Stock
out of funds legally available therefore, at the option of the Corporation, as a
whole, or from time to time, in part for cash at the "Redemption Price". If less
than all the outstanding shares of Series B Cumulative Convertible Preferred
Stock are to be redeemed, the shares to be redeemed shall be selected by the
Corporation and shall be either (i) selected by lot in such manner as the Board
of Directors may determine, or (ii) a pro-rata proportion of the shares of
Series B Cumulative Convertible Preferred Stock of all holders of Series B
Cumulative Convertible Preferred Stock.
(b) If full cumulative dividends on the Series B Cumulative
Convertible Preferred Stock have not been paid, the Series B Cumulative
Convertible Preferred Stock may not be redeemed in part and the Corporation may
not purchase or acquire any shares of the Series B Cumulative Convertible
Preferred Stock otherwise than pursuant to a purchase or exchange offer made on
the same terms to all holders of Series B Cumulative Convertible Preferred
Stock.
(c) If a Notice of Redemption has been given pursuant to
Section 7(d) and if, on or before the Redemption Date, the funds necessary for
such redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the holders of the
shares so called for redemption, then, notwithstanding that any certificates for
such shares have not been surrendered for cancellation, on the Redemption Date
dividends shall cease to accrue on the shares of
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Series B Cumulative Convertible Preferred Stock to be redeemed, and at the close
of business on the Redemption Date the holders of such shares shall cease to be
stockholders with respect to such shares and shall have no interest in or claims
against the Corporation by virtue thereof and shall have no voting or other
rights with respect to such shares, except the rights to receive moneys payable
upon such redemption, without interest thereon, upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding.
(d) Not less than 30 nor more than 60 days before any
Redemption Date, written Notice of Redemption shall be given by mail, postage
prepaid, to holders of record of the Series B Cumulative Convertible Preferred
Stock, such notice to be addressed to each such stockholder at his post office
address as shown by the records of the Corporation, specifying the number of
shares to be redeemed, the Redemption Price and the date and place of such
redemption.
(e) The Series B Cumulative Convertible Preferred Stock to be
redeemed on the Redemption Date shall be redeemed by making a Cash Payment Per
Share as presented in the table below plus an amount equal to all unpaid
dividends which have been earned on the outstanding shares of Series B
Cumulative Convertible Preferred Stock prior to the Redemption Date, such
amounts being herein sometimes referred to as the "Redemption Price."
For Redemption Dates prior to December 31, 1999, the Cash Payment Per
Share is $7.50.
For Redemption Dates subsequent to December 31, 1999 and prior to
December 31, 2000, the Cash Payment Per Share is $9.00.
For Redemption Dates subsequent to December 31, 2000, the Cash Payment
Per Share is $12.00.
(f) Each holder of outstanding shares of Series B Cumulative
Convertible Preferred Stock called for redemption may convert those shares into
Class A Common Stock as provided herein at any time prior to the Redemption
Date.
8. Adjustment of Conversion Price and Conversion Rate. The number and
kind of securities issuable upon the conversion of the Series B Cumulative
Convertible Preferred Stock, the conversion price and the conversion rate shall
be subject to adjustment from time to time upon the happening of certain events
as follows:
(a) Reorganization, Reclassification. In the event of a
reorganization, share exchange, or reclassification, other than a change in par
value, or from no par value to par value or a transaction described in
subsection (b) or (c) below, each share of Series B Cumulative Convertible
Preferred Stock shall, after such reorganization, share exchange or
reclassification, be convertible into the kind and number of shares of stock or
other securities or property of the Corporation to which the holder of Series B
Cumulative Convertible Preferred Stock would have been entitled if the holder
had held the Class A Common Stock issuable upon conversion of his Series B
Cumulative Convertible Preferred Stock immediately prior to such reorganization,
share exchange, or reclassification.
(b) Consolidation, Sale or Merger. In the event of a
consolidation, sale or merger to which the Corporation is a party, each share of
Series B Cumulative Convertible Preferred Stock shall after such consolidation,
sale or merger, be convertible into the kind and number of shares of stock
and/or other securities, cash or other property to which the holder of such
share of Series B Cumulative Convertible Preferred Stock would have been
entitled if the holder had held the Class A Common Stock issuable upon
conversion of his share of Series B Cumulative Convertible Preferred Stock
immediately prior to such consolidation, sale or merger.
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In the event that the holders of Series B Cumulative
Convertible Preferred Stock determine that the security proposed to be issued in
a consolidation, sale or merger is materially less favorable than the value of
the Preferred Stock acquired herein, the sole remedy of the holder shall be to
force the Corporation to redeem the holder's Series B Cumulative Convertible
Preferred Stock at a redemption price equal to $7.50 in cash. Any dispute as to
whether the security to be issued to the holder is materially less favorable
than the holder's Series B Cumulative Convertible Preferred Stock shall be
settled by arbitration in accordance with Commercial Arbitration Rules of the
American Arbitration Association now in effect (the "AAA Rules"), conducted by
one arbitrator either mutually agreed upon by the parties or chosen in
accordance with AAA Rules. Costs and expenses of the arbitrator shall be divided
equally between the parties. Reasonable attorneys fees related to the
arbitration shall be borne as determined by the arbitrator. Judgment upon the
awarded rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
(c) Subdivision or Combination of Shares. In case outstanding
shares of Class A Common Stock shall be subdivided or combined, the conversion
price shall be proportionately reduced, in case of subdivision of such shares,
as of the effective date of such subdivision, or as of the date a record is
taken of the holders of Class A Common Stock for the purpose of so subdividing,
whichever is earlier, or shall be proportionately increased, in case of
combination of such shares, as of the effective date of such combination, or as
of the date a record is taken of the holders of Class A Common Stock for the
purpose of so combining, whichever is earlier.
(d) Stock Dividends. In case shares of Class A Common Stock
are issued as a dividend or other distribution on the Class A Common Stock, then
the conversion price shall be adjusted, as of the date a record is taken of the
holders of Class A Common Stock for the purpose of receiving such dividend or
other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
conversion price in effect immediately prior to such payment or other
distribution by a fraction (i) the numerator of which shall be the number of
shares of Class A Common Stock outstanding immediately prior to such dividend or
other distribution, and (ii) the denominator of which shall be the total number
of shares of Class A Common Stock outstanding immediately after such dividend or
other distribution.
(e) Adjustment of Conversion Rate. Upon each adjustment of the
conversion price under the provisions of this Section 8, the conversion rate
shall be adjusted to an amount determined by dividing $5.00 by such adjusted
conversion price so that the product of (w) the adjusted conversion price
multiplied by (x) the number of shares of Common Stock then issuable upon
conversion shall equal the product of (y) the conversion price immediately prior
to the adjustment of conversion price multiplied by (z) the number of shares of
Common Stock issuable upon conversion immediately prior to the event giving rise
to such adjustment.
(f) Other Provisions Applicable to Adjustments Under this
Section. The following provisions will be applicable to the making of
adjustments in conversion price hereinabove provided in this Section 8.
(i) Treasury Shares. The number of shares of Common
Stock at any time outstanding shall not include any shares thereof then
directly or indirectly owned or held by or for the account of the corporation.
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(ii) Certain Definitions. For purposes of this
Section 8:
(a) The term "Common Stock" shall be deemed
to mean (i) the Class A Common Stock, no par value, and (ii) The Class B Common
Stock, no par value and (iii) the stock of the corporation of any class, or
series within a class, whether now or hereafter authorized, which has the right
to participate in the distribution of either earnings or assets of the
Corporation without limit as to the amount or percentage.
(iii) Minimum Adjustment. No reduction of the
conversion price shall be made if the amount of any such reduction would be
an amount less than $.05, but any such amount shall be carried forward and
reduction with respect thereof shall be made at the time of and together with
any subsequent reduction which, together with such amount and any other amount
or amounts so carried forward, shall aggregate $.01 or more.
(g) Notices of Adjustments. Whenever the conversion rate and
conversion price is adjusted as herein provided, an officer of the Corporation
shall compute the adjusted conversion rate and conversion price in accordance
with the foregoing provisions and shall prepare a written instrument setting
forth such adjusted conversion rate and conversion price and showing in detail
the facts upon which such adjustment is based, and such written instrument shall
promptly be delivered to the record holders of the Series B Cumulative
Convertible Preferred Stock.
9. Notices of Record Dates and Effective Dates. In case at any time:
(a) the Corporation shall declare a dividend (or any other distribution) on the
Common Stock payable otherwise than in shares of Common Stock; or (b) the
Corporation shall authorize the granting to the holders of Common Stock of
rights to subscribe for or purchase any shares of capital stock of any class or
any other rights; or (c) of any reorganization, share exchange or
reclassification of the capital stock of the Corporation (other than a
subdivision or combination of outstanding shares of Common Stock), or of any
consolidation or merger to which the Corporation is party or of the sale, lease
or exchange of all or substantially all of the property of the Corporation; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up of
the Corporation, then the Corporation shall cause to be mailed to the record
holders of the Series B Convertible Preferred Stock at least twenty (20) days
prior to the applicable record date or effective date hereinafter specified, a
notice stating (i) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken, the
date as of which the holders of record of Common Stock to be entitled to such
dividend, distribution or rights are to be determined or (ii) the date of which
such reclassification, reorganization, share exchange, consolidation, merger,
sale, lease, exchange, dissolution, liquidation or winding up, is expected to
become effective, and the date as of which it is expected that holders of record
of Common Stock shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
reorganization, share exchange, consolidation, liquidation, merger, sale, lease,
exchange, dissolution or winding up.
10. Voting Rights.
(a) Holders of Series B Cumulative Convertible Preferred Stock
shall be entitled to notice of any stockholders' meeting. Except as otherwise
provided herein or required by law, at any annual or special meeting of the
Corporation's stockholders, or in connection with any written consent in lieu of
any such meeting, each outstanding share of Series B Cumulative Convertible
Preferred Stock shall be entitled to the number of votes equal to the number of
full shares of Class A Common Stock into which such share of Series B Cumulative
Convertible Preferred Stock is then convertible (calculated by rounding any
fractional share down to the nearest whole number). Initially, each share of
Series B Cumulative
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Convertible Preferred Stock shall have one vote. Except as otherwise required
herein or by law, the Series B Cumulative Convertible Preferred Stock and the
Class A Common Stock shall vote together on each matter submitted to the
stockholders, and not by separate class or series.
(b) For as long as any shares of Series B Cumulative
Convertible Preferred Stock are outstanding, then, in addition to any other vote
or consent of stockholders provided by law or by the Corporation's Certificate
of Incorporation, the affirmative vote or written consent of the holders of a
majority of the Series B Cumulative Convertible Preferred Stock then
outstanding, voting as a separate class, shall be necessary or effective to
validate:
(i) any amendment, alteration or repeal of any
provision of, or addition of any provision to, the Corporation's Certificate of
Incorporation, in the event that such action would alter or change the powers,
preferences or special rights of the Series B Cumulative Convertible Preferred
Stock; or
(ii) the authorization of the increase in the
authorized amount of shares of Series B Cumulative Convertible Preferred Stock,
or the creation of, or the increase in the authorized amount of, any shares of
any class or series, or any security convertible into shares of any class or
series, ranking senior to or on a parity with the Series B Cumulative
Convertible Preferred Stock in the distribution of assets on liquidation, or in
the payment of dividends or otherwise.
The foregoing amendment to the Certificate of Incorporation of
the Corporation was adopted by the Board of Directors of the Corporation on
February 7, 1997 in the manner prescribed by the New Jersey Business Corporation
Act.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be executed on its behalf by its President as of this 27th day of
February, 1997.
ECHOCATH, INC.
By:
-----------------------------
Frank DeBernardis, President
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ECHOCATH, INC.
SUBSCRIPTION AGREEMENT
Echocath Inc.
P.O. Box 7224
Princeton, New Jersey 08543
Attention: Frank DeBernardis, President
Gentlemen:
I. Subscription. The undersigned, intending to be legally bound, hereby
irrevocably agrees to purchase from Echocath, Inc., a New Jersey corporation
(the "Company"), the number of shares (the "Shares") of the Company's Series B
Cumulative Convertible Preferred Stock (the "Preferred Stock"), set forth on the
signature page hereof, at a purchase price of $5.00 per Share.
II. Payment. The undersigned will pay for the subscription on the date hereof by
check payable in U.S. dollars or by wire transfer in U.S. dollars to an account
designated by the Company. The Company will file a Certificate of Amendment for
the Preferred Stock in the form of Exhibit A attached hereto and will issue
certificates representing the Shares within 30 days of the date hereof.
III. Acceptance of Subscription. The undersigned understands and agrees that the
Company in its sole discretion reserve the right to accept or reject this or any
other subscription for Shares, in whole or in part, notwithstanding prior
receipt by the undersigned of notice of acceptance of this subscription. The
Company shall have no obligation hereunder until the Company shall accept and
agree to the terms of this Subscription Agreement, as evidenced by the execution
and delivery to the undersigned of an executed copy of this Subscription
Agreement. If this subscription is rejected in whole, this Subscription
Agreement and all funds received from the undersigned will be returned without
interest or deduction, and this Subscription Agreement shall thereafter be of no
further force or effect. If this subscription is rejected in part, the funds for
such rejected portion of this subscription will be returned without interest or
deduction, and this Subscription Agreement shall continue in force and effect to
the extent this subscription was accepted.
IV. Representations and Warranties. The undersigned hereby acknowledges,
represents, warrants to and agrees with the Company as follows:
(a) None of the Shares are registered under the Securities Act of 1933, as
amended (the "Securities Act") or any state securities laws. The
undersigned understands that the offering and sale of the Shares is
intended to be exempt from registration under the Securities Act, by
virtue of Section 4(2) and the rules and regulations promulgated
thereunder, based, in part, upon the representations, warranties and
agreements contained in this Subscription Agreement;
(b) The undersigned has access to the same kind of information which would
be available in registration statements filed by the Company under the
Securities Act;
(c) Neither the Securities and Exchange Commission (the "Commission") nor
any state securities commission has approved the Shares offered or passed
upon or endorsed the merits of the offering, and the offering of the
Shares has not been reviewed by any Federal, state or other regulatory
authority;
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(d) The undersigned acknowledges that prior to the date hereof it has
received and reviewed a copy of the Company's annual report on Form
10-KSB, which annual report is attached hereto as Exhibit B;
(e) The undersigned acknowledges that all documents, records, and books
pertaining to the investment in the Shares have been made available for
inspection by it, its attorney, accountant, purchaser representative or
tax advisor (collectively, the "Advisors");
(f) The undersigned and the Advisors have had a reasonable opportunity to
ask questions of and receive answers from a person or persons acting on
behalf of the Company concerning the offering of the Shares and all such
questions have been answered to the full satisfaction of the undersigned
and its Advisors;
(g) In evaluating the suitability of an investment in the Company, the
undersigned has not relied upon any representation or other information
(oral or written) other than as contained in documents or answers to
questions so furnished to the undersigned or its Advisors by the Company;
(h) The undersigned is unaware of, and in no way relying on, any form of
general solicitation or general advertising in connection with the offer
and sale of the Shares;
(i) The undersigned has such knowledge and experience in financial, tax,
and business matters so as to enable it to utilize the information made
available to it in connection with the offering of the Shares to evaluate
the merits and risks of an investment in the Shares and to make an
informed investment decision with respect thereto;
(j) The undersigned is not relying on the Company respecting the tax and
other economic considerations of an investment in the Shares, and the
undersigned has relied on the advice of, or has consulted with, only its
own Advisors;
(k) The undersigned is acquiring the Shares solely for its own account for
investment and not with a view to resale or distribution and the
undersigned will not sell or transfer the Shares until they are registered
for resale under the Securities Act or an exemption therefrom is
available;
(l) The undersigned must bear the economic risk of the investment
indefinitely because none of the Shares may be sold, hypothecated or
otherwise disposed of unless subsequently registered under the Act and
applicable state securities laws or an exemption from registration is
available. Legends shall be placed on the Shares to the effect that they
have not been registered under the Securities Act or applicable state
securities laws and appropriate notations thereof will be made in each of
the Company's stock books;
(m) The undersigned has adequate means of providing for the undersigned's
current needs and foreseeable personal contingencies and has no need for
the undersigned's investment in the Shares to be liquid;
(n) The undersigned is aware that an investment in the Shares involves a
number of very significant risks and is able to bear the loss of its
entire investment;
(o) The undersigned represents that it was not formed for the specific
purpose of acquiring the Shares, such entity is validly existing under the
laws of the state of its organization, the consummation of the
transactions contemplated hereby is authorized by, and will not result in
a violation of state law or its charter or other organizational documents,
such entity has full power and authority to execute and
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deliver this Subscription Agreement and all other related agreements or
certificates and to carry out the provisions hereof and thereof, this
Subscription Agreement has been duly authorized by all necessary action,
this Subscription Agreement has been duly executed and delivered on behalf
of such entity and is a legal, valid and binding obligation of such
entity.
V. Indemnification. The undersigned agrees to indemnify and hold harmless each
of the Company, their respective officers, directors, employees, agents, and
affiliates against all losses, liabilities, claims, damages, and expenses
(including, but not limited to, any and all expenses incurred in investigating,
preparing, or defending against any litigation commenced or threatened) arising
out of any false representation or warranty or breach by the undersigned of any
Agreement herein or in any other document delivered in connection with this
Subscription Agreement.
VI. Registration of the Shares.
(a) Piggyback Registration Rights.
(i) If, at any time commencing after the date of this Subscription
Agreement and expiring five (5) years thereafter, the Company proposes to file a
registration statement or statements under the Securities Act for the public
sale of the Company's Class A Common Stock, no par value (the "Common Stock"),
for cash (other than in connection with a merger or pursuant to Form S-4, Form
S-8 or comparable registration statement) it will give written notice, at least
thirty (30) days prior to the filing of each such registration statement, to the
undersigned of its intention to do so. If the undersigned notifies the Company
in writing within ten (10) business days after receipt of any such notice of its
desire to include the shares of the Common Stock, which may be issued upon
conversion of the Shares (the "Common Shares") in such proposed registration
statement, the Company shall afford the undersigned the opportunity to have the
Common Shares registered under such registration statement; provided, however,
that in the case of an underwritten offering, if the Company notifies the
undersigned in writing that the managing underwriter of such offering has
notified the Company that the inclusion in the registration statement of any
portion of the Common Shares would have an adverse effect on such underwritten
offering, then the managing underwriter may limit the number of Common Shares to
be included in such registration statement only to the extent necessary to avoid
such adverse effect; provided, further, however, that in the event any shares of
Common Stock issued pursuant to any of the securities issued in the Company's
initial public offering ("IPO Securities") are to be included in such
underwritten offering, and the managing underwriter shall have determined to
limit the number of Common Shares or IPO Securities to be so included, then such
limitation shall be applied to the Common Shares and the IPO Securities, pro
rata based on the number of Common Shares and IPO Securities requested to be
included in such underwritten offering; and provided, further, however, that in
the event securities of the Company, other than IPO Securities, held by any
person or entity other than the Company or the undersigned ("Third Party
Securities") are to be included in such underwritten offering, and the managing
underwriter shall have determined to limit the number of Common Stock, IPO
Securities or Third Party Securities to be so included, then such limitation
shall be applied to the Common Shares, the IPO Securities and the Third Party
Securities, based on the number of Common Shares, IPO Securities and Third Party
Securities requested to be included in such underwritten offering so that the
amount of Third Party Securities are reduced by a percentage which is twice as
great as the percentage which the Common Shares and the IPO Securities are
reduced. Notwithstanding the provisions of this Section VI(a)(i), the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section VI(a)(i) (irrespective of whether a written request for
inclusion of any such securities shall
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have been made) to elect not to file any such proposed registration statements
or to withdraw the same after the filing but prior to the effective date
thereof.
(ii) Following the effective date of a registration statement
filed pursuant to Section VI(a)(i), the Company shall, upon the written request
of the undersigned, forthwith supply such reasonable number of copies of the
registration statement, prospectus and other documents necessary or incidental
to the registration as shall be reasonably requested by the undersigned to
permit the undersigned to make a public distribution of the Common Shares. The
Company will use its reasonable efforts to qualify the Common Shares for sale in
such states as the undersigned shall reasonably request, provided that no such
qualification will be required in any jurisdiction where, solely as a result
thereof, the Company would be subject to general service of process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction. The obligations of the Company hereunder with respect to the
Common Shares are expressly conditioned on the undersigned furnishing to the
Company such appropriate information concerning the undersigned and the Common
Shares as the Company may reasonably request.
(iii) The Company shall bear the entire cost and expense of the
registration of the Common Shares pursuant to Section VI(a)(i); provided,
however, that the undersigned shall be solely responsible for the fees of any
counsel retained by the undersigned in connection with such registration and any
transfer taxes or underwriting discounts, commissions or fees applicable to the
Common Shares sold by the undersigned pursuant thereto.
(iv) Neither the filing of a registration statement by the Company
pursuant to this Section VI(a) nor the making of any request for prospectuses by
the undersigned shall impose upon the undersigned any obligation to sell the
Common Shares.
(v) The undersigned, upon receipt of notice from the Company that
an event has occurred which requires a post-effective amendment to a
registration statement or a supplement to a prospectus included therein, shall
promptly discontinue the sale of the Common Shares until the undersigned
receives a copy of a supplemented or amended prospectus from the Company, which
the Company shall provide as soon as practicable after such notice.
(vi) Notwithstanding anything else to the contrary contained in
this Subscription Agreement, if the undersigned requests to have any of the
Common Shares registered under the Securities Act pursuant to this Section
VI(a), and if such Common Shares are so registered, then this Section VI(a)
shall be of no further force or effect.
(b) Demand Registration.
(i) At any time commencing September 1, 1997 and expiring five (5)
years from the date of this Subscription Agreement, the undersigned shall have
the right (which right is in addition to the registration rights under Section
VI(a) hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of counsel for the Company, in order to comply with the provisions of
the Securities Act, so as to permit a public offering and sale of the Common
Shares.
(ii) If the undersigned exercises its registration request,
pursuant to Section VI(b)(i) above, between September 1st and November 1st (the
"Window Period") of any given year, the registration costs and filing fees
incurred in connection with such registration (the "Costs") shall be divided
evenly between the undersigned and the Company; provided, however, that the
Costs payable by the undersigned shall be capped
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at $25,000. If the undersigned exercises such registration request on a date
outside of the Window Period, the Costs shall be divided evenly between the
undersigned and the Company; provided, however, that the Costs payable by the
undersigned shall be capped at $40,000. Costs shall not include any amounts
payable to the undersigned's counsel, any transfer taxes or underwriting
discounts, commissions or fees applicable to the Common Shares, which shall be
payable solely by the undersigned. Notwithstanding the foregoing, if the
registration statement to which the Costs are associated is, due solely to
actions of the Company, not declared effective by the Commission within six
months from the date it is first filed with the Commission, then the Company
shall pay all Costs associated with such registration statement.
(iii) In connection with any registration under Section VI(b)
hereof, the Company covenants and agrees as follows:
a. The Company shall use its best efforts to file a
registration statement within sixty (60) days of receipt of any demand therefor,
except that if such demand is made during the Window Period, the Company shall
use its best efforts to file a registration statement within 60 days of the end
of the Window Period, shall use its best efforts to have any registration
statements declared effective at the earliest possible time, and shall furnish
the undersigned such number of prospectuses as shall reasonably be requested;
provided, however, that the Company may, at any time, delay the filing or delay
or suspend the effectiveness of such demand registration or, without suspending
such effectiveness, instruct the undersigned not to sell any securities included
in such demand registration, (i) if the Company shall have determined upon the
written advice of counsel (confirmation of which notice shall be provided to the
undersigned in writing by such counsel) that the Company would be required to
disclose any actions taken or proposed to be taken by the Company in good faith
and for valid business reasons, including without limitation, the acquisition or
divestiture of assets, which disclosure would have a material adverse effect on
the Company or on such actions, or (ii) if required by law, to update the
prospectus relating to any such registration to include updated financial
statements (a "Suspension Period") by providing the undersigned with written
notice of such Suspension Period and the reasons therefor; and provided further,
that the Suspension Periods, in the aggregate, do not exceed sixty (60) days.
The Company shall provide such notice as soon as practicable and in any event
prior to the commencement of such a Suspension Period. The obligations of the
Company hereunder with respect to the Common Shares are expressly conditioned on
the undersigned furnishing to the Company such appropriate information
concerning the undersigned and the Common Shares as the Company may reasonably
request.
b. The Company agrees that it will use its best efforts to
maintain the effectiveness of any registration statement filed pursuant to
Section VI(b) hereof for a period of 1 year from the effective date of such
registration statement.
c. The Company will take all necessary action which may be
required in qualifying or registering the Common Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the undersigned, provided
that the Company shall not be obligated to execute or file any general consent
to service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
(iv) Neither the filing of a registration statement by the Company
pursuant to this Section VI(b) nor the making of any request for prospectuses by
the undersigned shall impose upon the undersigned any obligation to sell the
Common Shares.
-5-
<PAGE>
<PAGE>
(v) The undersigned, upon receipt of notice from the Company that an
event has occurred which requires a post-effective amendment to a registration
statement or a supplement to a prospectus included therein, shall promptly
discontinue the sale of the Common Shares until the undersigned receives a copy
of a supplemented or amended prospectus from the Company, which the Company
shall provide as soon as practicable after such notice.
VII. Registration Indemnification.
(a) The Company shall indemnify and hold harmless the undersigned from
and against any and all losses, claims, damages and liabilities caused by any
untrue statement of a material fact contained in any registration statement
covering the Common Shares filed by the Company under the Securities Act, any
post-effective amendment to such registration statement, or any prospectus
included therein required to be filed or furnished by reason of Section VI of
this Subscription Agreement or caused by any omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except, insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission based upon
information furnished or required to be furnished in writing to the Company by
the undersigned expressly for use therein, which indemnification shall include
each person, if any, who controls the undersigned within the meaning of the Act;
provided, however, that the indemnification in this paragraph VII(a) with
respect to any prospectus shall not inure to the benefit of the undersigned (or
to the benefit of any person controlling the undersigned) on account of any such
loss, claim, damage or liability arising from the sale of the Common Shares by
the undersigned, if a copy of a subsequent prospectus correcting the untrue
statement or omission in such earlier prospectus was provided to the undersigned
by the Company prior to the subject sale and the subsequent prospectus was not
delivered or sent by the undersigned to the purchaser prior to such sale; and
provided further, that the Company shall not be obligated to so indemnify the
undersigned or other person referred to above unless the undersigned or other
person, as the case may be, shall at the same time indemnify the Company, its
directors, each officer signing such registration statement and each person, if
any, who controls the Company within the meaning of the Securities Act, from and
against any and all losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in such registration statement, any
registration statement or any prospectus required to be filed or furnished by
reason of this Subscription Agreement or caused by any omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or omission based upon
information furnished in writing to the Company by the undersigned expressly for
use therein.
(b) If for any reason the indemnification provided for in the preceding
subparagraph is held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any loss, claim, damage, liability or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim, damage
or liability in such proportion as is appropriate to reflect not only the
relative benefits received by the indemnified party and the indemnifying party,
but also the relative fault of the indemnified party and the indemnifying party,
as well as any other relevant equitable considerations.
VIII. Board Seat. If at any time, through the date which is three years from the
date of this Subscription Agreement, a seat on the Company's Board of Directors
(the "Board") shall become vacant, for whatever reason, and if the Company
determines, in its sole discretion, to fill such vacant Board seat, then the
Company shall notify the undersigned and the undersigned shall have thirty (30)
days following such
-6-
<PAGE>
<PAGE>
notification to provide the Company with the name of an individual to fill such
Board seat. If the Company approves such individual, which approval shall not be
unreasonably withheld, then the Company shall elect such individual to the
Board. If such individual is not approved then the undersigned shall have the
right to submit the names of additional individuals until one is elected to the
Board. Once one individual nominated by the undersigned is elected to the Board
the undersigned shall not have the right to nominate any additional individuals
to the Board.
IX. Series A Preferred Stock. The Company hereby represents that there are
currently no shares of the Company's Series A Convertible Preferred Stock
("Series A Stock") issued and/or outstanding and the Company hereby covenants
that it will not issue any shares of Series A Stock while there are any shares
of the Preferred Stock issued and outstanding.
X. Irrevocability; Binding Effect. The undersigned hereby acknowledges and
agrees that the subscription hereunder is irrevocable by the undersigned, except
as required by applicable law, and that this Subscription Agreement shall
survive the death or disability of the undersigned and shall be binding upon and
inure to the benefit of the parties and their heirs, executors, administrators,
successors, legal representatives, and permitted assigns. If the undersigned is
more than one person, the obligations of the undersigned hereunder shall be
joint and several and the agreements, representations, warranties, and
acknowledgments herein shall be deemed to be made by and be binding upon each
such person and his heirs, executors, administrators, successors, legal
representatives, and permitted assigns.
XI. Modification. This Subscription Agreement shall not be modified or waived
except by an instrument in writing signed by the party against whom any such
modification or waiver is sought.
XII. Notices. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered against receipt to the party to whom it
is to be given (a) if to either of the Company, at the address set forth above,
or (b) if to the undersigned, at the address set forth on the signature page
hereof (or, in either case, to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section X). Any
notice or other communication given by certified mail shall be deemed given at
the time of certification thereof, except for a notice changing a party's
address which shall be deemed given at the time of receipt thereof.
XIII. Assignability. Following the initial purchase of the Shares, the rights
and obligations hereunder are assignable by the undersigned; provided, however,
that anyone to whom this Subscription Agreement is assigned must agree in
writing to be bound by all of the terms and provisions hereof but the rights and
obligations of the undersigned under Section VIII of this Subscription Agreement
are not transferable or assignable.
XIV. Applicable Law. This Subscription Agreement shall be governed by and
construed in accordance with the internal laws of the State of New Jersey
without regard to its conflicts of laws principles.
XV. Blue Sky Qualification. The Sale of the Shares is expressly conditioned upon
the exemption from qualification of the offer and sale of the Shares from
applicable Federal and state securities laws. The Company shall not be required
to qualify this transaction under the securities laws of any jurisdiction and,
should qualification be necessary, the Company shall be released from any and
all obligations to maintain its offer, and may rescind any sale contracted, in
the jurisdiction.
XVI. Counterparts. This Subscription Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute
-7-
<PAGE>
<PAGE>
this subscription by signing any of such counterpart and delivering the same by
telex, telecopy, telegraph, cable or otherwise in writing (each delivery by any
of such means to be deemed to be "in writing" for purposes of this Subscription
Agreement).
XVII. Use of Pronouns. All pronouns and any variations thereof used herein shall
be deemed to refer to the masculine, feminine, neuter, singular or plural as the
identity of the person or persons referred to may require.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this 27th day of February, 1997.
Number of Shares Subscribed: 280,000 Shares of Preferred Stock
Total Subscription Amount: $1,400,000
EP MEDSYSTEMS, INC.
By:
------------------------------
Name:
Title:
Taxpayer Identification Number
----------------------------------
----------------------------------
Address
ACCEPTED AND AGREED
ECHOCATH, INC.
By:
------------------------------
Name:
Title:
Date: February 27, 1997
-8-
<PAGE>
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<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-1-1996
<PERIOD-END> FEB-28-1997
<PERIOD-TYPE> 6-MOS
<CASH> 2,360,427
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 208,716
<CURRENT-ASSETS> 2,678,761
<PP&E> 342,434
<DEPRECIATION> 23,067
<TOTAL-ASSETS> 3,284,633
<CURRENT-LIABILITIES> 505,002
<BONDS> 0
<COMMON> 9,545,858
0
1,400,000
<OTHER-SE> (9,561,242)
<TOTAL-LIABILITY-AND-EQUITY> 1,384,616
<SALES> 12,580
<TOTAL-REVENUES> 162,580
<CGS> 4,303
<TOTAL-COSTS> 4,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,712
<INCOME-PRETAX> (1,369,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,369,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,369,134)
<EPS-PRIMARY> (.60)
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