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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, 1998
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
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(Address of Principal Executive Offices)
Issuer's Telephone Number. . .(609) 987-8400
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- -------------------------------------------------------------------------------
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
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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 7, 1998
- ---------------------- ----------------------------
Class A common stock (No Par Value) 2,316,759
Class B common stock (No Par Value) 1,207,277
Transitional Small Business Disclosure Format (check one)
YES NO X
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1
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PART 1: FINANCIAL INFORMATION
PART 2: OTHER INFORMATION
ECHOCATH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1: Financial Statements
Balance Sheets,
August 31, 1997 and February 28, 1998 (Unaudited) 3
Statements of Operations for the three months ended
February 28, 1997 (Unaudited), and February 28, 1998 (Unaudited) 4
Statements of Operations for the six months ended
February 28, 1997 (Unaudited) and February 28, 1998 (Unaudited) 5
Statements of Cash Flows for the six months ended
February 28, 1997 (Unaudited), and February 28, 1998 (Unaudited) 6
Notes to Financial Statements 7 - 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 9 - 12
Signatures 13
</TABLE>
2
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ECHOCATH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1997 February 28, 1998
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 788,933 $ 1,114,279
Inventory 200,565 201,150
Prepaid expenses 109,994 79,672
------------ ------------
Total current assets 1,099,492 1,395,101
Furniture, equipment and leasehold improvements, net 324,243 301,710
Intangible assets, net 264,076 284,829
Other assets 27,827 28,252
------------ ------------
$ 1,715,638 $ 2,009,892
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable $ 540,000 $ 540,000
Accounts payable 90,270 62,576
Accrued expenses 373,145 429,598
Obligations under capital leases, less current portion 25,852 22,714
------------ ------------
Total current liabilities 1,029,267 1,054,888
Obligations under capital leases 28,702 27,760
Other liabilities 87,519 118,381
------------ ------------
Total liabilities 1,145,488 1,201,029
------------ ------------
Capital contribution subject to repayment 750,000 --
------------ ------------
Stockholders' equity (deficit):
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) 1,393,889 1,393,889
Class A common stock, no par value, 18,500,000 shares
authorized; 2,316,759 issued and outstanding as of
February 28, 1998 and 1,886,955 as of August 31, 1997 6,198,611 7,247,834
Class B common stock, no par value, 1,500,000 shares
authorized; 1,207,277 shares issued and outstanding,
292,723 shares retired and transferred to Class A shares;
convertible into one share of Class A common stock 3,273,470 4,023,470
Accumulated deficit (11,045,820) (11,856,330)
------------ ------------
Total stockholders' (deficit) equity (179,850) 808,863
------------ ------------
$ 1,715,638 $ 2,009,892
============= =============
</TABLE>
See accompanying notes to financial statements.
3
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ECHOCATH, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1997 AND
FEBRUARY 28, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
REVENUE:
License fees $ 150,000 $ --
Cost of sales -- --
----------- -----------
Gross profit 150,000 --
Operating expenses:
R&D 381,414 355,107
Marketing and G&A 439,724 422,566
----------- -----------
Total operating expenses 821,138 777,673
----------- -----------
Loss from operations (671,138) (777,673)
Net interest income 8,108 3,865
----------- -----------
Net loss $ (663,030) $ (773,808)
=========== ===========
Basic and diluted earnings per share (0.28) (0.29)
Weighted average shares of Common Stock 2,277,000 2,691,000
</TABLE>
See accompanying notes to financial statements.
4
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ECHOCATH, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997 AND
FEBRUARY 28, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
REVENUE:
License fees $ 150,000 $ 800,000
Product sales 12,580 --
------------ ------------
Total revenue 162,580 800,000
Cost of sales 4,303 --
------------ ------------
Gross profit 158,277 800,000
Operating expenses:
R&D 738,041 696,499
Marketing and G&A 805,430 879,431
------------ ------------
Total operating expenses 1,543,471 1,575,930
------------ ------------
Loss from operations (1,385,194) (775,930)
Net interest income 16,060 3,220
------------ ------------
Net loss $(1,369,134) $ (772,710)
============ ============
Basic and diluted earnings per share (0.60) (0.32)
Weighted average shares of Common Stock 2,277,000 2,559,000
</TABLE>
See accompanying notes to financial statements.
5
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ECHOCATH, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,369,134) $ (772,710)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 57,046 59,346
Change in operating assets & liabilities:
Decrease in trade accounts receivable 7,192 --
Increase in inventory (66,813) (584)
Decrease in prepaid expenses 39,603 30,322
Increase in other assets (8,343) (425)
Increase in accounts payable 30,594 1,792
Increase (decrease) in accrued expenses and due
from related parties (42,376) 26,966
Increase in other liabilities -- 30,862
------------- -----------
Net cash used in operating activities (1,352,231) (624,431)
------------- -----------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (136,135) (27,725)
Purchase of intangible assets
(13,581) (29,841)
------------- -----------
Net cash used in investing activities (149,716) (57,566)
------------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (12,943) (4,080)
Repayment from shareholder 101,899 --
Net proceeds from initial public offering and
over-allotment option (14,273) 223
Proceeds from issuance of preferred stock 1,400,000 --
Issuance of Class A common stock -- 1,049,000
Class B preferred dividends -- (37,800)
------------- -----------
Net cash provided by financing activities 1,474,683 1,007,343
------------- -----------
Net (decrease) increase in cash and cash
equivalents (27,264) 325,346
Cash and cash equivalents, beginning of period 2,387,691 788,933
------------- -----------
Cash and cash equivalents, end of period $ 2,360,427 $ 1,114,279
------------- -----------
Supplemental disclosure of cash flow information:
Interest expense $ 31,712 $ 29,883
------------- -----------
Supplemental disclosure of noncash information:
Equipment acquired under capital lease $ -- $ 8,190
------------- -----------
</TABLE>
See accompanying notes to financial statements.
6
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ECHOCATH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 28, 1997 and 1998 have been
made.
NOTE B:
<TABLE>
<CAPTION>
Inventories are summarized as follows:
February 28, 1998
-----------------
<S> <C>
Raw Materials $ 130,732
Work In Process 845
Finished Goods 69,573
----------
$ 201,150
==========
</TABLE>
NOTE C:
On July 7, 1995, the Company entered into an agreement with Alliance Partners
("Alliance") in order to amend its previously existing agreement. 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 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. As of October 31, 1997, Alliance released the $750,000 contingent
payment in exchange for 50,000 shares of Class A common stock and an option to
purchase 50,000 shares of common stock, thereby converting the Company's
contingent liability to equity. The option is exercisable at $2.00 per share of
common stock and such option expires 6 years from the date of grant. This
transaction was treated as a capital contribution, consistent with the original
Alliance transaction.
NOTE D:
LICENSE AGREEMENTS WITH MEDTRONIC, INC.
On December 30, 1996 the Company announced that it entered into an exclusive
license agreement with Medtronic, Inc. for the licensing of EchoMark'r' and
ColorMark'r' proprietary technologies for certain medical procedures. Under the
agreement the Company expects to receive a series of payments totaling $950,000
after the completion of certain milestones. The Company has received no
licensing revenue to date under this agreement. The total payments to the
Company under the December 1996 Medtronic Agreement are $150,000 as of April 1,
1998.
7
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The Company entered into an exclusive license agreement dated February 27, 1997
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 up to $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
products are commercially available the Company will receive royalties under the
terms of the agreement. The Company has received no milestone payment nor has it
earned any royalties to date under this agreement. The agreement provides that
any royalty payment can be reduced, but not to an amount below zero, by an
amount equal to the amount of any dividends under the Company's Series B
cumulative preferred stock which are accrued but not paid as of that date. As of
February 28, 1998 the Company has $75,600 of accrued preferred stock dividends.
On October 30, 1997, the Company announced it had reached a second definitive
licensing and development agreement with Medtronic, Inc. Pursuant to the terms
of the October 1997 Medtronic Agreement, the Company, among other things: (i)
granted Medtronic a worldwide exclusive license to make, have made, use, sell
and have sold products utilizing the Company's ColorMark and EchoMark
technologies in guiding devices during cardiothoracic surgical procedures:
and (ii) granted Medtronic the exclusive right and option at any time within
six (6) months of the effective date of the October 1997 Medtronic Agreement,
to acquire a worldwide exclusive license to the Company's EchoEye and EchoFlow
technologies for use in guiding device during cardiothoracic surgical
procedures.
In consideration of the grant of the exclusive rights to Medtronic, Medtronic
agreed to pay to the Company a combined total of $1,800,000 million, which
amount includes, among other things: (i) $800,000 paid to the Company in upfront
licensing fees: (ii) $1,000,000 for the purchase of 363,636 restricted shares of
the Company's Class A common stock, no par value (the "Class A common stock"),
issued to Medtronic Asset Management, Inc. wholly-owned subsidiary of Medtronic;
and (iii) future payments by Medtronic to the Company which include minimum
annual royalties upon product commercialization.
NOTE E:
PREFERRED STOCK SUBSCRIPTION AGREEMENT
The Company entered into a subscription agreement dated February 27, 1997 with
EP MedSystems. EP MedSystems purchased 280,000 shares of the Company's 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 (see Part 2: Other
Information - Item 1, Legal Proceedings).
NOTE F:
LOSS PER SHARE
As of February 28, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Basic loss per share is based on net loss
for the relevant period, divided by the weighted average number of common shares
outstanding during the period.
Diluted loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Common share equivalents, such as outstanding stock options, and preferred
stock, are not included in the calculation since the effect would be
antidilutive.
8
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NOTE G:
On February 26, 1998, the Company was notified by NASDAQ that based on the
quarter ended November 30, 1997 Form 10-QSB filing, the Company did not satisfy
NASDAQ's minimum equity requirements of $2 million and that if the Company did
not correct this matter it would be delisted from the NASDAQ Smallcap Market.
Currently, the Company is exploring various opportunities which could
potentially increase equity over the NASDAQ minimum equity requirements.
However, there can be no assurances that any of these opportunities will occur
or that the Company will not be delisted from the NASDAQ Smallcap Market.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Certain statements in this Report on Form 10-QSB ("Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and elsewhere 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: limited
commercial operations; no assurances of success; need for additional financing;
uncertainty of market acceptance; reliance on collaborative agreements;
competition and rapid technological change; failure to receive or delays in
receiving regulatory approval; limited manufacturing and assembly experience;
limited marketing and sales experience; dependence upon, and need for, key
personnel; uncertain protection of patent and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; potential adverse impact of FDA and other government regulations;
limitations on third party reimbursement; potential adverse impact of
anti-remuneration laws; potential product liability; risk of loss in lawsuit;
risk of low price stocks; and other factors referenced in this Report. When
used in this Report, statements that are not statements of material fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "anticipates," "plans," "intends," "expects" and similar expressions are
intended to identify such forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Six Months Ended February 28, 1998 and 1997
REVENUE:
The Company had revenues of $800,000 for the six months ended February 28, 1998,
all of which were from license fees; and $150,000 from license fees and $12,580
from product sales for the six months ending February 28, 1997.
The Company had no cost of sales associated with the license fees for the six
months ended February 28, 1998 and $4,303 which represented 2.7% of sales for
the six months ended February 28, 1997.
9
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RESEARCH AND DEVELOPMENT:
Research and Development expenses decreased $41,542 or 5.6% during the six
months ended February 28, 1998 because of the completion of a research
agreement, a lower level of FDA consulting fees, less travel, and a decrease in
material purchased in the current six months.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, General and Administrative expenses increased $74,001 or 9.2% during
the six months ended February 28, 1998 because of a large increase in legal
expenses resulting from EP MedSystems litigation, legal expenses associated with
satisfying listing requirements on the NASDAQ Smallcap Market, the license
agreement with Medtronic and an agreement with Alliance Partners to reclassify a
contingent liability to permanent capital. The Company also recognized $49,000
of compensation associated with the issuance of Class A Common Stock to Alliance
Partners. Other factors did not have any material effect on the six month
comparisons.
RESULTS OF OPERATIONS
Three Months Ended February 28, 1998 and 1997
REVENUE:
The Company did not produce any revenue for the quarter ended February 28, 1998
compared to license fees of $150,000 for the quarter ended February 28, 1997.
The Company had no cost of sales associated with the license fees for the
quarter ended February 28, 1997.
RESEARCH AND DEVELOPMENT:
Research and Development expenses decreased $26,307 or 6.9% during the three
months ended February 28, 1998 because of the completion of a research agreement
and lower level of FDA consultant fees in the quarter ended February 28, 1998
compared to the quarter ended February 28, 1997.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, General and Administrative expenses decreased $17,158 or 3.9% during
the quarter ended February 28, 1998 compared to the quarter ended February 28,
1997 because of the elimination of selling consultant fees and the reduction of
administration consultant fees were greater than the increase in legal fees for
the quarter ended February 28, 1998 compared to the quarter ended February 28,
1997. Other factors did not have any material effect on the three month
comparisons.
LIQUIDITY AND CAPITAL RESOURCES
The Company projects that it has sufficient funds to the end of the fiscal
year. In order to continue operations thereafter, the Company will be required
to raise additional funds. The Company is in the process of arranging a proposed
financing with a placement agent. However, there can be no assurances that such
financing will be consummated. The Company also believes that additional cash
resources should be available through financing provided through the completion
of license agreements and strategic alliances. There can be no assurance that
the Company will be able to complete the aforementioned license agreements,
strategic alliances or financing on acceptable terms or at all. The Company may
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 assurances that the Company will be able to obtain
financing from any other sources on acceptable terms or at all.
10
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PART II: OTHER INFORMATION
Item 1: Legal Proceedings
On October 16, 1997, EP MedSystems delivered to the Company a complaint (the
"Complaint") filed in the United States District Court for the District of New
Jersey in connection with the Company's sale of securities to EP MedSystems
pursuant to a Subscription Agreement, dated as of February 27, 1997, by and
between the Company and EP MedSystems. In the Complaint, EP MedSystems alleges
that the Company violated 'SS'10(b) of the Exchange Act and committed common
law fraud in connection with EP MedSystems' purchase of securities from the
Company. EP MedSystems requested unspecified compensatory damages, costs,
attorneys' fees and punitive damages. On November 26, 1997, pursuant to an order
of the Court, the Company filed an Answer, without prejudice to its right to
move to dismiss the Complaint, denying the material allegations of the
Complaint, and asserting a counterclaim against EP MedSystems seeking its costs
and expenses in the action, including its attorneys' fees, based on EP
MedSystems' breach of the Subscription Agreement. On December 3, 1997, EP
MedSystems filed an Amended Complaint, also alleging violations of 'SS'10(b)
of the Exchange Act, and common law fraud. Pursuant to Court order, the
Company's Answer was due December 10, 1997, also without prejudice to the
Company's right to move to dismiss. On December 10, 1997, the Company filed an
Answer to the Amended Complaint, again denying the material allegations of the
complaint, and asserting a counterclaim against EP MedSystems based on EP
MedSystems' breach of the Subscription Agreement. On December 17, 1997, the
Company served on EP MedSystems a motion to dismiss the Complaint. This motion
has been fully briefed and has been submitted to the Court.
The Company believes, after discussion with counsel, that the Complaint is
without merit and intends to defend itself vigorously.
Item 2: Changes in Securities - None
Item 3: Defaults Upon Senior Securities - None
Item 4: Submission of Matters to a Vote of Security Holders
A) The Company held its annual meeting of shareholders on March 5, 1998.
B) The shareholders elected a board of five directors to serve until the
next annual meeting of stockholders. The following directors were elected:
FRANK DEBERNARDIS
Chief Executive Officer
President and Director
DAVID VILKOMERSON
Executive Vice President,
Director of Research and Development,
Assistant Secretary and Director
DANIEL MULVENA
Chairman of the Board of Directors
ANTHONY DIMUN
Director
IRWIN ROSENTHAL
Secretary and Director
11
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C) The following matters were voted upon by the stockholders:
1) The election of five directors as follows: 6,416,115 votes were
cast in favor of and 280,500 against for Frank A. DeBernardis, Daniel
M. Mulvena and Anthony J. Dimun. 6,696,115 votes were cast in favor
of and 500 against David Vilkomerson. 5,718,080 votes were cast in
favor of and 978,535 were cast against Irwin Rosenthal.
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 620,000 to 1,020,000. The vote was 5,270,240 for and
292,650 votes against.
3) KPMG Peat Marwick, LLP was selected as independent public accountants
for the fiscal year 1998 by a vote of 5,871,769 for and 500 votes
against.
Item 5: Other Information - None
Item 6: Exhibits and Reports on Form 8-K
A) Exhibits
10.25) Employment Agreement dated as of March 10, 1998 between the
Company and David Vilkomerson.
27) Financial Data Schedule
B) There were no reports on Form 8-K filed during the quarter ended
February 28, 1998.
12
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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, 1998
EchoCath, Inc.
--------------------
(Registrant)
By: /s/ Frank DeBernardis
--------------------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting
Officer
13
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.....................'r'
The section symbol shall be expressed as.................................'SS'
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EMPLOYMENT AGREEMENT
AGREEMENT made as of October 8, 1996, by and between ECHOCATH, INC., a New
Jersey corporation, having its principal place of business at 4326 U.S. Route 1,
Monmouth Junction, New Jersey 08852 ("Employer") and DAVID VILKOMERSON, Ph.D.,
an individual residing at 2 Carter Brook Lane, R.D. 4, Princeton, NJ 08540
("Employee").
W-I-T-N-E-S-S-E-T-H
WHEREAS, Employer currently employs Employee and desires to continue the
employment relationship, and Employee desires to accept such employment, all in
accordance with the terms and conditions set forth herein,
NOW THEREFORE, it is agreed as follows:
1. EMPLOYMENT. Commencing on the date hereof, Employer shall employ
employee, and Employee shall serve as an employee of Employer in such capacity,
upon the terms and conditions set forth herein.
2. SCOPE OF EMPLOYMENT. During the term of this Agreement, Employee
shall devote his entire business time, attention and energy to the business, and
to seeking improvement in the profitability of Employer. He shall serve as
Senior Executive Vice President and Chief Technical Officer of Employer and
shall perform such services as typically are provided by a senior officer and
chief technical officer of a corporation and such other services consistent
herewith as shall be assigned to him from time to time by the Co-Chairmen of the
Board and the Board of Directors of Employer. During the term of this Agreement,
Employee shall not engage in any other business activity which, in the
reasonable judgment of the Employer's Board of Directors, conflicts with the
duties of Employment hereunder, whether or not such activity is pursued for
gain, profit or other pecuniary advantage; provided, however, that it is
understood that this Section 2 shall not preclude Employee from making passive
investments in other companies.
3. TERM.
3.1 This Agreement shall commence on the date hereof and continue
for a term of three (3) years thereafter and terminating on November 1, 1999,
unless terminated earlier as provided below in this Article 3. Employer shall
give Employee notice at least one year prior to the expiration date of its
intent not to extend this Agreement.
3.2 Notwithstanding the term of employment provided for above,
this Agreement shall immediately terminate upon Employee's death or Disability.
For purposes of this Agreement, "Disability" shall have the same meaning as the
term "Disability" is defined in Employer's disability insurance policy then in
effect. Notwithstanding termination of this Agreement in the event of death,
Employer shall pay to Employee's estate the salary described in Section 4 until
the earlier of (i) three (3) months from the date of death, or (ii) the last day
of the term of this Agreement.
3.3 Notwithstanding the term of employment provided for above,
Employer shall have the right to terminate Employee's employment for Cause, upon
written notice to Employee. For purposes of this Agreement, "Cause" shall mean
(i) the indictment of Employee for a felony or the filing of an information or
similar document for a misdemeanor which, in the reasonable judgment of
Employer, is likely to have a material adverse effect on the business or
reputation of Employer, (ii) Employee's material breach of this Agreement, (iii)
Employee's willful misconduct which may reasonably be anticipated to have a
material adverse effect on Employer's business, (iv) Employee's willful
disregard of lawful and proper instructions of Employer's Board of Directors,
but refusal to relocate more than 20 miles from the Princeton, New Jersey area
shall not be considered a refusal to follow such instruction, (v) Employee's
lack of effort in performing the services required by this Agreement.
Termination for cause shall not be effective unless Employee shall have given
notice and a 15 day period to cure the breach.
3.4 Notwithstanding the term of employment provided for above,
Employer shall have the right to terminate Employee's employment without Cause,
in the sole judgment of Employer, upon written notice to Employee. Termination
without cause shall be subject to the severance payment defined below.
3.5 Employee shall have the right to terminate this Agreement for
Good Reason (as defined below), upon written notice to Employer. For purposes of
this Agreement, "Good Reason" shall mean (i) Employer's material breach of this
Agreement, provided that Employee first provides Employer with written notice of
such conduct and Employer fails to make substantial efforts to correct such
conduct within fifteen (15) business days of its receipt of such notice.
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3.6 In the event of Employee's termination pursuant to Section
3.2 or Section 3.3 hereof, Employer shall only be obligated to pay Employee any
unpaid salary and benefits accrued to the date of termination, except as
otherwise expressly provided in any of Employer's written benefit plans.
3.7 In the event that Employee terminates this Agreement for Good
Reason or Employer terminates this Agreement without Cause prior to the
expiration of the term hereof, or upon expiration of the Agreement, the Employer
shall, pay Employee a severance payment equal to one year's salary at the then
current salary rate. Employer shall also provide a continuation of Employee's
medical insurance coverage for one year following termination. Said coverage may
be implemented by continuing Employee on Employer's insurance program, to the
extent such act is permissible, or by paying Employee's COBRA payments.
Additionally, all options and other benefits which were to have been granted or
vested during the period shall continue during the one year period.
3.8 The payments provided for in Sections 3.6 and 3.7,
respectively, above shall be Employee's sole and exclusive relief and shall be
in lieu of any other termination benefits or payments of any kind whatsoever
which are hereby expressly waived, for or in connection with such termination.
Appropriate and required withholding for Social Security, federal and state
income taxes (or comparable withholdings which may be applicable for employees
outside the United States), together with any other deductions authorized by
Employee or required by law or court order, shall be made and will reduce the
gross amount to be paid under this Agreement.
4. SALARY. In consideration for Employee's services hereunder, during
the first year of this Agreement, Employer shall pay Employee a salary at a rate
of $130,000 per year. In year two, the salary shall be at the rate of $135,200
and in year three at $140,600.
5. FRINGE BENEFITS.
(a) Employee shall be entitled to four (4) weeks of paid vacation
each year, to be taken at such times as are mutually convenient
to Employee and Employer.
(b) Employee shall receive from Employer such other benefits as
shall be comparable to benefits generally made available from
time to time to other employees of Employer.
(c) Employer shall be entitled to participate in a yearly bonus
program, as determined annually by the Board of Directors. The
plan for the current year and guidelines for future years is
attached as Schedule A.
(d) Stock Options. Shall be awarded per the terms of Schedule
B. In the event of a Change in Control, as defined below, all
of the options awarded to Employee shall vest and become
immediately exercisable.
"Change in Control" shall mean the approval by the shareholders
of Employer of (i) any consolidation or merger of Employer in
which holders of stock in Employer immediately before the
consolidation or merger will not own 50% or more of the voting
shares of the surviving corporation immediately after such
consolidation or merger, or (ii) any sale, lease, exchange or
other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of
Employer.
6. BUSINESS EXPENSES. Employer will reimburse Employee, in accordance
with any Employer-established policies or guidelines, for all reasonable
business expenses actually incurred by Employee in promoting the business of
Employer, upon presentation by Employee, from time to time, of an itemized
account of such expenses.
7. TRADE SECRETS AND COVENANT AGAINST COMPETITION.
7.1 The trade secrets of Employer are hereby defined as including
(i) the processes utilized and to be utilized in Employer's business; and (ii)
the methods and results of Employer's research; and (iii) any other confidential
information or data relating to the business of Employer which is not publicly
known. Employee further agrees to protect the trade secrets and confidential
information of third parties disclosed to Employer. Trade secrets do not include
processes, methods, results and information known to Employee prior to this
employment by Employer.
7.2 Employee agrees that he will not, either during his
employment or after cessation of such employment, impart or disclose any of the
trade secrets to any person, firm or corporation other than Employer, or
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<PAGE>
use any of such trade secrets, directly or indirectly, for his own benefit or
for the benefit of any person, firm or corporation other than Employer.
7.3 In addition to the foregoing agreements relating to
Employer's trade secrets, during the term of this Agreement (including any
renewals thereof) and during the term of the "Post-Employment Period" (as
defined below), Employee will not, without Employer's prior written consent,
solicit the employees of Employer or Employer's affiliates for the purpose of
hiring or retaining any such employees. For purposes of this Agreement, the term
"Post-Employment Period" shall mean the period commencing on the date that this
Agreement is terminated for any reason and ending either (x) one year from the
date of termination of this Agreement or (y) if this Agreement is terminated by
the Employee for Good Reason or by the Employer without Cause, one year from the
severance payment paid by Employer to Employee pursuant to Section 3.7 above.
7.4 Employee agrees that all memoranda, lab books, notes,
records, charts, formulae, specifications, lists and other documents made,
compiled, received, held or used by Employee while employed by Employer,
concerning any phase of Employer's business or its trade secrets, shall be
Employer's property and shall be delivered by Employee to Employer upon
termination of Employee's employment or at any earlier time on the request of
Employer.
7.5 Any invention or improvement made or conceived by Employee
during the term of Employee's employment by Employer (whether during or after
working hours) relating to the business of Employer, shall be promptly disclosed
in writing by Employee to Employer and shall be the sole property of Employer.
Upon Employer's request (whenever made), Employee shall execute and assign to
Employer all related applications for letters patent to the United States and
such foreign countries as Employer may designate and shall execute and deliver
to Employer such other instruments as Employer deems necessary for it to obtain
such letters patent and all rights therein. For each such invention Employer
shall pay Employee $100 upon the assignment of the application for a United
States patent or other first patent application thereon (all assignments of
amended applications and all applications for other countries to be made without
further payment) and $100 upon the issuance of such United States patent. Any
such invention or improvement made or disclosed by Employee to anyone within one
year after the termination of Employee's employment shall be deemed to have been
made or conceived during Employee's employment hereunder, provided that such
invention or improvement relates to products which Employer is producing or
developing on the date of termination of Employee's employment with Employer.
7.6 Employee acknowledges that given his access to information
regarding Employer, the provisions of this Section 7 are reasonable and
necessary to protect Employer's business. Employee further acknowledges that he
has carefully reviewed the provisions of this Section 7, he fully understands
the economic consequences thereof, he has assessed the respective advantages and
disadvantages to him of entering into this Agreement and he has concluded that
in light of his education, skills, and abilities, the restrictions set forth in
this Section 7 will not prevent him from of entering into this Agreement.
Employee agrees that each of the provisions of this Section 7, including,
without limitation, the period of time, geographical area and types and scope of
the restrictions on Employee's activities specified herein, are intended to be
and shall be divisible.
7.7 Employee hereby recognizes and acknowledges that irreparable
injury or damage shall result to the business of Employer in the event of a
breach or threatened breach by Employee of the terms and provisions of this
Section 7 of this Agreement. Therefore, Employee agrees that Employer shall be
entitled to an injunction restraining Employee from engaging in any activity
constituting such breach or threatened breach. The parties agree that an
injunction may be issued as interim relief by an arbitrator pursuant to the
provisions of Section 8.8.
8. MISCELLANEOUS.
8.1 ENTIRE AGREEMENT. This instrument contains the entire
agreement of the parties with respect to the employment of Employee and
supersedes all prior agreements or arrangements between the parties concerning
Employee's employment by Employer and specifically supersedes and terminates any
prior agreement concerning severance to be paid to the Employee in the event of
a termination of his employment. This Agreement cannot be changed orally but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification, extension or discharge is sought.
8.2 SEVERABILITY. If any provision of this Agreement is declared
invalid by any legal tribunal, then such provision shall be deemed automatically
modified to conform to the requirements for validity as declared at such time,
and as so modified, shall be deemed a provision of this Agreement as though
originally included herein. In the event that the provision invalidated is of
such a nature that it cannot be so modified, the provision shall be deemed
deleted from this Agreement as though the provision had never been included
herein. In either case, the remaining provisions of this Agreement shall remain
in effect.
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8.3 CONSTRUCTION. The parties intend that this Agreement shall
not be construed against the party that has drafted all or any portion of this
Agreement.
8.4 NOTICE. Any notice or other communication required or
permitted under this Agreement shall be sufficient if in writing and delivered
personally, sent by facsimile, or by certified, or express mail or overnight
courier, and shall be deemed given when so delivered (except if mailed, then two
days after mailing), to the parties as set forth below, unless changed in
writing:
(a) to Employee at his residence address indicated above, or;
(b) to the Employer (Attention: President) at its principal
office, with a copy to each of its Co-Chairmen of the Board at
their then current addresses.
8.5 SUCCESSORS. The rights and obligations of Employee under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer, including any successors by merger or purchase or
otherwise.
8.6 GOVERNING LAW.This Agreement has been made in and shall be
interpreted in accordance with and be governed by the laws of the State of New
Jersey.
8.7 PARAGRAPH HEADINGS. The paragraph headings used in this
Agreement are included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
8.8 ARBITRATION. Any controversy, claim or dispute arising out of
or relating to this Agreement or its construction and interpretation shall be
settled by arbitration in New Jersey in accordance with the then-current rules
of the American Arbitration Association, and judgment upon the award rendered in
such arbitration may be entered in any court having jurisdiction thereof. In
addition, any controversy, claim or dispute concerning the scope of this
arbitration clause or whether a particular dispute falls within this arbitration
clause may also be settled by arbitration in accordance with the rules of the
American Arbitration Association.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
Attest/Witness: ECHOCATH, INC.
- ------------------------- ----------------------------
Attest/Witness:
- ------------------------- ----------------------------
David Vilkomerson, Ph.D.
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SCHEDULE A
BONUS
Employee shall be entitled to receive up to 25% of his salary as
a bonus payment should he achieve pre-determined SOP's as agreed to
between the Employee and the Board of Directors.
Should actual results exceed the Plan, Employee shall be entitled
to an additional bonus as determined by the Board of Directors.
The following guidelines apply for the first year of the
Agreement:*
<TABLE>
<CAPTION>
Weight
---------
<S> <C>
1. Financial Performance 40 - 60%
- meeting revenue targets
- reaching earnings forecast
2. Development of Milestones.
3. Growth in share volume.
</TABLE>
*This form of Schedule A is merely an example. Following execution of this
Agreement, Employee shall prepare and shall deliver to the Co-Chairman and CEO
by no later than March 31, 1998 (and by no later than August 31st of each
subsequent year in which this Agreement is in effect) a proposed SOP. The Board
will then have sixty (60) days to either approve or disapprove such SOP. At the
time of signing this Agreement, a bonus and stock option award for performance
in fiscal 1997 (i.e. from January - August 31, 1997) will be awarded to account
for the change in bonus-award basis from calendar year to fiscal year and the
bonus awarded in November 1998 be based on the SOP agreed upon in February,
1998.
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SCHEDULE B
STOCK OPTIONS
1. The Board of Directors has agreed to re-price all of
Employee's current options (90,000 shares at $5.00 per share) at the
fair market price as of April 29, 1997.
2. Employee shall receive an award of options on 150,000 shares
of Employer's common stock at the fair market value on the date of the
meeting of the Compensation Committee April 7, 1997.
3. Employee is eligible for stock options which may be awarded
annually based on performance and subject to the recommendations of
the Compensation Committee.
Employer shall consult with any compensation professional retained by
Employee in order to minimize, to the extent feasible, that tax impact
of an option grant/exercise on Employee.
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> FEB-28-1998
<PERIOD-TYPE> 6-MOS
<CASH> 1,114,279
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 201,150
<CURRENT-ASSETS> 1,395,101
<PP&E> 688,184
<DEPRECIATION> 386,475
<TOTAL-ASSETS> 2,009,892
<CURRENT-LIABILITIES> 1,054,888
<BONDS> 0
0
1,393,889
<COMMON> 11,271,276
<OTHER-SE> (11,856,330)
<TOTAL-LIABILITY-AND-EQUITY> 2,009,892
<SALES> 0
<TOTAL-REVENUES> 800,000
<CGS> 0
<TOTAL-COSTS> 1,575,930
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,883
<INCOME-PRETAX> (772,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (772,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (772,710)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
