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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number 0-27380
ECHOCATH, INC.
(Name of small business issuer in its charter)
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New Jersey 22-3273101
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 7224, Princeton, New Jersey 08543
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (609) 987-8400
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
CLASS A COMMON STOCK, NO PAR VALUE
REDEEMABLE CLASS A WARRANTS
REDEEMABLE CLASS B WARRANTS
UNITS {EACH CONSISTING OF ONE SHARE OF CLASS A COMMON STOCK,
ONE REDEEMABLE CLASS A WARRANT AND ONE REDEEMABLE CLASS B WARRANT}
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(Title of class)
Check whether the issuer: (1) 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[ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year (year ended August
31, 1998) were $1,075,399.
The aggregate market value on December 8, 1998 of the publicly trading
voting stock held by non-affiliates (consisting of Class A Common Stock, no par
value) computed using the last sales price on that date was approximately
$3,528,117.
As of December 8, 1998, 2,352,078 shares of Class A Common Stock, no par
value, and 1,172,018 shares of Class B Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
None
Transitional Small Business Disclosure Format (check one) [ ] YES [X] NO
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INTRODUCTORY NOTE
EchoCath, Inc., a New Jersey Corporation (the "Company or "EchoCath") is
engaged in developing, manufacturing and marketing medical devices which enhance
and expand the use of ultrasound technology for medical applications and
procedures.
Certain statements in this Report on Form 10-KSB ("Report") under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
limited commercial operations; no assurance of success; need for additional
financing; ability to function as a going concern, 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 the United States Food and Drug Administration and other government
regulations; limitations on third-party reimbursement; potential adverse impact
of anti-remuneration laws; potential product liability; listing on the NASD's
OTC Bulletin Board'r'; Year 2000 issues; 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," "believes," "estimates,"
"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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
The Company is engaged in developing, manufacturing and marketing medical
devices which enhance and expand the use of ultrasound technology for medical
applications and procedures. The Company's technologies enable ultrasound
imaging to, among other things, identify devices during interventional
procedures such as needle biopsies, catheterizations and intravascular imaging.
The Company has developed four proprietary ultrasound technologies that have
direct application for minimally-invasive surgical procedures. The Company's
technologies include a proprietary transcutaneous, epivascular, and
catheter-based sensor and electronics system ("EchoFlow'TM'") which, if
successfully developed, would provide data on the blood flow through internal
vessels, a proprietary catheter positioning system ("EchoMark'r'") which
electronically marks and displays the position of non-metallic objects, such as
catheters, within the body on existing ultrasound imaging screens, a proprietary
system ("ColorMark'r'") which highlights metallic objects, such as needles and
other interventional instruments, in color to permit them to be easily seen on
existing ultrasound imaging screens, and a proprietary imaging system
("EchoEye'r'") which, if successfully developed, would allow clinicians to view
tissues and organs inside the body in three-dimensional real-time and provide
forward-looking intravascular images and guidance for minimally invasive
ultrasound-guided surgical procedures.
The Company believes that products incorporating its technologies can
improve and expand the clinical uses of ultrasound imaging for both diagnostic
and therapeutic applications and enable clinicians to perform a wide variety of
procedures less invasively, more safely, more cost-effectively and with greater
precision than is currently possible with conventional X-ray, computed
tomography ("CT"), magnetic resonance imaging ("MRI") or optical imaging
equipment. In some cases, the Company believes that its products may make it
possible to perform on an outpatient basis procedures normally confined to the
hospital, thus improving patient comfort and reducing costs. The continued
development of these products, the commercialization of any products
incorporating these technologies, as well as any other proposed products
utilizing the Company's technologies, may depend on the Company's continued
ability to obtain additional financing through joint ventures, licensing
agreements or other collaborative arrangements or otherwise.
The Company's operations have not generated significant revenues to date.
The Company has incurred operating losses in each of its fiscal years, and
expects that operating losses will continue in the foreseeable future. No
assurance can be given that the Company will successfully commercialize any of
its products or achieve profitable operations.
Ultrasound Imaging Background
Imaging systems are necessary because many medical and surgical procedures
cannot be performed without detailed information about conditions in the
interior of the body. Physicians typically scan the body using ultrasound,
optical, X-ray, CT or MRI equipment. In addition, ultrasound and optical imaging
devices may be mounted onto catheters and inserted directly into arteries, veins
or other parts of the body. These imaging catheters may also be used in the
performance of certain therapeutic procedures, such as angioplasty, various
obstetric and gynecological procedures, and minimally invasive surgical
procedures.
Each of the currently available imaging technologies, X-ray, MRI, CT, and
optical technologies have significant limitations. Each of these technologies
are expensive and time consuming to perform. X-ray imaging cannot provide views
of the structure of soft tissue or cross-sectional views of blood vessels or
other body lumens. X-ray procedures are expensive and can expose both patients
and clinicians to potentially dangerous radiation. Catheter-based optical
systems are safer and can provide interior views of body structures, but can
only view the surface of the body tissue. Because of these limitations,
clinicians are increasingly turning to ultrasound imaging. The Company believes
that ultrasound's growth results largely from the fact that ultrasound devices
are cost-effective and allow the clinician to see below the surface of body
tissue.
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Currently available ultrasound imaging devices, however, also have certain
limitations. These devices are often unable to record the location of a catheter
or other medical device inserted by the clinician into the body. Because the
precise placement of such devices is often essential for therapeutic use, this
difficulty can severely impair the potential usefulness of ultrasound for
guiding interventional procedures.
The Company's Products and Technology
The following is a description of the Company's products and proposed
products utilizing the Company's proprietary technologies.
ECHOFLOW The Company is engaged in ongoing research and development of the
EchoFlow technology and products incorporating the EchoFlow technology which, if
successfully developed, would provide data on the blood flow through internal
vessels. Small sensors that can be mounted onto blood vessels or within the
walls of a graft, and that provide crucial data on the flow of blood, have wide
applicability, including for feedback control of pacemakers and implantable
defibrillators. EchoFlow sensors can be disposable products, and will connect to
an electronics module.
The Company has successfully performed bench tests on EchoFlow sensors, and
has conducted preclinical testing on EchoFlow at Mount Sinai Hospital in 1997
and at the University of Louisville in April 1998. In March 1998, at the
national conference of the Society of Clinical Vascular Surgeons ("SCVS") in San
Diego, California, EchoCath demonstrated the EchoFlow system using a sensor,
one-quarter the size of a postage stamp, that when laid directly on or over a
blood vessel, provides the quantitative blood flow measurements required by a
vascular surgeon. At the SCVS conference, the pre-clinical results from
employing an EchoFlow prototype instrument to measure blood flow were also
presented. Continued product definition took place at the Annual Meeting of the
SCVS in June 1998. (Professor William Abbott of Harvard Medical School, a member
of EchoCath's Medical Advisory Board.) Product prototypes are currently being
tested. The Company anticipates that, subject to completing its research and
development, obtaining the necessary approval of the United States Food and Drug
Administration (the "FDA") and other regulatory approvals and developing a
commercial prototype, it will market and sell the initial EchoFlow product to
vascular surgeons for intraoperative measurements and potentially for intensive
care monitoring of circulatory status.
The Company intends to develop, manufacture and market additional EchoFlow
products that utilize its EchoFlow technology. Planned products include
monitoring systems that will measure blood flow in the circulatory system,
utilizing sensors on the skin above a blood vessel, or placed directly on the
vessel following surgery, or, carried on a catheter, inside the blood stream. As
the status of the circulatory system is crucial, the Company believes such
products have significant potential uses but widespread acceptance of these
products will depend on numerous factors. (See Introductory Note and
"Important Factors Regarding Forward-Looking Statements"). The commercialization
of other applications of the EchoFlow product will depend on the Company's
ability to obtain additional financing through joint ventures, licensing
agreements or other collaborative arrangements or otherwise. The Company cannot
predict, when, if ever, such products will be successfully developed or
available for commercial sale.
The Minimally Invasive Cardiac Surgery Division ("MICS Division") of
Medtronic, Inc., a Minnesota corporation ("Medtronic") purchased an option to
acquire the exclusive right to license EchoFlow for minimally invasive cardiac
surgery ("MICS"). While the option has expired, the Company and Medtronic have
continued to engage in discussions regarding a potential licensing agreement
relating to EchoFlow technologies. The Company cannot predict whether or not
such discussions will result in the Company and Medtronic reaching a definitive
agreement. In addition, in October 1997 Medtronic's MICS Division licensed the
rights to use certain other EchoCath technologies in the field-of-use of MICS.
ECHOMARK The Company's EchoMark system electronically marks and displays
the position of non-metallic objects, such as catheters within the body on
existing ultrasound imaging screens, eliminating the need to use X-ray to
confirm the position of such objects. The Company has developed a catheter
utilizing the EchoMark technology to diagnose fallopian tube blockage (the
"EchoMark Salpingography Catheter"). The EchoMark Salpingography Catheter
consists of a disposable catheter to which is attached a proprietary sensor
connected by wire to a reusable catheter system interface (the "EchoMark CSI").
The EchoMark CSI, for which the Company received FDA market clearance in 1992,
provides the interface between the Company's EchoMark products and
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most commercially available ultrasound imaging systems. On the EchoMark
Salpingography Catheter, the sensor captures ultrasound signals and relays them
back to the EchoMark CSI, which in turn displays the position of the sensor on
the ultrasound imaging screen. The Company believes that the EchoMark
Salpingography Catheter may expand the use of ultrasound for diagnosing and
treating infertility problems in women because of the desire to avoid X-rays in
such patients and the desire to reduce procedure time. The Company intends to
enter into joint venture, licensing or other collaborative arrangements to
market and sell the EchoMark Salpingography Catheters. To date, the Company has
been unsuccessful in securing an agreement with a joint venture partner or
licensee or any other arrangement. The Company has also developed the EchoMark
Electrophysiology Catheter (the "EchoMark Electrophysiology Catheter") which
consists of a conventional electrophysiology catheter augmented by a
piezoplastic covered brass sensor connected by wire to the EchoMark CSI. The
sensor captures ultrasound signals and relays them back to the EchoMark CSI,
which in turn displays the position of the sensor in the image of the cardiac
structures on the ultrasound imaging screen. The Company believes that the
EchoMark Electrophysiology Catheter will increase the speed and ease the
diagnosis of arrhythmias in the heart. The Company received FDA clearance in May
1995 to market the EchoMark Electrophysiology Catheter to diagnose defective
conductive pathways in the heart. In February 1997, the Company entered into a
license agreement with EP MedSystems Inc., a New Jersey corporation ("EP
MedSystems"), for this use of this technology.
The Company licensed its EchoMark technology to the Pacing Division of
Medtronic for pacemaker lead implantation (in conjunction with the ColorMark
technology, as mentioned below), to the MICS Division of Medtronic for
ultrasound guidance in cardiac surgery, and to EP MedSystems for
electrophysiology applications. See "-Collaborative Agreements." On March 31,
1998, EP MedSystems announced the successful use of EchoMark in connection with
guiding electrophysiology devices under ultrasound imaging.
Additional products which the Company has developed utilizing the EchoMark
technology are an EchoMark peripheral angioplasty catheter (the "EchoMark PTA
Catheter") and EchoMark guidewire (the "EchoMark Guidewire"). The Company
received marketing clearance from the FDA under a 510(k) pre-market notification
for the EchoMark PTA Catheter in 1992 and the EchoMark Guidewire in 1993. The
Company previously experienced resistance from the medical community when it
attempted to introduce the EchoMark PTA Catheter in 1993 because of the conflict
over the administration of such procedures between different medical
specialties. The Company is continuing to explore means of introducing the
EchoMark PTA Catheter to be utilized in the actual performance of peripheral
angioplasty under ultrasound guidance.
Currently, the EchoMark CSI may be used with the systems of Acuson,
Advanced Technology Laboratories, Inc. ("ATL"), Hewlett-Packard Inc., Siemens
Medical Systems Inc., Toshiba and other ultrasound systems.
The Company intends to enter into additional joint venture, licensing or
other collaborative arrangements for the distribution, marketing sale and/or use
of the Company's proprietary EchoMark technology.
COLORMARK The Company has developed a product (the "ColorMark Clip")
utilizing the ColorMark technology. The ColorMark Clip consists of a disposable
clip and a non-disposable drive box. The clip is mounted on the needle or other
interventional device and the drive box produces a voltage which is transmitted
to a piezoceramic slab mounted in the clip. The voltage generates vibrations
which in turn allows the device to appear in color on the ultrasound imaging
screen which permits clinicians to more effectively guide needles during
therapeutic and diagnostic procedures. The ColorMark Clip is compatible with a
wide variety of needles and guide wires and can operate with most currently
available color ultrasound systems. The non-disposable drive box has a current
selling price of $5,000 and the disposable clips sell for approximately $50
each. The Company has received market clearance from the FDA for the ColorMark
Clip for needle placements. The Company believes that with the ColorMark Clip,
needle biopsies and vascular access procedures are more accurate and faster for
clinicians to administer. The ColorMark Clip has been introduced at major
radiology-oriented medical conventions. The Company is seeking alliances to
market the ColorMark Clip and associated devices it has developed.
The Company may develop and commercialize additional products utilizing the
ColorMark technology to address specialized procedures such as laparoscopic
instrument guidance. Such products are expected to be subject to regulatory
approval by the FDA and comparable foreign agencies or state health departments
prior to marketing and are expected to require additional financing to
commercialize.
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In addition to the ColorMark technology being licensed to Medtronic for
guidance of pacemaker lead implantation, it has also been licensed to Medtronic
MICS Division for cardiac surgery applications, and to EP MedSystems for guided
placement of electrophysiology catheters. The Company is seeking additional
alliances to market the ColorMark Clip and associated devices it has developed.
Pursuant to an International Distribution Agreement effective April 1, 1997
(the "Medison Agreement"), between the Company and Medison Co., Ltd. of Seoul,
Korea ("Medison"), the Company granted Medison the exclusive right to promote,
sell and distribute certain products utilizing the Company's proprietary
ColorMark technology throughout the Far East and a non-exclusive right to
promote, sell and distribute certain products utilizing the Company's
proprietary ColorMark technology throughout other parts of the world. Medison
has not met the minimum purchase requirements of this agreement, largely due to
the unstable conditions in the Far East markets. The Company has not cancelled
the Medison Agreement and continues to evaluate the situation. See
"-Collaborative Agreements."
The Company will seek to enter into additional joint venture, licensing or
other collaborative agreements for, among other things, the distribution,
marketing, sale and/or use of the Company's proprietary ColorMark technology.
ECHOEYE The Company is engaged in the research and development of products
incorporating the EchoEye technology which, if successfully developed, would
allow clinicians to view tissues and organs inside the body in three-dimensional
real-time and provide forward-looking images and guidance for minimally invasive
ultrasound guided procedures. The Company has successfully performed preclinical
testing on the EchoEye technology.
The EchoEye technology has been licensed to EP MedSystems for its use in
electrophysiology procedures. In October 1997, Medtronic received an option to
license the use of EchoEye in cardiac surgery. This option has expired. See
"-Collaborative Agreements."
Further Developments
Any further developments of the Company's proposed products, as well as
other products the Company wishes to pursue, may depend on the Company's
continued ability to obtain substantial additional financing through joint
ventures, licensing agreements or other collaborative arrangements or otherwise.
In addition, such products are expected to be subject to regulatory approval by
the FDA and comparable foreign agencies or state health departments prior to
marketing.
Markets and Applications
Set forth below is a description of the markets and applications for the
Company's products and proposed products.
ECHOFLOW Products utilizing the EchoFlow technology, will, if successfully
developed, provide data on the blood flow in vessels. Applications are expected
to include cardiac output, displacing an indirect and noncontinuous method,
thermal dilution, with a continuous direct measurement. According to published
reports there are over one million thermal-dilution catheters used each year in
the United States. Management believes that the EchoFlow products will, if
successfully developed, provide accurate beat-to-beat measurement of cardiac
flow, a currently desired and unmet need. Additional potential uses of EchoFlow
include monitoring of bypass grafts (artificial or natural), stent placement,
and measurement of hemodynamic status.
The Company anticipates that, subject to completing its research and
development, obtaining the necessary FDA and other regulatory approvals and
developing a commercial prototype, it will market and sell EchoFlow products
initially to vascular surgeons for intraoperative applications. The
commercialization of such products may depend on the Company's ability to obtain
additional financing through joint ventures, licensing agreements or other
collaborative arrangements or otherwise.
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Two distinct, but related, instruments will be initially developed from the
EchoFlow technology: an "evaluator" instrument, the first EchoFlow product, and
a "monitor" instrument. While the instruments will share signal-processing
electronics, each will have its distinct operating interfaces and displays. The
evaluator instrument will be adapted for surveying an operational site and
evaluating the flow, such as traversing the surface of the heart to find the
coronaries, or moving along an artery to find a change in velocity that
indicates a narrowing of the artery. In contrast, the monitoring system will be
used with a static sensor and will measure the velocity as a function of time
(whereas the evaluator instrument will measure velocity as a function of
location). The monitoring system will need different capabilities, such as
storing, analyzing and displaying the flow data over time, to show trends and
changes. The sensors to be used with the two types of instruments will differ as
well. The evaluator instrument will be equipped with non-disposable hand held or
finger-mounted probes, while the monitoring instrument will employ disposable
band aid-like sensors ("patches") that are as thin and light as possible.
EVALUATOR INSTRUMENT -- The evaluator instrument is expected to be
introduced initially to the vascular surgery market. The vascular surgeon's work
involves restoring circulation and the evaluator instrument will be a vital tool
to ensure the success of any such revascularization. The Company believes that
the vascular surgeon is also likely to purchase the evaluator instrument for
"graft surveillance", post-operatively examining the flow in any peripheral
graft to ensure its survival. The Company intends to market the evaluator to the
cardiovascular surgeon, particularly the surgeon involved in the
minimally-invasive coronary artery bypass graft surgery ("mini-CABG")
procedures. This procedure, requires a means of measuring the flow of coronary
artery blood. The EchoFlow evaluator instrument is expected to be used in both
the mini-CABG and open-chest coronary artery bypass graft.
The Company also intends to market the evaluator instruments to plastic
surgeons. An integral part of advanced plastic surgery is moving of tissue
flaps. Blood supply is the crucial element in this procedure.
Many vascular surgical procedures are performed by the "general surgeon",
and with the adoption of the evaluator instrument as part of vascular surgery,
the general surgeon is likely to also utilize the instrument. Maintaining
circulation is a critical part of most surgical procedures and the evaluator
instrument may be used.
MONITORING INSTRUMENT -- The monitoring instrument is planned to be
produced in two models: one for use with a transcutaneous patch, to be placed on
the skin above a repaired vessel or graft, the other for use with an epivascular
patch, to be placed internally directly on a vessel, such as on a coronary
artery bypass graft, with the connecting signal cable leaving the body attached
to, or part of, a drainage catheter. These monitoring patches will remain on, or
in place, during the post-operative period, providing the surgeon with valuable
early-warning of any complication. Another important monitoring system use is in
dialysis. Since the basic electronic components of the monitoring instrument are
the same as for the evaluator instrument, the major development will be in
creating the appropriate software for the instrument and the materials for the
patches.
ECHOMARK
INFERTILITY THERAPY -- Infertility therapy generally includes
hysterosalpingography procedures which image the uterus and fallopian tubes and
SSG procedures which image each fallopian tube individually. Both of these
procedures involve X-rays and the injection of iodinated contrast media into the
fallopian tubes and uterine cavity in order to view the condition of the cavity
and determine whether lesions or other obstructions exist. These examinations
are expensive, highly invasive and uncomfortable for patients, and they must be
performed in the hospital. The procedures involve injection of potentially toxic
contrast dyes into the body and the related risks from exposure to radiation.
Ultrasound technology potentially can address many of these concerns by
providing a less expensive outpatient procedure that eliminates the use of
radiation and removes the risk of irritation caused by the contrast media.
However, ultrasound also has limitations since it is often difficult or
impossible to identify the position of catheters and instruments used during the
procedure. The EchoMark Salpingography Catheter is designed to make the position
of the catheter or other instrument easier to determine, independent of the
angle of the catheter. The Company believes that the EchoMark Salpingography
Catheter should expand the usefulness of ultrasound for diagnosing and treating
infertility problems, reduce procedure time, eliminate the use of radiation to
provide guidance, and also make possible the transfer of the procedure to a less
expensive and more comfortable outpatient
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setting. However, the EchoMark procedure will require the medical community to
change the traditional methods of diagnosis and treatment. The Company intends
to seek an alliance partner to market and sell the EchoMark Salpingography
Catheter for the diagnosis and treatment of infertility to OB/GYN doctors. To
date no EchoMark Salpingography Catheters have been sold.
CARDIAC ELECTROPHYSIOLOGY -- The EchoMark EP Catheter was designed for
the diagnosis and treatment of cardiac arrhythmias. The Company believes that
the EchoMark EP Catheter allows more rapid placement of EP catheters than
present X-ray techniques. As such, this product represents a potentially
significant improvement in this procedure. Pursuant to the terms of the EP
MedSystems Agreement, the Company granted EP MedSystems the exclusive right to
make, have made, use and sell products the Company's proprietary EchoMark
technology in the field of cardiac electrophysiology. See "-Collaborative
Agreements"; and "Item 3 - Legal Proceedings."
PERIPHERAL ANGIOPLASTY -- Peripheral angioplasty procedures are
currently performed with X-ray contrast media and in X-ray suites. The Company
believes that ultrasound-guidance using EchoMark PTA Catheter will save
significant costs with as good or superior clinical outcomes. Market resistance
from traditional practitioners was encountered in 1993 when the EchoMark PTA
Catheter was introduced into the United States market. Management believes that
increased cost-consciousness coupled with increased marketing by the Company
could lead to increased acceptance of the EchoMark PTA Catheter in the United
States despite the need to change the imaging procedure from X-ray to
ultrasound.
COLORMARK The Company has demonstrated the utility of ColorMark guidance of
biopsies at leading clinical reference sites and is seeking alliance partners to
begin direct marketing of the ColorMark Clip for needle biopsies to radiologists
and breast surgeons and for vascular access procedures to interventional
radiologists and invasive cardiologists. The Company has had minimal sales of
the ColorMark Clip.
NEEDLE BIOPSY -- Biopsies, in which small pieces of tissue are excised
and examined, are performed in order to diagnose the cause of abnormal masses of
tissue. Biopsies are sometimes performed after the entire tissue mass has been
removed surgically, but biopsies can often be performed before surgery using
biopsy needles. To successfully perform a needle biopsy, often an imaging device
is needed to guide the biopsy needle. Biopsy procedures include fine-needle
aspiration biopsy, core biopsy, and surgical biopsy. Based upon management's
analysis of American Cancer Society statistics, physician interviews and
published clinical reports, the Company believes that a significant portion of
these procedures could require guidance using either ultrasound imaging, CT
scanning, X-ray imaging or MRI. Management believes ultrasound is generally
considered by clinicians to be the preferred guidance imaging method, as it is
less costly and less time-consuming than other alternatives. However, use of
this method is currently hampered by the fact that the biopsy needle is often
difficult to see on the imaging screen. The needle may disappear altogether if
it is not at a favorable reflecting angle for the ultrasound transducer.
Clinicians must master various techniques for getting the needle to appear on
the screen by adjusting the alignment of the needle or "jiggling" it. Textured
needles provide only a limited solution to this problem, although they are less
expensive than the ColorMark Clip. As a result, only experienced clinicians
generally attempt ultrasound guided biopsy. The ColorMark Clip is designed to
eliminate this needle invisibility problem in biopsy procedures. The Company
believes that the ColorMark Clip could enable needle biopsies to be performed
faster, easier and more accurately. The FDA has cleared for marketing the use of
an ultrasound system manufactured by ATL for diagnosing cancerous lesions in the
breast which are larger than 1 cm. The use of such ultrasound system may reduce
the number of surgical biopsies performed each year. However, the Company
believes that such FDA approval may lead to an increase in acceptance and use of
ultrasound for detecting breast cancer.
VASCULAR ACCESS PROCEDURES -- A vascular access procedure, a necessary
step in performing any radiology or cardiology catheterization procedure,
involves the insertion of a catheter into the femoral artery, guided by feel.
Poor placement of the needle that is used to puncture the artery can lead to
bleeding complications at the puncture site, particularly where a large-bore
catheter is used or in situations where the patient is obese, hypertensive or
using an anticoagulant agent. Ultrasound imaging potentially can provide
guidance for the exact placement of the puncturing needle quickly and easily,
but until now this potential was limited by the lack of an effective method for
viewing the needle. Physicians suggest that the ColorMark Clip is most likely to
be used in catheterizations where anticoagulants are involved, such as
angioplasty and stenting procedures. Additionally, procedures involving large
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bore catheters (such as placement of intra-aortic balloon pumps) also represent
potential opportunities for the ColorMark Clip. Management believes that the
ColorMark Clip is well suited for these patients and that the ColorMark Clip
makes this procedure easier to perform accurately, and allows clinicians to
delegate the procedure to less skilled persons, saving time, and increasing
laboratory volume. A disadvantage to using the ColorMark Clip is the requirement
for its use in conjunction with a colorflow ultrasound imaging system. While
these systems are common in hospital radiology departments, they are currently
less common in offices and surgical suites where biopsies and vascular access
procedures may be performed.
ECHOEYE
INTRAVASCULAR IMAGING -- Intravascular imaging catheters are used to
inspect the condition of blood vessels, allowing clinicians to identify the
extent and locations of vascular lesions and identify the most effective
treatment. The two leading types of intravascular imaging catheters are optical
angioscopes and ultrasound catheters. Currently available intravascular
ultrasound catheters operate by scanning around the catheter's axis as it passes
through the imaging site. The usefulness of optical systems is limited because
they cannot see below the surface of lesions, thus failing to capture important
information about their composition. Current ultrasound systems, on the other
hand, are unable to scan the area ahead of the catheter, and cannot view
obstructions that totally block the artery or otherwise prevent the catheter
from passing through. EchoEye products will combine features of optical
angioscopes and existing ultrasound imaging catheters and will be designed to
provide detailed tissue characterization like any other intravascular ultrasound
catheter. Like the angioscope, EchoEye products will be designed to scan
forward, ahead of the catheter tip. This forward-looking capability also makes
possible ultrasound-guided minimally invasive surgical procedures, giving the
surgeon more information than is available using traditional endoscopes.
Intravascular imaging catheters are primarily used by cardiologists and
radiologists during cardiac and peripheral angioplasty procedures where standard
balloon dilation yields poor results or where alternative recanalization
procedures (using stents, lasers or atherectomy devices) are being considered.
Percutaneous insertion of a vascular stent and or graft is a developing
procedure in which it is imperative that the graft or stent device be guided and
placed with a degree of accuracy beyond the capability of current technology. In
addition, cardiac electrophysiologists could potentially use EchoEye products to
guide therapeutic cardiac ablation procedures; EPMedSystems has the exclusive
license for such use. See "-Collaborative Agreements."
MINIMALLY INVASIVE SURGERY -- Minimally invasive (laparoscopic)
surgery is designed to reduce surgical complications and recovery time by
reducing the size of incisions used to access the part of the body being
treated. Small incisions are made and trocars (short tubes through which various
instruments and endoscopes may be introduced) are inserted. The instruments are
guided using an optical endoscope (laparoscope) introduced through another
trocar. Laparoscopic surgery is currently hampered by the fact that the
procedure can only be guided visually. There is no opportunity for tactile
feedback to provide information about details below the tissue surface.
Ultrasound imaging offers surgeons the opportunity to identify these subsurface
conditions, expanding the usefulness of the minimally invasive surgical
technique. EchoEye products may be used to improve laparoscopic surgical
procedures. In some procedures, ultrasound imaging catheters may be used to
identify the location of major blood vessels prior to initiating treatment, or
to scan the operating field for cancer lesions or other small diseased areas at
the end of a procedure. In other procedures, ultrasound visualization is
necessary to guide micro-invasive surgical therapy in a complex anatomical
environment.
OTHER POTENTIAL MARKETS The Company has identified a number of clinical
applications, for which the Company's technologies may be used but which do not
as yet represent markets on which the Company has chosen to concentrate. These
potential applications include central venous pressure catheters, chorionic
villi sampling/amniocentesis, intrauterine ultrasound imaging, percutaneous
drainage, percutaneous transluminal angioplasty, percutaneous umbilical blood
sampling, temporary pacing wires and thermal dilution catheters. The Company may
seek to address these markets through strategic alliances with other entities.
Research and Development
The Company has incurred an aggregate of approximately $9,168,000
(excluding the value of the technology contributed at inception by Ultramed,
Inc., a privately-held corporation ("Ultramed")) of research and
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development expenses from its inception through August 31, 1998, including
approximately $1,471,000 during the fiscal year ended August 31, 1997 and
approximately $1,265,000 during the fiscal year ended August 31, 1998.
Substantially all of the Company's research and development expenditures to date
have related to the development of the EchoFlow, EchoMark, ColorMark, and
EchoEye technologies and the products utilizing such technologies and
development of manufacturing techniques for such products.
In February 1996, $575,000 was paid by the Company to Heart Rhythm
Technologies, Inc. ("HRT"), a subsidiary of Guidant Corporation ("Guidant") to
reacquire the technology rights to the Company's EchoMark and EchoEye
technologies in connection with an exclusive licensing and development agreement
between the Company and HRT dated September 21, 1992. Such licensing and
development agreement was terminated in February 1996. In April 1996, the
Company received a $98,000 Phase I Small Business Innovation Research ("SBIR")
grant from the National Institute of Health to demonstrate the feasibility of
EchoFlow technology.
The Company conducts all of its research and development on the premises of
its facility in Princeton, New Jersey. The Company has eight full time employees
dedicated to research and development activities and one part-time employee
dedicated to regulatory activities.
Collaborative Agreements
MEDTRONIC AGREEMENTS
DECEMBER 1996 MEDTRONIC AGREEMENT -- Pursuant to the terms of the
December 1996 Medtronic Agreement, the Company granted Medtronic Pacing Division
a worldwide exclusive license to make, have made, use, sell and have sold
products utilizing the Company's EchoMark and ColorMark proprietary technologies
to enable the precise positioning, with conventional ultrasound imaging systems,
of pacemaker leads within the heart. The total payments to the Company under the
December 1996 Medtronic Agreement are $200,000 as of November 30, 1998.
In consideration of the grant of the exclusive license to Medtronic,
Medtronic agreed, among other things, to pay to the Company: (i) $150,000 which
was paid upon execution of the December 1996 Medtronic Agreement; (ii) $800,000
consisting of payments in installments as certain development milestones and
initial sales are achieved on the ColorMark products; (iii) annual minimum
royalties beginning two (2) years after FDA approval of the first product
commercialized by Medtronic which utilizes the Company's ColorMark
visualization; and (iv) when commercially available, royalties on the sale by
Medtronic of products utilizing the Company's EchoMark or ColorMark
technologies. The total cumulative royalties payable to the Company under the
terms of the December 1996 Medtronic Agreement are capped at $20,000,000.
OCTOBER 1997 MEDTRONIC AGREEMENT -- 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 EchoMark or ColorMark technologies in
guiding devices during cardiothoracic surgical procedures; (ii) received an
immediate $50,000 followed by a later $200,000 payment from Medtronic MICS
Division (for completion of "Concept Design Validation" for an EchoFlow
instrument to be used in mini-CABG procedures to determine if adequate flow has
been established in coronary arteries after a bypass procedure) for Medtronic to
acquire the exclusive option at any time until October 31, 1998, for a payment
of at least $1.5 million to acquire a worldwide exclusive license to the
Company's EchoEye and EchoFlow technologies for use in guiding devices during
cardiothoracic surgical procedures. While the option has expired, the Company
and Medtronic have continued to engage in discussions regarding a potential
license agreement relating to EchoFlow technologies.
In consideration of the grant of the exclusive rights to Medtronic,
Medtronic agreed to pay to the Company a combined total of $1,750,000, which
amount includes: (i) $750,000 paid to the Company in upfront licensing fees;
(ii) $1,000,000 from 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., a wholly-owned subsidiary of Medtronic; and
(iii) future payments by Medtronic to the Company which include minimum annual
royalties upon product commercialization. The total cumulative royalties payable
to the Company under the terms of the
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October 1997 Medtronic Agreement are capped at $20,000,000. To date, the Company
has not received any royalties or payments from the sale of products under
either agreement with Medtronic.
EP MEDSYSTEMS AGREEMENT Pursuant to the terms of the EP MedSystems
Agreement signed in February 1997, the Company granted EP MedSystems the
exclusive right and license to make, have made, use and sell products utilizing
the Company's EchoMark, ColorMark, and EchoEye proprietary technologies for use
in the field of electrophysiology. The license granted to EP MedSystems
specifically excludes use of the Company's EchoMark, ColorMark, and EchoEye
technologies on permanently implantable defribillators and pacemaker leads.
In consideration of the license grant, EP MedSystems agreed to: (i) pay to
the Company an initial license fee of $700,000, payable in installments as
certain development milestones and initial sales are achieved on the EchoMark
and EchoEye technologies, including (a) completion of the testing of a limited
series of patients, (b) completion of a development program for EchoEye, and (c)
the sale of a limited quantity of EchoMark EP Catheters; (ii) make royalty
payments to the Company on the sale of products utilizing the Company's
EchoMark, ColorMark, and EchoEye technologies in the field of electrophysiology.
The total cumulative royalties payable to the Company under the terms of the
EP MedSystems Agreement are not to exceed $30,000,000.
As of February 17, 1997, the Company entered into a Subscription Agreement
with EP MedSystems whereby EP MedSystems purchased 280,000 shares of the
Company's Series B Cumulative Convertible Preferred Stock (the "Series B
Cumulative Convertible Preferred Stock") for $1,400,000. The EP MedSystems
Agreement provides that any royalties payable to the Company pursuant to the
terms of the EP MedSystems Agreement can be reduced, but not to an amount below
zero, 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 the
date such royalty payment is due. See "Item 3 - Legal Proceedings."
MEDISON AGREEMENT The Company entered into the Medison Agreement effective
April 1, 1997 with Medison of Seoul, Korea for the distribution of ColorMark
systems throughout the Far East. Medison had agreed to order a certain minimum
number of ColorMark systems within 12 months from the effective date of the
Medison Agreement. Medison and the Company had previously agreed to delay
Medison's minimum purchase order requirement until early calendar year 1998.
Medison has since been unable to complete the minimum requirements, but the
Company has not cancelled the Medison Agreement and continues to evaluate the
situation.
BARD AGREEMENT Pursuant to an agreement dated September 24, 1993 (the "Bard
Agreement"), between the Company and Bard Radiology Division of C.R. Bard, Inc.
("Bard"), the Company granted Bard (i) the exclusive right to distribute certain
modified needles and retrofitted Bard biopsy guns for ColorMark use throughout
the world, and (ii) the non-exclusive right to distribute the Company's driver
boxes throughout the world. In consideration of the license grant, the Company
received, among other things, a $540,000 advance on the Company's future
receivables from Bard evidenced by a promissory note in the principal amount of
$540,000. The Bard Agreement was terminated on October 28, 1996. In April 1997,
the Company agreed to pay $598,000, representing the full amount of principal
and interest owing as of April 1997 by the Company to Bard under the Bard
Agreement, at any time prior to July 1998. The amount due as of August 31, 1998
was $665,080. Bard has extended the current maturity date to December 31, 1998.
Manufacturing and Suppliers
The Company plans to subcontract the production of component parts of the
EchoFlow instrument systems, and intends to assemble and test EchoFlow
instrument systems at the Company's facility in Princeton, New Jersey. The
Company currently has the capability to manufacture EchoMark CSI systems,
ColorMark disposable clips, and ColorMark drivers at its own facility. Outside
vendors are used to fabricate catheters and to mount sensors. Prototype
manufacturing is performed by an outside manufacturing firm with specific
expertise in fabricating catheter devices. The Company intends to continue to
manufacture certain unique elements of its products. The Company believes that
with its current facilities and vendor arrangements, it can manufacture enough
of its products to meet its anticipated needs through April 2002. Thereafter,
the Company will be required to raise significant additional capital, attract
and retain experienced personnel, purchase or lease additional equipment and
comply with extensive government regulations with respect to its facilities.
Further, even if the Company manufactures its
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products directly, it will continue to depend upon subcontractors to manufacture
and deliver certain components of its products in a timely and satisfactory
manner. The Company has limited manufacturing capability and depending upon the
volume of its products sold, the Company may determine to enter into
arrangements with others for the manufacture and assembly of its products, in
which event it will be substantially dependent upon such third parties to
deliver such products in a timely manner and on a competitive basis.
The Company believes that its products are manufactured in substantial
compliance with the FDA's Good Manufacturing Practices ("GMP") regulations. In
April 1997, the FDA conducted an inspection of the Company's facilities and
subsequently notified the Company that it was in compliance with the FDA's GMP
regulations. At various assembly stages, each component undergoes testing to
check compliance with Company specifications. Third-party manufacturers
generally are required to verify that product fabrication and inspection process
steps meet the Company's specifications and applicable regulatory requirements.
Upon successful completion of these tests, the products are packaged,
sterilized, prepared for shipment and subject to final inspection. If the
Company enters into agreements with contract manufacturers for producing its
products, these manufacturers will be required to operate under FDA GMP
regulations and other relevant regulatory standards and produce materials to the
Company's specifications.
Marketing and Sales
To date the Company has had minimal sales of its products. The Company is
currently in the process of developing a distribution network to market and sell
certain of its products. The Company initially intends to focus its marketing
efforts on the EchoFlow product line.
The Company intends to position a distribution network, application
specialists, and create promotional media for the introduction of the EchoFlow
product, if it is ever introduced.
The Company has entered into collaborative agreements for the marketing and
sale of certain of its products. Such collaborative agreements include the
December 1996 Medtronic Agreement, the October 1997 Medtronic Agreement, the EP
MedSystems Agreement and the Medison Agreement. See "-Collaborative Agreements".
The Company intends to enter into additional joint venture, licensing, or
other collaborative arrangements to market and sell its products. When, and if,
the Company enters into these arrangements, these arrangements may result in the
lack of control by the Company over the marketing and selling of the Company's
products.
Because use of the Company's products will require changes from traditional
methods and procedures, their acceptance by the medical community will require a
significant educational effort to be undertaken by or on behalf of the Company.
Educational and promotional materials will be produced to support the sales
effort. In addition, the Company intends to develop training seminars, exhibit
its technologies at medical conferences and build market support for providing
extensive customer training.
Competition
The Company monitors clinical trial reports and patent applications to
assess its competition and is not aware of any products on the market or under
development that, in management's opinion, can match the ability of the
Company's technologies to guide medical devices using ultrasound.
ECHOFLOW As EchoFlow measures blood flow, the most significant competitor
is the human finger. Checking for blood flow by feeling for a pulse is among the
most common "procedures" in medicine. The obvious limitation to using the
tactile method for blood flow determination is that it is not quantitative, nor
even very qualitative. It is possible to feel a pressure pulse when there is no
flow, and if there is a lot of fat over an artery, to feel no pulse when there
is plenty of flow. Another useful device is a "pen dop", a small Doppler system
that fits into a pen-sized case. However, a pen dop is not accurate in measuring
absolute blood velocity. At present, it is impossible to measure Doppler
blood flow without adding an extensive ultrasound imaging system to a Doppler
system, a large, bulky system at a great expense, requiring a specialized
technician to operate and containing a probe which is roughly fist-sized and
therefore, difficult to use intra-operatively. The Company believes these
systems are not actually competitive with EchoFlow instrumentation.
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There are other hemodynamic sensing systems that are used in animal
studies, utilizing Doppler or transit-time ultrasound, or electromagnetic
flowmeters, to measure bloodflow. However, management believes that these
laboratory devices, if successfully developed, may not be feasible for long-term
implantation, unlike the small, flexible and inert structures of its proposed
products utilizing the EchoFlow technology. However, long-term successful
implantation of EchoFlow devices has not yet been determined.
For acute measurements, thermal-dilution is a standard in the operating
room and in the intensive care unit and coronary care unit market. As
thermal-dilution is a non-continuous and intrinsically unreliable method,
management believes it could be displaced by products incorporating the EchoFlow
technology. Other acute uses include Doppler guide wires, such as those made by
CardioMetrics, Inc., a division of Endosonics Corporation ("CardioMetrics"), for
use in coronary angioplasty and diagnostic use. Management believes that more
accurate and reliable data will result from products utilizing the EchoFlow
technology units, used either within the artery, like the CardioMetrics
guidewire, or as an epivascular sensor.
There are ultrasound devices that have found a place in vascular surgery
laboratories. These are the Electromagnetic Flow Meter ("EMF") and the
Transit-time Flowmeter ("TTF"). The EMF operates by placing a magnet around a
blood vessel and measuring the voltage developed across the vessel, from which
an indication of velocity can be obtained. If in addition the diameter is known
(such as knowing the size of probe used to encircle the vessel) the flow can be
calculated. However, the need to obtain good electrical contact on a slippery
small vessel, the need to measure small voltages in the presence of a variety of
electrical connections to the patient, the need to have exactly the right size
probe to fit snugly enough to get good contact, all have caused the EMF system
not to be considered reliable enough to be used routinely in human surgery.
The TTF measures blood flow by comparing the difference in time between the
time interval for a pulse to travel between two transducers. The most important
drawback of the TTF is that it must surround the vessel to be measured. That
requires the vessel to be dissected out of its bed and the proper sized sensor
placed around it. Vessels so treated frequently spasm, causing a measurement
error, and there are cases of the vessels being injured as they are clipped into
the sensor. In addition, unless uniformly good ultrasound contact is made, the
TTF may give inaccurate results. Finally, the TTF can only be used
intra-operatively, so there is no possibility of comparing flow readings during
the operation with those afterward.
The Company believes that by using the EchoFlow instrument, the physician
will be able to make a quantitative measurement with the ease of moving a
fingertip-sized sensor over the vessel.
ECHOMARK Management believes there are no companies that compete directly
with its EchoMark technology for guiding catheters under ultrasound. ATL's
Biosponder'TM' technology, although in some ways similar to the EchoMark
technology, is not designed to be mounted onto a catheter.
Management believes that several companies are developing alternative
technologies that are designed to address the infertility market both from a
diagnostic and a therapeutic standpoint. These products typically rely on
optical technology. Although these products may not be directly comparable with
the Company's ultrasound technology, they present a potential threat to the
commercial success of the Company's products. For example, several companies are
developing miniature flexible fiber optic endoscopes (falloposcopes) that can
provide direct visualization of the fallopian tubes for diagnostic and
therapeutic purposes. To guide falloposcopes to the fallopian tubes, OvaMed Inc.
and others have initiated development of self-guiding (pre-curved) catheters
that are designed to find the opening of the fallopian tubes without direct or
ultrasound visualization. Other infertility market competitors such as Bard,
Cook Medical Company and Boston Scientific Corporation ("Boston Scientific") all
have the catheter technology and expertise to develop X-ray guided catheters.
While these catheters have the advantage of using the traditional method of
X-ray guidance, they have the disadvantage of exposing potentially fertile
reproductive systems to radiation.
COLORMARK Management is aware of only two companies that market or have
marketed products that compete with the ColorMark Clip. ATL sold, or may in the
future sell, Biosponder'TM', a biopsy needle mounted with a flat ultrasound
sensor; its principle of operation is similar to the Company's EchoMark
technology. Management believes that its needle visualization technology has
advantages over the ATL product since Biosponder'TM' is
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confined to use with one particular ATL scanhead and is made in only one needle
size. It is thus not usable with other systems already in the field or adaptable
for all uses. Furthermore, the sensor has a limited "angle of acceptance"
(meaning the range of needle positions relative to the ultrasound imaging
transducer that will produce usable images) relative to the Company's
technology, although its range is broader than that of an ordinary biopsy
needle.
The second competing product is the Smart Needle'TM' marketed by the
Peripheral Systems Group of Advanced Cardiovascular Systems, a subsidiary of
Guidant. The Smart Needle'TM' is a Doppler-guided needle useful for assisting
vascular access. To date, the product has been directed primarily to
interventional radiologists. Unlike the ColorMark Clip, the Smart Needle'TM' is
not guided by ultrasound visualization of the target artery, so it does not
eliminate all of the difficulties of vascular access.
In addition, several biopsy needle manufacturers market needles that have
been specially resurfaced to enhance their echogenicity (and thus their
visibility under ultrasound). Although helpful and less expensive than the
Company's technology, management believes these modifications do not fully
improve visualization sufficiently during needle biopsy and vascular access
procedures.
ECHOEYE Management believes that several companies including Cardiovascular
Imaging Systems, Inc. ("CVIS"), a subsidiary of Boston Scientific, and
Endosonics Corporation are marketing and developing miniaturized catheters
mounted with ultrasound transducers for visualization and tissue
characterization within peripheral and coronary arteries. Each of the
competitive devices known to management is a "side-looking" imaging device that
views a doughnut-shaped area perpendicular to the axis of the catheter. With a
side-looking catheter, the scanned area is behind the catheter's tip. These
devices provide useful ultrasound diagnostic information but are limited by
their inability to scan vascular occlusions that prevent the passage of the
catheter as well as the areas beyond such obstructions.
Management is aware of one company, CVIS, that is reportedly pursuing early
stage development of forward-looking catheter designs. Management does not
believe that this competitor has yet produced an operational forward-looking
catheter. However, CVIS has access to substantial resources and is capable of
moving forward rapidly with its development efforts. The products from this
potential competitor would have the advantage of being compatible with its
currently placed ultrasound imaging systems.
Management believes that several companies have developed ultrasound
imaging products for minimally invasive surgery applications. Endomedix Inc. and
Aloka Inc. have imaging systems that are approved for laparoscopic
cholecystectomy. However, unlike EchoEye, if successfully developed, neither of
these systems provide real-time, three-dimensional images of the visualized
area. At least two other manufacturers, Multigon Inc. and Tetrad Inc., are
seeking to develop their own ultrasound imaging systems. Management does not
believe that any competing three-dimensional, real-time ultrasound imaging
systems are currently in development for minimally invasive surgery
applications. However, many of the companies that are undertaking development of
imaging systems that may compete with products utilizing the EchoEye technology
have greater financial, manufacturing, marketing, distribution, and technical
resources than the Company.
GENERAL The health care industry is characterized by extensive research
efforts and rapid technological change. Future innovations could render the
Company's current and proposed products obsolete. Competition in the market for
imaging catheters is intense and is expected to increase. The Company's current
and proposed products are expected to compete against other types of imaging
systems (such as CT, optical scanning, X-ray and MRI) as well as other
ultrasound imaging products. Manufacturers of non-imaging therapeutic catheters
or external ultrasound imaging devices could also enter the market with
competitive products. Such companies may succeed in developing products that are
more effective or less costly than those developed by the Company and may be
more successful than the Company in manufacturing and marketing their products.
Many companies are engaged in research and development of new devices that may
address the same clinical applications as the Company's products. The future
success of the Company will depend, in part, on the degree of clinical
acceptance of ultrasound imaging as opposed to competing technologies as well as
on acceptance of the Company's products for ultrasound imaging applications.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, manufacturing, marketing, distribution,
operating, technical, and other resources than the
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Company. Academic institutions, hospitals, governmental agencies, and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies on
their own or through joint ventures. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective and/or less costly than those developed or being
developed by the Company, thereby rendering the Company's technologies not
competitive or obsolete.
Patents and Proprietary Rights
PATENTS AND PATENT APPLICATIONS All of the Company's technologies have been
invented by officers and employees of the Company or employees of Ultramed,
which was founded to manufacture ultrasonic duplex vascular imaging systems, and
the rights to such technologies were assigned to the Company.
The Company has received four patents in the United States covering aspects
of the EchoFlow technology, has two issued United States patents related to
aspects of the EchoMark technology, holds four issued United States patents
related to aspects of the ColorMark technology, and holds one issued United
States patent for the EchoEye technology. The Company has received or is in the
process of applying for foreign patent approvals for all of its technologies.
The EchoFlow patents are directed to the use of diffractive transducers and
their use in phase or frequency modulation to measure fluid flow; two patents
will expire in 2016, the third patent in 2017 and the fourth in 2018.
The Company's two EchoMark technology U.S. patents, which expire in 2010
and 2011, are directed to the technology underlying the piezoelectric sensor as
well as the EchoMark CSI used to produce the guidance mark on the ultrasound
imaging console. Applications corresponding to both U.S. patents have also been
filed in Europe and Japan under the Patent Cooperation Treaty ("PCT")
provisions.
Two of the Company's ColorMark technology U.S. patents, which expire in
2013, relate to the use of flexural vibration waves on needles to enhance
ultrasound visualization as well as claims on the technology used to create the
vibrations. Applications corresponding to both U.S. patents have also been filed
in Europe and Japan under PCT provisions.
The Company has received two further U.S. patents, which expire in 2014, on
an extension of the ColorMark technology relating to how to perform needle
guidance from a black and white ultrasound system and relating to the method of
attaching needles to a universal ColorMark Clip system.
The Company's EchoEye technology U.S. patent, which expires in 2012, covers
the forward-looking scanning for the EchoEye technology. The Company also
intends to seek claims on the controls designed for the scanhead, on the
scanning pattern performed by the transducer and to cover the programming used
in the system to control the mechanics and to interpret and manipulate the data
gathered from the transducer.
The Company intends to file other patent applications on inventions
developed in the course of continuing research and development efforts. Such
applications will either be owned by, or licensed to, the Company.
TRADENAME, TRADEMARK AND SERVICE MARK RIGHTS The Company is the owner of
the registered trademarks EchoMark'r', ColorMark'r' and EchoEye'r' in the United
States and registration is pending for EchoFlow'TM'.
Government Regulation
FDA AND CERTAIN OTHER REGULATORY REQUIREMENTS The Company's research and
development activities and the production and marketing of the Company's
products are subject to regulation for safety, efficacy and compliance with a
wide range of regulatory requirements by numerous governmental authorities in
the United States and in other countries. In the United States, medical devices
are subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act and
other federal statutes and regulations govern or influence the research,
testing, manufacture, safety, labeling, storage, recordkeeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in civil penalties,
recall, injunction or seizure of products, refusal to permit products to be
imported into the United States, refusal of the government to
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approve or clear product approval applications or to allow the Company to enter
into government supply contracts, withdrawal of previously approved applications
and criminal prosecution.
In order to obtain FDA approval of a new device, companies must generally
submit proof of safety and efficacy. In some cases such proof entails extensive
clinical and preclinical laboratory tests. The testing, preparation of necessary
applications and processing of those applications by the FDA is expensive and
may take several years to complete. There is no assurance that the FDA will act
favorably or in a timely manner in reviewing submitted applications, and the
Company may encounter significant difficulties or costs in its efforts to obtain
FDA approvals which could delay or preclude the Company from marketing any
products it may develop. The FDA may also require postmarketing testing and
surveillance of approved products, or place other conditions on the approvals it
grants. These requirements could cause it to be more difficult or expensive to
sell the products, and could therefore restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
For patented products or technologies, delays imposed by the governmental
approval process may materially reduce the period during which the Company will
have the exclusive right to exploit such technologies; however, an additional
period of up to five years may be added to the term of the patent in such
circumstance.
The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMP, 510(k) premarket
notification, and are subject to other general controls. Class II devices may be
subject to additional regulatory controls, including performance standards and
other special controls, such as postmarket surveillance. New Class III devices,
which are either invasive or life-sustaining products, or new products never
before marketed (for example, non-"substantially equivalent" devices), require
clinical testing to assure safety and effectiveness and FDA approval prior to
marketing and distribution. The FDA also has the authority to require clinical
testing of Class I and Class II devices.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a Class I or Class II device that was
legally marketed prior to May 1976, the date on which the Medical Device
Amendments of 1976 were enacted, or to a device that was legally introduced to
the market after the FDA has found it to be substantially equivalent to a
legally marketed device, the manufacturer may seek clearance from the FDA to
market the device by filing a 510(k) pre-market notification. Substantial
equivalence also can be found for pre-1976 Class III devices for which premarket
approval applications ("PMA") have not been required. The 510(k) pre-market
notification may need to be supported by appropriate data establishing the claim
of substantial equivalence to the satisfaction of the FDA. Following submission
of the 510(k) pre-market notification, the manufacturer or distributor may not
place the device into commercial distribution until an order is issued by the
FDA. Although the FDA has no specific time limit by which it must respond to a
510(k) pre-market notification, it currently responds to the submission of a
510(k) pre-market notification within approximately 130 days. The FDA order may
declare that the device is substantially equivalent to another legally marketed
device and allow the proposed device to be marketed in the United States. The
FDA may, however, determine that the proposed device is not substantially
equivalent, or require further information, such as additional test data, before
the FDA is able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must seek pre-market approval of the proposed device through the submission of a
PMA application. A PMA application must be supported by extensive data,
including preclinical and human clinical trial data, to prove the safety and
efficacy of the device. Upon receipt, the FDA conducts a preliminary review of
the PMA application. If sufficiently complete, the submission is declared filed
by the FDA. By regulation, the FDA has 180 days to review a PMA application once
it is filed, although PMA application reviews more often occur over a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to complete.
If human clinical trials of a proposed device are required and the device
presents "significant risk," the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically
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including the results of animal and laboratory testing. If the IDE application
is approved, human clinical trials may begin at a specified number of
investigational sites with the number of patients approved by the FDA.
Sales of devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country must generally be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.
The conduct of laboratory studies must be done in conformity with the FDA's
good laboratory practice regulations. Clinical studies must comply with the
FDA's regulations for institutional review board approval and for informed
consent. In addition, a variety of state and local permits are required under
regulations relating to the Company's proposed laboratory activity.
The Company is registered as a medical device manufacturer with the FDA. As
such, the Company and its contract manufacturer will be inspected on a routine
basis by the FDA for compliance with the FDA's GMP regulations. These
regulations require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to manufacturing, testing,
distribution, storage, and control activities. Foreign manufacturing facilities
that produce devices for sale in the United States are also subject to these GMP
requirements and to periodic FDA inspections. On October 7, 1996, the FDA
revised the GMP regulations to include, among other things, design controls and
service. These revised regulations became effective on June 1, 1997. The Medical
Device Reporting regulation requires that the Company provide information to the
FDA on deaths or serious injuries alleged to have been associated with the use
of its devices, as well as product malfunctions that are likely to cause or
contribute to death or serious injury if the malfunction were to recur. In
addition, the FDA prohibits a company from promoting an approved device for
unapproved applications and reviews company labeling for accuracy.
In April 1997, the FDA conducted an inspection of the Company's facilities.
Subsequent to such inspection, the FDA notified the Company that it was in
compliance with the FDA's GMP regulations.
The Company has received 510(k) authorization for the ColorMark Clip and
Driver, the EchoMark EP Catheter, the EchoMark PTA Catheter and the EchoMark
Guidewire and is awaiting FDA clearance on certain improvements to the EchoMark
SP Catheter.
The Company began animal trials with EchoFlow products in early 1997. It is
anticipated that clinical trials will begin in early 1999. EchoEye is still in a
preclinical phase of development. An operational prototype of an EchoEye device
was successfully tested in an animal trial in 1993. Additional in vitro testing
is currently underway.
Currently, the Company may not sell its products in Europe because it has
not yet received regulatory approval of its products (the "CE Mark") now
required for such sales. The Company is exploring such registration, however,
there can be no assurance that any of the Company's products will receive a CE
Mark.
THIRD-PARTY REIMBURSEMENT Successful commercialization of the Company's
products may depend in part on the availability of adequate reimbursement from
third-party health care payers such as Medicare, Medicaid, and private insurance
plans. Reimbursement rules vary from payer to payer, and reimbursement also may
depend upon the setting in which a particular item or service is furnished.
In general, payers exclude payment for items and services that are deemed
to be not medically "reasonable and necessary," or which are considered to be
not safe and effective, experimental or investigative, or not medically
appropriate for the patient. In making these determinations, payers typically
rely on studies published in peer-reviewed medical journals, the opinions of
recognized medical specialty societies, and the practices of physicians in the
local medical community. Some payers are also beginning to consider the cost of
a new item or service in comparison to existing alternatives in determining
whether and how much they will reimburse for a new technology.
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FDA clearance or approval to begin marketing a device generally is required
by payers as a condition of coverage, but such clearance or approval alone does
not assure that the payer will reimburse for the device.
Most medical procedures involve payment for the physician service and, in
cases where the service is provided outside of the physician's office, payment
for the facility costs, including supplies, furnished in connection with the
procedure. Medicare, which is a federal government program that primarily
reimburses health care furnished to the elderly and disabled, pays for physician
services based on a physician fee schedule, which assigns a payment weight for
each covered physician procedure. Because there currently is no separate
physician procedure code for the use of the Company's products, physicians now
must use appropriate existing procedure codes for physician services involving
the use of such products.
Medicare reimburses hospital inpatient services on the basis of a
prospective payment system in which the reimbursement to the hospital for a
particular patient is determined by the particular diagnosis-related group
("DRG") to which the patient is assigned. Generally, such reimbursement will not
depend on the specific items or services furnished to the patient during the
hospital stay. As a result, hospitals have an incentive to provide
cost-effective treatments that will reduce hospital costs and shorten the
patient's length of stay. The Company believes that the Company's current and
proposed products will be cost-effective and that hospitals will have an
incentive to use the Company's proposed products. Medicare reimburses
nonsurgical therapeutic services furnished in the hospital outpatient setting on
the basis of the reasonable costs of those services. For services that Medicare
has determined should be covered in ambulatory surgery centers, Medicare
reimbursement to the ambulatory surgery center is based on a fee schedule.
Medicare has not made any determination concerning whether use of the Company's
current and proposed products will or should be covered in ambulatory surgery
centers and, if so, how much the procedure should be reimbursed. Generally,
Medicare does not separately reimburse physicians for the facility costs
associated with furnishing a therapeutic procedure in their offices; such
reimbursement is considered to be bundled into the physician fee schedule
payment for the physician service. In some cases, however, where expensive
supplies are required for procedures that generally are furnished in hospital or
other facility settings but which can be safely performed in a physician's
office, Medicare will make an additional payment to help defray the cost of the
supplies.
Medicaid (which is a joint federal-state program to reimburse health care
costs of the poor), Blue Cross and Blue Shield plans, and commercial insurers
have their own reimbursement rules, which can vary substantially from each
other. Some of these payers have adopted reimbursement systems that are based on
the Medicare physician fee schedule or Medicare DRG system for hospital
inpatients. Increasingly, payers are instituting reimbursement methodologies
that give an incentive to providers to reduce costs and furnish cost-effective
care.
ANTI-RENUMERATION LAWS The Medicare and Medicaid anti-kickback statute
prohibits financial relationships designed to induce the purchase (or arranging
or recommending the purchase) of items or services, or patient referrals to
providers of services, for which payment may be made under Medicare, Medicaid,
or other federally funded health care programs. These provisions have been
broadly interpreted to apply to certain relationships between manufacturers,
such as the Company, and hospitals, physicians, or other potential purchasers or
sources of referral. Under current law, courts and the Office of Inspector
General of the Department of Health and Human Service ("HHS") have stated that
the statute is violated where even one purpose (as opposed to a primary or sole
purpose) of the arrangement is to induce purchases or referrals. However, the
HHS Departmental Appeals Board has stated that some financial inducements (such
as drug samples or recruitment lunches) may not be subject to prosecution
because they are de minimis, and therefore are unlikely to affect referral or
purchase decisions.
The anti-kickback statute contains exceptions for, among other things,
properly reported discounts and compensation of bona fide employees. In
addition, federal regulations establish certain "safe harbors" from liability
under the anti-kickback statute, including further refinements of the exceptions
for discounts and employee compensation, and a safe harbor for personal services
contracts. While failure to satisfy all the criteria for a particular safe
harbor does not necessarily mean that an arrangement is unlawful, practices that
are of the same generic kind as those for which there is a safe harbor available
(for example, discounts, personal services contracts) may be subject to scrutiny
if they do not qualify for the safe harbor. Several states also have statutes or
regulations prohibiting financial relationships with referral sources that are
not limited to services for which Medicare or Medicaid payment may be made.
State laws vary and have been infrequently interpreted by courts or regulatory
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agencies. Sanctions under these federal and state anti-remuneration laws may
include civil money penalties, license suspension or revocation, exclusion of
providers or practitioners (but under current law not manufacturers) from
participation in Medicare and Medicaid, and criminal fines or imprisonment.
The Company will compensate its distributors based on volume of sales. The
Company also compensates physicians for certain services (consulting on the
development of the Company's technologies and participation as investigators in
clinical trials of the Company's products) furnished to the Company. In
addition, the Company from time to time may sponsor educational programs at
which Company representatives, or a physician who has used EchoFlow, may
make a presentation to physicians or hospital personnel concerning the product.
A presenting physician may receive travel expenses, and attending physicians or
other personnel may receive a free meal or other refreshments. These practices
may not in all cases meet all of the criteria for a safe harbor from
anti-kickback law liability. Because of the breadth of the statutory provisions
described above, it is possible that these or other of the Company's business
practices could be subject to challenge under one or more such laws.
While there can be no assurance that the Company's position would be upheld
if challenged, the Company believes that: (i) its compensation of its sales
force satisfies the criteria for the safe harbor for compensation of bona fide
employees; (ii) its discounting practice either meets, or may easily be modified
to meet, the requirements of the discount safe harbor; (iii) its compensation of
physicians for consulting or participation in clinical trials represents
reasonable compensation for legitimate and needed services actually provided to
the Company, and is not intended to induce purchase of the Company's products or
the referral of patients for use thereof; and (iv) any free meals or
refreshments provided to physicians or others in connection with presenting
information concerning the Company's products (and any travel expenses provided
to a speaker at such a presentation) are too de minimis to affect a decision
concerning whether to purchase (or arrange for or recommend the purchase of) the
Company's products, or to refer patients for use thereof, and therefore should
not be viewed as remuneration within the meaning of the anti-kickback law.
Product Liability and Insurance
The testing, clinical trials, manufacturing, and sale of the Company's
products involve the inherent risks of product liability claims against the
Company. The Company currently maintains product liability insurance coverage of
$6,000,000; however, such insurance is expensive, subject to various exclusions
and may not be obtainable by the Company in the future on terms acceptable to
the Company. In addition, there can be no assurance that the amount and scope of
any coverage will be adequate to protect the Company in the event that a product
liability claim is successfully asserted against the Company.
Human Resources
As of November 30, 1998, the Company employed 18 full time employees. Eight
employees provide research and development services, three work in production,
six employees provide management and administrative services and one part-time
employee provides regulatory services.
The Company's employees are not a party to any collective bargaining
agreements. The Company believes that it has good relations with its employees.
Medical Advisors
The following is a list of the Medical Advisors of the Company and, based
upon information supplied by each of them, the institutions with which they are
affiliated. The affiliations are provided for information purposes only and do
not indicate a relationship between such institution and the Company.
<TABLE>
<S> <C>
Dr. William Abbott Professor of Surgery, Harvard Medical School, Boston,
Massachusetts, Chief of Vascular Surgery
at the Massachusetts General Hospital, Boston,
Massachusetts.
Dr. Valentin Fuster Professor of Medicine of Mount Sinai School of
Medicine, New York, New York, Director Cardiovascular
Institute, Mount Sinai Medical Center.
</TABLE>
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<TABLE>
<S> <C>
Dr. Lawrence H. Hollier Chairman and Franz W. Sichel Professor, Department of
Surgery, The Mount Sinai Medical Center, New York, New
York
Dr. Kurt Isselbacher Mallinckrodt Professor of Medicine, Harvard Medical
School, Boston, Massachusetts; Director,
MGH Cancer Center, The Massachusetts General
Hospital, Boston, Massachusetts.
</TABLE>
Each of the Medical Advisors has entered into a medical advisory agreement
("Medical Advisory Agreements"), pursuant to which the Medical Advisors meet up
to four days annually to advise the Company of advances in their field of
expertise and to consult with the Company and to assess the feasibility of
research and development programs under consideration by the Company in their
field, and to offer guidance for future research and clinical applications of
the Company's technology in their field. The Medical Advisors also meet
individually and in groups to advise the Company on the research, development,
operations and commercialization of its technology, to consult on the Company's
projects and to attend meetings of the Medical Advisors. Generally, any further
activities, if requested, are on an as available basis and at the agreed upon
fee. The Medical Advisory Agreements contain confidentiality provisions.
The Medical Advisors are not expected to otherwise actively participate in
the development of the Company's technology. The Medical Advisory Agreements are
for a term of five years. In consideration for the services rendered under the
Medical Advisory Agreements, Dr. Abbott receives an amount of $15,000 per annum,
Dr. Fuster receives an amount of $25,000 per annum, and each is reimbursed for
reasonable expenses. In addition, in January 1996, Dr. Abbott and Dr.
Isselbacher were each granted options to purchase 10,000 shares of Class A
Common Stock under the Company's 1995 Stock Option Plan (the "Option Plan") at
an exercise price of $5.00 per share, which options will vest in five equal
annual installments commencing January 17, 1996 and are exercisable for a period
of five years following the date of vesting. In October 1998, Dr. Hollier was
granted options to purchase 25,000 shares of Class A Common Stock under the
Option Plan at the current market price, all of which options vested immediately
and are exercisable for a period of ten years following the date of vesting. The
Medical Advisory Agreements also provide for indemnification of each Medical
Advisor, his successors, heirs and assigns against any liabilities, damage, loss
and expense (including reasonable attorneys' fees and expenses of litigation)
incurred or imposed upon indemnities or any one of them in connection with any
class action suits, demands or judgments arising from their good faith services
under the Medical Advisory Agreements.
The Company's Medical Advisors are employed on a full-time basis by
employers other than the Company and certain of such individuals have consulting
or other advisory arrangements with others. Accordingly, they are expected to
devote only a small portion of their time to the Company. Regulations or
policies of the institutions of which they are full-time employees may adversely
affect the rights of the Medical Advisors to own such options and stock and to
serve as Medical Advisors. Generally, any inventions or processes discovered by
the Medical Advisors which are made solely in the performance of services to the
Company will become the property of the Company, but inventions which relate to
the Medical Advisor's research at their respective hospitals may not become the
property of the Company if the rights to such inventions will become the
property of their respective hospitals pursuant to agreements between the
Medical Advisors and their respective hospitals.
History, Reorganization and Recapitalization
The Company is a New Jersey corporation which was incorporated in September
1992 as the successor to the business and assets of EchoCath, Ltd., a New Jersey
general partnership (the "Partnership"). The Partnership was formed in February
1990 under the name Catheter Technology, Ltd., and in June 1991, changed its
name to EchoCath, Ltd.
In August 1995, the Company effected a .848 for 1 reverse stock split of
its common stock. The resulting shares were then converted and reclassified as
848,000 shares of Class B Common Stock, no par value (the "Class B Common
Stock") (together with the Class A Common Stock, the "Common Stock"). Shortly
thereafter, the Company's outstanding shares of preferred stock and warrants to
purchase preferred stock were canceled in exchange for the issuance of 127,000
shares of Class B Common Stock.
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Important Factors Regarding Forward-Looking Statements
The following factors, among others, could cause the Company's actual
results, performance or achievements, or industry results, to differ materially
from those expressed in the Company's forward-looking statements in this Report
and presented elsewhere by management from time to time.
LIMITED COMMERCIAL OPERATIONS; NO ASSURANCE OF SUCCESS Potential investors
should be aware of the problems, delays, expenses and difficulties frequently
encountered by an enterprise in the Company's early stage of development which
include unanticipated problems relating to development of proposed products,
testing, regulatory compliance, manufacturing and assembly, the competitive
environment in which the Company will operate, marketing problems and additional
costs and expenses that may exceed current estimates. Certain of the Company's
proposed products will require significant additional research, development,
testing and financing, and may need to overcome significant regulatory burdens
prior to commercialization. There can be no assurance that after the expenditure
of substantial funds and efforts, the Company's proposed products will be
successfully developed.
SHAREHOLDERS' DEFICIT; EXPECTATION OF SUBSTANTIAL FUTURE LOSSES From its
inception through August 31, 1998, the Company has incurred a cumulative net
loss of $(16,067,000). At August 31, 1998, the Company had working capital of
$(734,000) and a shareholders' deficit of $(236,000). Net losses for the years
ended August 31, 1997 and 1998 were $(1,780,000) and $(1,856,000), respectively.
The Company intends to conduct significant additional research, development and
testing activities which, together with expenses incurred for the establishment
of a marketing and distribution presence and other general and administrative
expenses, are expected to result in continuing operating losses for the
foreseeable future. There can be no assurance that the Company will ever achieve
profitable operations.
NEED FOR ADDITIONAL FINANCING The Company will require substantial
additional financing in the future to fully implement its proposed business
plan. Former sources of capital are not obligated, but may contribute, loan or
provide any additional financing to the Company. The Company has no binding
commitments from any third parties to provide funds to the Company and while it
anticipates funding from various sources, there can be no assurance that
additional financing will be available on terms favorable or acceptable to the
Company, if at all. In addition, if the convertible debentures issued to
Investment Partners of America, L.P. are not converted, the Company will have
to repay such debentures in March and April 1999. See "Item 5 - Market for
Common Equity and Related Shareholder Matters - Recent Sales of Unregistered
Securities." The Company believes that additional cash resources should be
available either through financing provided by the completion of license
agreements (see "Description of Business-Collaborative Agreements") and
strategic alliances or, if necessary, by reducing the level of its operating
expenses by deferring certain research and development or marketing expenses.
However, the Company's current cash balance is only sufficient to meet its cash
requirements through December 31, 1998 and is therefore in need of immediate
additional funds. Failure to obtain such additional financing would have a
material adverse effect on the Company and could require the Company to severely
limit or cease its operations. See "Ability to Function as a Going Concern" and
"Item 6 -Management's Discussion and Analysis - Liquidity and Capital
Resources".
ABILITY TO FUNCTION AS A GOING CONCERN The Company's auditors have reported
that recurring losses from operations, negative working capital and net capital
deficiency raise substantial doubt about the Company's ability to continue as a
going concern. The Company's financial statements do not include any adjustments
which might result from the outcome of this uncertainty.
UNCERTAINTY OF MARKET ACCEPTANCE The commercial success of the Company's
EchoMark, EchoFlow, ColorMark Clip and EchoEye, as well as the Company's other
products and proposed products, will depend upon acceptance of such products by
the medical community as safe, useful and cost-effective. There can be no
assurance that the benefits of utilizing ultrasound technology for the Company's
intended applications will gain acceptance by the medical community to enable
such products to gain commercial acceptance. There can be no assurance that the
Company will not experience resistance from the medical community with respect
to any of its products in the future. The Company may be required to expend
substantial additional funds and time in order to demonstrate the safety,
efficacy and reliability of its products to potential customers.
RELIANCE ON COLLABORATIVE ARRANGEMENTS; RESTRICTIONS The Company has
granted certain companies the exclusive right to market and distribute, in
certain territories, selected technologies of the Company pursuant to certain
collaborative agreements. Such collaborative agreements contain certain
provisions restricting the Company, among other things, to sublicense and/or
subdistribute its technologies. As a result, the Company may not market products
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or proposed products that are covered by those agreements independently and may
not enter into strategic alliances or collaborative agreements with other
parties relating to any products in such territories covered by any such
exclusivity agreements. Restrictions regarding exclusivity limit the Company's
ability to pursue and negotiate collaborative agreements with other entities on
terms which may be more favorable to the Company. In addition, the amount of
resources and the time that any of these collaborators devote toward marketing
the Company's products or proposed products are not within the Company's
control. There can be no assurance that any marketing, sales or other efforts
undertaken by the Company or its collaborators will be successful. Each of these
agreements terminates under specified circumstances and any termination could
have a material adverse effect on the Company.
Consistent with its business strategy, the Company intends to pursue
licensing, joint development and other collaborative arrangements with others.
There can be no assurance, however, that the Company will be able to find
additional collaborators or negotiate additional collaborative agreements on
terms acceptable to the Company, if at all, that the collaborative agreements
with the Company will be successful, or that collaborators will devote
sufficient resources to the Company's products, proposed products or
technologies. In addition, there can be no assurance that future collaborative
arrangements will not allow others to enter into arrangements with the Company's
collaborators for the commercialization of the same product or that
collaborators will not pursue alternative products either on their own or in
collaboration with others, including the Company's competition. See "Description
of Business."
COMPETITION AND RAPID TECHNOLOGICAL CHANGE The health care industry is
characterized by extensive research efforts and rapid technological change.
Competition for imaging catheters is intense and is expected to increase.
Certain of the Company's proposed products are expected to compete against other
types of imaging systems (such as CT, optical scanning, X-ray and MRI) as well
as other ultrasound imaging products. Manufacturers of non-imaging therapeutic
catheters or external ultrasound imaging devices could also enter the market
with competitive products. In addition, many companies are engaged in research
and development of new devices that may address the same clinical applications
as the Company's products. Academic institutions, hospitals, governmental
agencies and other public and private research organizations are also conducting
research and seeking patent protection and may develop competing products or
technologies. The future success of the Company will depend, in part, on the
degree of clinical acceptance of ultrasound imaging as opposed to competing
technologies as well as on acceptance of the Company's products for ultrasound
imaging applications. Many of the Company's competitors and potential
competitors have substantially greater financial, technological, manufacturing,
marketing, distribution and other resources than the Company. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective and less costly than those
developed or being developed by the Company, thereby rendering the Company's
technologies not competitive or obsolete. See "Description of
Business-Competition."
LIMITED MANUFACTURING AND ASSEMBLY EXPERIENCE; DEPENDENCE UPON KEY
SUPPLIERS; POTENTIAL DEPENDENCE ON OUTSIDE PARTIES FOR MANUFACTURING AND
ASSEMBLY OF THE COMPANY'S PRODUCTS The Company has limited manufacturing and
assembly experience and to date has not yet manufactured any of its products in
significant quantity. No assurance can be given that the Company will ever be
able to establish commercial scale manufacturing operations. The Company is
dependent upon subcontractors to manufacture and deliver certain components of
its products in a timely and satisfactory manner and any interruption in the
supply of such components could have a materially adverse effect on the
manufacturing and assembly of the Company's products or on the Company. If the
Company retains third parties for manufacturing and assembly of its products, it
will be substantially dependent upon such third parties to deliver such products
in a timely manner and on a competitive basis. There can be no assurance that
the Company will be successful in entering into any manufacturing arrangements
with others on acceptable terms or at all.
LIMITED MARKETING AND SALES EXPERIENCE; POTENTIAL DEPENDENCE ON OUTSIDE
PARTIES FOR MARKETING AND SALES The Company is in the process of developing a
distribution network to market and sell certain of its products and is currently
developing its in-house marketing support staff. There can be no assurance that
the Company will be successful in establishing such sales organization or
in-house marketing staff or as to the effectiveness of such sales organization
or in-house marketing staff. The Company also intends to enter into joint
venture, licensing or other collaborative arrangements to market and sell its
products. Such arrangements may result in a lack of control by the Company over
the marketing and selling of its products. There can be no assurance that the
Company will be successful in entering into any such arrangements or be able to
effectively manage and maintain its relationships
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with others, or that any marketing and sales efforts undertaken by or on behalf
of the Company by others will be successful. The Company also relies on its
licensees to perform under the various licensing agreements to which the Company
is a party. There can be no assurance that such relationships will result in
revenue to the Company. In addition to domestic sales, the Company intends to
sell its products outside of the United States. There can be no assurance that
the Company will be successful in entering into other such arrangements to sell
its products outside of the United States. See "Risks Inherent in International
Transactions."
RISKS INHERENT IN INTERNATIONAL TRANSACTIONS A number of risks are inherent
in international transactions, such as the imposition of governmental controls,
fluctuations in foreign currency exchange rates, regulation of medical devices
and other medical products, export license requirements, political and economic
instability, trade restrictions, changes in tariffs and difficulties and
expenses in managing international operations. In order to sell its products in
Europe, the Company must obtain the CEMark, but it has not done so, and there
can be no assurance that any of the Company's products will receive the CE Mark,
which would restrict international sales of such products.
DEPENDENCE UPON, AND NEED FOR, KEY PERSONNEL The Company is dependent upon
a limited number of key personnel, particularly Frank A. DeBernardis, its Chief
Executive Officer and President, and David Vilkomerson, Ph.D., its Executive
Vice President. The loss of these individuals or a reduction in the time devoted
by such persons to the Company's business could have a material adverse effect
on the Company. The Company's future success will depend in part upon its
ability to attract and retain highly qualified personnel. The Company faces
competition for such personnel from other companies, academic institutions,
government entities, and other organizations, many of which have significantly
greater resources than the Company. There can be no assurance that the Company
will be able to attract and retain the necessary personnel on acceptable terms
or at all.
UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS; NO ASSURANCE OF
ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE The Company considers patent
protection of its technologies to be critical to its business prospects. The
Company currently holds four issued United States patents related to aspects of
the EchoFlow technology, has two issued United States patents related to
aspects of the EchoMark technology, has received four patents in the United
States covering aspects of the ColorMark technology and holds one issued United
States patent for the EchoEye technology. Applications corresponding to the
EchoFlow, EchoMark, ColorMark and EchoEye technology patents have been filed in
Europe and Japan under PCT provisions. The Company intends to file other patent
applications on inventions developed in the course of continuing research and
development efforts and is in the process of applying for foreign patent
approvals for all of its technologies. There can be no assurance that the
Company's pending patent applications will issue as patents, that any issued
patents will provide the Company with significant competitive advantages or that
challenges will not be instituted against the validity or enforceability of any
patent owned by the Company. The cost of litigation to uphold the validity and
prevent infringement of patents can be substantial. Furthermore, there can be no
assurance that others will not independently develop similar or more advanced
technologies or design around aspects of the Company's technologies which may be
patented or duplicate the Company's trade secrets. The Company may in some cases
be required to obtain licenses from third parties or to redesign its products or
processes to avoid infringement. There can he no assurance that such licenses
would be available or, if available, would be on terms acceptable to the Company
or that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. The Company also relies on trade secrets and
proprietary technology and enters into confidentiality agreements with its
employees and consultants. There can be no assurance that the obligation to
maintain the confidentiality of such trade secrets or proprietary information
will not be breached by employees or consultants or that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse. See "Description of Business-Patents and Proprietary
Rights."
POTENTIAL ADVERSE IMPACT OF FDA AND OTHER GOVERNMENT REGULATIONS The
manufacturing and marketing of the Company's products is subject to extensive
and rigorous government regulation federally, from various state governments and
in foreign countries. In the United States and certain other countries, the
process of obtaining and maintaining regulatory approvals is lengthy, expensive
and uncertain. In the United States, the FDA enforces, where applicable,
development, testing, labeling, manufacturing, registration, notification,
clearance or approval, marketing, distribution, recordkeeping and reporting
requirements for medical devices. Although the Company has received FDA
clearance for marketing certain of its products, there can be no assurance that
any of the Company's other products or proposed products will ever obtain the
regulatory clearance or approval required for marketing, or that the Company
will be able to comply with any additional FDA, state or foreign regulatory
requirement. In
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addition, there can be no assurance that government regulations applicable to
the Company's products or the interpretation of those regulations will not
change, including those related to the products currently cleared for marketing,
and thereby prevent the Company from marketing some or all of its products
temporarily or permanently. The Company is also subject to other federal, state
and local laws, regulations and recommendations relating to laboratory and
manufacturing practices as well as Medicare, Medicaid and anti-kickback laws of
certain states. Noncompliance with applicable requirements can result in civil
penalties, the recall, injunction or seizure of products, an inability to import
products into the United States, the refusal by the government to approve or
clear product approval applications or to allow the Company to enter into
government supply contracts, the withdrawal of previously approved product
applications and criminal prosecution. The extent of potentially adverse
government regulation that might arise from future legislation or administrative
action cannot be predicted. See "Description of Business-Government
Regulation-FDA and Certain Other Regulatory Requirements."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT In the United States, the Company
anticipates that its products will be purchased primarily by medical
institutions and physicians which will then bill various third-party payers,
such as Medicare, Medicaid, other government programs, and private insurance
plans, for the health care services provided to their patients. Payers may deny
reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate, experimental, used for a non-approved indication or
not cost-effective. No separate code has yet been established to bill for the
physician procedure involved in the use of any of the EchoCath products. There
is no assurance that efforts by the Company to obtain a separate code for any of
the EchoCath products will be successful or, if successful, that third-party
payers will cover the procedure and reimburse it at an adequate level.
Third-party payers are increasing their level of scrutiny of new medical
technologies with respect to whether such technologies should be covered and, if
so, how much they should be reimbursed. In addition, Congress is currently
considering several health care reform proposals which, if enacted, could
significantly affect the availability of reimbursement for medical products and
services. There can be no assurance that reimbursement for procedures utilizing
the Company's products will be sufficient to cover the additional cost of the
Company's products, or that future reimbursement policies of payers will not
adversely affect the Company's ability to sell its products on a profitable
basis. See "Description of Business-Government Regulation-Third-Party
Reimbursement."
POTENTIAL ADVERSE IMPACT OF ANTI-REMUNERATION LAWS The Medicare and
Medicaid anti-kickback status prohibits financial relationships designed to
induce the purchase (or arranging for or recommending the purchase) of items or
services, or patient referrals to providers of services, for which payment may
be made under Medicare, Medicaid, or other federally funded health care
programs. Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare and Medicaid payments may be made. Sanctions under these Federal and
state anti-remuneration laws may include civil money penalties, license
suspension or revocation, exclusion of providers or practitioners (but under
current law, not manufacturers) from participation in Medicare and Medicaid, and
criminal fines or imprisonment. Because of the breadth of the statutory
provisions described above, it is possible that some of the Company's business
practices could be subject to challenge under one or more such laws. See
"Description of Business-Government Regulation-Anti-Remuneration Laws."
POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE; POTENTIAL RECALL The
testing, clinical trials, manufacturing and sale of the Company's products
involve the inherent risk of product liability claims against the Company. The
Company's product liability insurance coverage is expensive, subject to various
exclusions and may not be obtainable by the Company in the future on terms
acceptable to the Company. There can be no assurance that the amount and scope
of any coverage will be adequate to protect the Company in the event that a
product liability claim is successfully asserted against the Company. A product
liability claim or judgment against the Company in excess of the Company's
insurance coverage could have a material adverse effect on the Company. If the
Company enters into a joint venture or other arrangement with respect to its
products or if the Company licenses its products to a third party, there can be
no assurance that such joint venturers or licensees will agree or will be able
to obtain or maintain insurance on acceptable terms, or that if such insurance
is obtained, it will be adequate to cover the Company's potential liability.
Products such as those sold or proposed to be sold by the Company may be subject
to recall for unforeseen reasons. Such a recall could have a material adverse
effect on the Company and its reputation.
HAZARDOUS MATERIALS; COMPLIANCE WITH ENVIRONMENTAL REGULATIONS The
Company's research and development may involve the controlled use of hazardous
materials, chemicals and various radioactive compounds.
23
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<PAGE>
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by federal,
state and local regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
switch liability could exceed the resources of the Company. The Company may
incur substantial costs to comply with environmental regulations if the Company
develops manufacturing capacity. In addition, there can be no assurance that
current or future environmental laws, rules, regulations or policies will not
have a material adverse effect on the Company.
POSSIBLE "YEAR 2000" PROBLEMS The "Year 2000" Problem is the result of
computer programs written to recognize the applicable year with two digits
rather than four digits. A computer program written in such manner would
recognize the entry of "00" in a date field as referring to the year 1900 and
not the year 2000. Although the Company believes that its computer systems and
software products are fully Year 2000 compatible, it is possible that certain
computer systems or software products of the Company's suppliers and contractors
may not accept input of, store, manipulate and output dates prior to the Year
2000 or thereafter without error or interruption. The Company is requesting
assurances from all software vendors from which it has purchased or from which
it may purchase software that such software will correctly process all date
information at all times. Furthermore, the Company is querying its suppliers and
contractors as to their progress in identifying and addressing problems that
their computer and other technological systems will face in correct processing
date information as the Year 2000 approaches. However, there can be no assurance
that the Company will identify all date-handling problems of its suppliers and
contractors in advance of their occurrence, or that the Company will be able to
successfully remedy problems that are discovered. The expense of the Company's
efforts to identify and address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have a
material adverse effect on the Company.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF RESTRICTIONS ON SHARES In the
event the restrictions on any Forfeitable Shares (See "Management's Discussion
and Analysis-General") issued in connection with the Company's initial public
offering of securities in January 1996 (the "Initial Public Offering") (which
includes 833,000 shares of Class B Common Stock (approximately 56% of the shares
outstanding prior to the Company's Initial Public Offering) which will be
transferred to the Company for no consideration if certain earnings or Class A
Common Stock minimum bid price levels are not attained) are released,
compensation expense will be recorded for financial reporting purposes in an
amount equal to the value of the shares at the time such restrictions lapse.
Therefore, in the event the Company attains any of the earnings thresholds or
the Company's Class A Common Stock meets the minimum bid prices required for the
release of the restrictions, the Company will recognize during the period in
which such restrictions lapse, what could be a substantial charge to earnings,
as compensation expense to the Company, which would have the effect of
increasing the Company's loss or reducing or eliminating earnings, if any, at
such time. The amount of compensation expense recognized by the Company may have
a depressive effect on the market price of the Company's securities.
CONTROL BY EXISTING SHAREHOLDERS; OWNERSHIP OF SHARES HAVING
DISPROPORTIONATE VOTING RIGHTS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES As of December 8, 1998, the Company's existing Class B Common Stock
shareholders own 1,172,018 shares of Class B Common Stock, representing
approximately 30.8% of the Company's outstanding capital stock and approximately
69.0% of the total voting power of the Class A Common Stock and Class B Common
Stock currently outstanding. As a result, the Company's existing Class B Common
Stock shareholders will be able to elect all of the Company's directors and
otherwise control the Company. Furthermore, the disproportionate vote afforded
the shares of Class B Common Stock could also serve to impede or prevent a
change of control of the Company. As a result, potential acquirors may be
discouraged from seeking to acquire control of the Company through the purchase
of Class A Common Stock, which could have a depressive effect on the market
price of the Company's securities.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS The Company's Certificate of Amendment to the Restated Certificate of
Incorporation (the "Certificate of Incorporation") and By-Laws and New Jersey's
Business Corporation Act contain certain provisions that could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Class A Common Stock. Certain of such
provisions impose various procedural and other requirements which could make it
more difficult for shareholders to effect certain corporate actions.
24
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Furthermore, the Company's Certificate of Incorporation authorizes the issuance
of a maximum of 5,000,000 shares of preferred stock on terms which may be fixed
by the Company's Board of Directors without further shareholder action. The
terms of any series of preferred stock, which may include priority claims to
assets and dividends and special voting rights, could adversely affect the
rights of holders of the Class A Common Stock. In February 1997, in connection
with the EP MedSystems Agreement, the Company sold 280,000 shares of the Series
B Cumulative Convertible Preferred Stock to EP MedSystems that contains certain
priority claims to assets and dividends and special voting rights. The Series B
Cumulative Convertible Preferred Stock and the issuance of other shares of
preferred stock could make the possible takeover of the Company or the removal
of management of the Company more difficult, discourage hostile bids for control
of the Company in which shareholders may receive premiums for their shares of
Class A Common Stock or otherwise dilute the rights of holders of Class A Common
Stock and the market price of the Class A Common Stock.
NO DIVIDENDS ANTICIPATED The Company has never paid any dividends on its
Common Stock and does not anticipate the payment of dividends on the Common
Stock in the foreseeable future. If a dividend on the Common Stock is declared
by the Company's Board of Directors, the Board of Directors must 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, rounded to the nearest cent, each such
determination to be made as of the record date for the determination of the
dividend. Holders of the Series B Cumulative Convertible Preferred Stock are
also entitled to dividends equal to $.0675 per share per quarter to the extent
the Company has earnings and funds legally available to pay such dividends. To
the extent that the Company does not have earnings, or funds are not legally
available to pay a dividend to the holder of the Series B Cumulative Convertible
Preferred Stock, then such funds will be accrued as a liability on the books of
the Company and be cumulative for the benefit of the shareholders.
DELISTING FROM THE NASDAQ SMALLCAP MARKET Effective November 16, 1998, the
Company's securities were delisted from The Nasdaq SmallCap Market'sm' (the
"Nasdaq-SMC") and are now listed on the NASD OTC Bulletin Board'r'. Because the
Company has been delisted from the Nasdaq-SMC, trading, if any, in the Company's
securities must be conducted in the over-the-counter market. As a result, an
investor will find it more difficult to dispose of, and to obtain accurate
quotations as to the value of, such securities.
In addition, trading in the Class A Common Stock is now subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors (generally, individuals with net worth excess of
$1,000,000 or annual incomes exceeding $200,000 individually, or $300,000
together with their spouses) must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the SEC, any equity security not traded on an
exchange or quoted on Nasdaq-SMC that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Such requirements could severely
limit the market liquidity of the Company's securities and the ability of
purchasers to sell their securities in the secondary market.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases an approximately 20,000 square foot facility
on U.S. Route 1 in Monmouth Junction, New Jersey, pursuant to a five-year lease
expiring on March 31, 2002. Currently, the Company utilizes 15,000 square feet
of such facility. However, the facility contains space appropriate for
approximately 4,000 square feet of offices for planned personnel, and
approximately 16,000 square feet appropriate for manufacturing and laboratory
use. The lease provides for an annual rent of approximately $214,000 for the
fiscal year ended August 31, 1997, approximately $222,000 for the fiscal year
ended August 31, 1998 and approximately $259,000 for the fiscal year ending
August 31, 1999 and approximately $294,000 for each fiscal year thereafter
through March 2002.
25
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<PAGE>
Such lease also provides for payment by the Company of real estate taxes and
certain operating expenses. The Company has an option to purchase the entire
facility for a purchase price of $2,000,000 plus certain consumer price index
adjustments, which expires on March 31, 2002. The Company believes that these
facilities are adequate for its current administrative and manufacturing needs
and that this facility will be sufficient to meet the Company's anticipated
manufacturing needs through April 2002. The property that the Company leases is
in good condition.
The Company has been informed that the current plan of the New Jersey
Turnpike Authority ("NJTA") is that it will require the Company's facility to be
taken as part of the development of Route 92. The Environmental Protection
Agency has denied the NJTA's request to carry out such development and, upon
appeal by the NJTA, the Army Corps of Engineers (the "Corps") is currently
evaluating whether the development plan should be carried out. The Company has
been informed that such an evaluation could take several years. If the Corps
does decide that the project should be carried out, the final determination to
develop Route 92 will have to be made by the Office of Environmental Affairs. If
the project is approved in any event, the Company believes that it will have
adequate time to locate new facilities at a reasonable rental rate and that any
possible action by the NJTA will not have a material adverse effect on the
Company.
In addition, research and development activities are currently conducted on
behalf of the Company in the United States and Europe at various hospitals.
ITEM 3. LEGAL PROCEEDINGS.
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. See "-Collaborative Agreements." 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. On
October 20, 1998, the Court dismissed the suit with prejudice, but did not
decide on the Company's outstanding counterclaims against EP MedSystems.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended August 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information
From January 22, 1996 through November 16, 1998, shares of the Class A
Common Stock were traded on the Nasdaq-SMC. On November 16, 1998, the Company's
securities were delisted from the Nasdaq-SMC and are currently trading on the
NASD's OTC Bulletin Board'r'. The following table sets forth, for the periods
indicated and as reported by Nasdaq, the high and low last sales prices for
shares of the Class A Common Stock. The quotations following reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
---------------------------------------------------------------
<S> <C> <C>
November 30, 1996 5 4 1/2
February 28, 1997 6 4
May 31, 1997 4 1/8 3
August 31, 1997 3 5/8 2
November 30, 1997 4 1/4 1 3/4
February 29, 1998 3 3/4 2 3/4
May 31, 1998 3 5/8 1 3/4
August 31, 1998 3 1/8 2
September 1, 1998 through
December 8, 1998 2 7/8 1 1/8
</TABLE>
Holders of Common Stock
Based upon information supplied to the Company by its transfer agent, the
number of shareholders of record of the Class A Common Stock and Class B Common
Stock on December 8, 1998 was approximately 9 and 18 respectively. The Company
believes that there are in excess of 550 beneficial owners of the Class A Common
Stock whose shares are held in "Street Name."
Dividends
The Company has never paid cash dividends with respect to the Class A
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan, for the foreseeable
future, to pay dividends to holders of the Class A Common Stock. Any decision as
to the future payment of dividends on Class A Common Stock will depend on the
results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.
If a dividend on the Common Stock is declared by the Company's Board of
Directors, the Board of Directors must 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, rounded to the nearest cent, each such determination to be made as
of the record date for the determination of the dividend.
Recent Sales of Unregistered Securities
During the period covered by this Report, except as previously included on
a Form 10-QSB, the Company sold the following securities without registering the
securities under the Securities Act of 1933, as amended (the "Securities Act"),
all in non-underwritten transactions:
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CONVERTIBLE DEBENTURES The Company issued two convertible debentures to
Investment Partners of America, L.P., a New Jersey limited partnership ("IPA"),
in the amounts of $250,000 on September 18, 1998 and $275,000 on October 27,
1998. The first debenture was issued directly to IPA and the second debenture
was issued to IPA on behalf of eight of its regular customers, all of whom are
accredited investors. The debentures pay 6 1/2% interest and mature six months
from the date of issuance. The debentures are convertible into shares of the
Company's Class A Common Stock at the then-current market price, but no greater
than $2.00 per share and no less than $1.00 per share. The shares of Class A
Common Stock issuable upon conversion of the debentures carry price protection,
in that the holders of such shares will receive additional shares equal to the
price difference if the Company sells shares to a third party at a price less
than the conversion price. The offering was made in reliance on Regulation D and
Rule 506 promulgated thereunder, and all investors are accredited investors.
Commissions of 2.5% of the total amount of the debentures were paid to an
affiliate of IPA upon the closing of the loan and commissions of an additional
2.5% will be paid upon conversion of the debentures to Jesup & Lamont Securities
Corporation. In addition, an affiliate of IPA received a six-month consulting
agreement with the Company for $5,000 monthly on October 27, 1998. The shares of
Class A Common Stock issued upon conversion of the debentures will carry
piggy-back rights for the 18 month-period following the issuance of the
debentures and, if no registration statement is filed during that time period,
the shares of Class A Common Stock will carry demand registration rights.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Report.
Results of Operations
FISCAL YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1997: The Company had sales revenue for the fiscal year ended August 31, 1998 of
$20,985 and revenue of $1,054,414 from license and development fees. While the
Company enters into licensing agreements with third parties from time to time,
the license fees recorded in 1998 were not indicative of annual performance and
may not be recurring in future periods. The license and development fees are
principally related to an $800,000 upfront nonrefundable license fee from
Medtronic. In the fiscal year ended August 31, 1997, the Company had sales
revenue of $160,910 from the initial shipment of ColorMark products to Medison
under the terms of a distribution agreement and $150,000 in license fees.
The cost of products sold was $20,985 for the fiscal year ended August 31,
1998 and $40,731 in 1997.
The Company incurred research and development expenses for the fiscal year
ended August 31, 1998 of $1,457,699. Research and development expenses decreased
0.9% during the fiscal year ended August 31, 1998 when compared to the fiscal
year ended August 31, 1997, in which such expenses were $1,471,568, because of
approximately $119,000 of reimbursement of certain development expenses under
the terms of a license and development agreement, and a lower level of FDA
consulting fees were offset by increased salary and facility expenses.
The Company had marketing, general and administrative expenses of
$1,380,934 for the fiscal year ended August 31, 1998. Selling, general and
administrative expenses decreased 17.0% during the fiscal year ended August 31,
1998 when compared to the fiscal year ended August 31, 1997, in which such
expenses were $1,637,660, because the Company eliminated a marketing employee
and a marketing consultant and certain related expenses associated with such
reduction. The reduced allocation of management time to administration and the
reduction of facility allocation to administration further reduced
administration costs. This was partially offset by a large increase in legal
expenses resulting from the EP MedSystems litigation, attempting to satisfy the
listing requirements of the Nasdaq-SMC, the license agreement with Medtronic and
an agreement with Alliance Partners ("Alliance") 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.
28
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General
The Company anticipates that revenues will be insufficient to meet all
operating expenses for the foreseeable future even if there is market acceptance
of its products, and accordingly, it expects to incur substantially increased
operating losses for the foreseeable future. There can be no assurance that the
Company will ever achieve profitable operations.
In connection with the Company's Initial Public Offering, certain of the
existing shareholders of the Company, primarily officers, directors and other
employees, agreed to transfer a portion of their shares of the Company's Class B
Common Stock (the "Forfeitable Shares") to the Company if the Company does not
attain a certain minimum earnings threshold or if the Company's Class A Common
Stock does not meet certain minimum bid prices. The Company believes that the
release of the restrictions on the Forfeitable Shares held by officers,
directors, employees and consultants will be treated, for financial reporting
purposes, as compensation expense to the Company. Accordingly, the Company will
in the event of the release of the restrictions, recognize during the period in
which the earnings thresholds are met or probable of being met or the Company's
Class A Common Stock meets or is probable of meeting the minimum bid prices,
what could be a substantial charge which would have the effect of substantially
increasing the Company's loss or reducing or eliminating earnings, if any, at
such time. The amount of compensation expense recognized by the Company will not
affect the Company's total shareholders' equity.
Liquidity and Capital Resources
Since its inception, the Company's efforts have been principally devoted to
research and development and raising capital, and the Company has sustained
cumulative losses of approximately $(16,067,000) through August 31, 1998. These
losses resulted primarily from research and development expenses aggregating
approximately $9,936,000 relating to the Company's technologies and products,
and expenses aggregating approximately $7,809,000 incurred in connection with
marketing, and general and administrative activities, including legal and
professional activities relating thereto, which are continuing since inception
(February 14, 1990). The Company has funded its activities through private
placements of equity and debt securities, borrowings and the Company's Initial
Public Offering, representing an aggregate of $16,193,000. As of August 31,
1998, the Company had negative
29
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working capital of approximately $(621,000), an accumulated deficit of
approximately $(12,902,000) and a shareholders' deficit of approximately
$(236,306).
In December 1996, the Company entered into the December 1996 Medtronic
Agreement, for certain proprietary technologies. In fiscal 1997, the Company
recognized $150,000 in license fees.
In February 1997, the Company entered into the EP MedSystems Agreement and
Preferred Stock Subscription Agreement with EP MedSystems. The Company sold
280,000 shares of Series B Cumulative Convertible Preferred Stock for $1,400,000
under the terms of the Subscription Agreement with EP MedSystems. See "Item 3 -
Legal Proceedings." On October 22, 1998, EP MedSystems served a notice upon the
Company demanding registration of the Series B Preferred Stock which EP
MedSystems holds.
During the 12-month period following the date of this Report, the Company
intends to focus its efforts on continuing the pre-clinical and clinical testing
of EchoFlow, and, if the results of such testing are successful, make a
submission to the FDA for approval to market the first EchoFlow product. During
such period, the Company will also continue its efforts in exploiting the
ColorMark technology, will continue the testing of its EchoEye technology and
seek support of an alliance partner or partners. The Company may also commence
research and development of the other products utilizing ColorMark and/or
EchoMark technologies. The Company also intends to seek the requisite regulatory
approvals for certain of the Company's other proposed products during such time
period.
The report of the Company's independent auditors on the Company's financial
statements includes an explanatory paragraph which states that the Company's
recurring losses from operations, its net capital deficiency, and negative
working capital raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company's ability to
continue with its plans is contingent upon its ability to obtain sufficient cash
flow from operations or to obtain additional financing from external sources.
The Company's current cash balance is only sufficient to meet its cash
requirements through December 31, 1998 and is therefore in need of immediate
additional funds. The Company believes that additional cash resources should
be available either through financing provided by the completion of license
agreements (see "Description of Business-Collaborative Agreements") and
strategic alliances or, if necessary, by reducing the level of its operating
expenses by deferring certain research and development or marketing expenses.
There can be no assurance that the Company will be able to complete the
aforementioned license agreements and strategic alliances on acceptable terms
or at all. The Company will 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. While the Company anticipates funding
from private equity placements and other sources, there can be no assurance that
the Company will be able to obtain financing from any other sources on
acceptable terms or at all.
YEAR 2000 COMPATIBILITY The Company is working to resolve the potential
impact of the Year 2000 on the ability of the Company's computerized information
systems to accurately process information that may be date-sensitive. Any of the
Company's programs or computer-assisted systems that recognize a date using "00"
as the year 1900 rather than the Year 2000 could result in errors or systems
failures. It is also possible that certain computer systems or software products
of the Company's suppliers and contractors may not be year 2000 compatible. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer and other technological systems will
face in correctly processing date information as the Year 2000 approaches. The
Company has not completed its assessment, but currently believes that costs of
addressing this issue will not have a material adverse impact on the Company's
financial position. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
ITEM 7. FINANCIAL STATEMENTS.
30
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Independent Auditors' Report
The Board of Directors
EchoCath, Inc.:
We have audited the accompanying balance sheet of EchoCath, Inc. as of August
31, 1998, and the related statements of operations, stockholders' deficit, and
cash flows for each of the years in the two-year period ended August 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EchoCath, Inc. as of August 31,
1998, and the results of its operations and its cash flows for each of the years
in the two-year period ended August 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative working capital and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
November 16, 1998
/s/ KPMG Peat Marwick LLP
---------------------
F-1
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<PAGE>
ECHOCATH, INC.
Balance Sheet
August 31, 1998
Assets
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 256,234
Accounts receivable 4,905
Inventory (note 2) 189,121
Prepaid expenses and other assets 106,449
----------
Total current assets 556,709
Furniture, equipment and leasehold improvements, net 254,180
Intangible assets, net 282,145
Other assets 19,731
----------
$1,112,765
==========
Liabilities and Stockholders' Deficit
Current liabilities:
Note payable (note 5) 540,000
Accounts payable 71,061
Accrued expenses (note 14) 663,699
Obligations under capital leases - current portion (note 6) 16,069
----------
Total current liabilities 1,290,829
Obligations under capital leases, less current portion (note 6) 22,398
Other liabilities 35,844
----------
Total liabilities 1,349,071
----------
Stockholders' deficit (notes 7 and 15):
Preferred stock, no par value. Authorized
5,000,000 shares; issued and
outstanding 280,000 shares of Series B
cumulative convertible, senior
in liquidation to Class A and Class B common
stock (liquidation value $1,400,000) 1,393,889
Class A common stock, no par value. Authorized,
18,500,000 shares; issued and outstanding 2,332,430 shares 7,248,219
Class B common stock, no par value. Authorized
1,500,000 shares; issued and outstanding 1,191,606 shares;
retired 308,394 shares; convertible into one share of
Class A common stock 4,023,470
Accumulated deficit (12,901,884)
----------
Total stockholders' deficit (236,306)
Commitments and contingencies (note 12)
----------
$1,112,765
==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<PAGE>
ECHOCATH, INC.
Statements of Operations
Years ended August 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenues:
License and development fees $ 150,000 1,054,414
Product sales 160,910 20,985
----------- ---------
310,910 1,075,399
----------- ---------
Operating expenses:
Cost of sales 40,731 9,357
Research and development 1,471,568 1,457,699
Marketing, general and administrative 1,637,660 1,380,935
----------- ---------
3,149,959 2,847,991
----------- ---------
Loss from operations (2,839,049) (1,772,592)
----------- ---------
Other income (expense):
Interest income 89,271 51,228
Interest expense (notes 5 and 6) (66,134) (59,100)
----------- ---------
23,137 (7,872)
----------- ---------
Net loss (2,815,912) (1,780,464)
----------- ---------
Preferred dividends (37,800) (75,600)
----------- ---------
Net loss to common stockholders $(2,853,712) (1,856,064)
=========== =========
Basic and diluted net loss per common share $ (1.25) (.71)
=========== =========
Weighted average shares outstanding 2,277,000 2,625,000
=========== =========
</TABLE>
F-3
<PAGE>
<PAGE>
ECHOCATH, INC.
Statements of Stockholders' Deficit
Years ended August 31, 1997 and 1998
<TABLE>
<CAPTION>
Class B Class A Class B
preferred common common Accumulated
stock Stock stock deficit Total
--------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1996 $ - 6,211,661 3,348,470 (8,192,108) 1,368,023
Issuance of 280,000 shares of Class B
preferred to EP MedSystems, Inc. (note 7) 1,393,889 - - - 1,393,889
Additional costs associated with initial
public offering - (13,050) - - (13,050)
Private placement fee - - (75,000) - (75,000)
Dividends on preferred stock - - (37,800) (37,800)
Net loss - - - (2,815,912) (2,815,912)
--------- --------- --------- ----------- ----------
Balance at August 31, 1997 1,393,889 6,198,611 3,273,470 (11,045,820) (179,850)
Issuance of 363,636 shares of Class A
common stock (note 8) - 1,049,000 - - 1,049,000
Net proceeds from employee stock
purchaser plan - 608 - - 608
Capital contribution from alliance partners - - 750,000 - 750,000
Dividends on preferred stock - - - (75,600) (75,600)
Net loss - - - (1,780,464) (1,780,464)
--------- --------- --------- ----------- ----------
Balance at August 31, 1998 $1,393,889 7,248,219 4,023,470 (12,901,884) (236,306)
========= ========= ========= =========== ==========
</TABLE>
F-4
<PAGE>
<PAGE>
ECHOCATH, INC.
Statements of Cash Flows
Years ended August 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,853,712) (1,856,064)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 119,896 118,639
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 6,125 (4,905)
(Increase) decrease in inventory (58,663) 11,444
Decrease in prepaid expenses and other current assets 40,295 3,544
Decrease in other assets 2,035 8,096
Decrease in accounts payable (4,991) 10,271
(Decrease) increase in accrued expenses (33,053) 223,273
Increase in other liabilities 23,925 61,725
----------- ----------
Net cash used in operating activities (2,758,143) (1,423,977)
----------- ----------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements (170,258) (29,552)
Purchases of intangible assets (54,442) (37,092)
----------- ----------
Net cash used in investing activities (224,700) (66,644)
----------- ----------
Cash flows from financing activities:
Principal payments on capital lease obligations (23,653) (16,086)
Repayment from shareholder 101,899 -
Payment of finder's fee in connection with a 1992
private placement (75,000) -
Net proceeds from initial public offering
and over-allotment option (13,050) -
Net proceeds from employee stock purchaser plan - 608
Net proceeds from issuance of preferred stock 1,431,689 -
Issuance of Class A common stock - 1,049,000
Class B preferred dividends (37,800) (75,600)
----------- ----------
Net cash provided by financing activities 1,384,085 957,922
----------- ----------
Net decrease in cash and cash equivalents (1,598,758) (532,699)
Cash and cash equivalents at beginning of year 2,387,691 788,933
----------- ----------
Cash and cash equivalents at end of year $ 788,933 256,234
=========== ==========
Supplemental disclosure of cash flow
information - interest expense $ 66,134 58,750
=========== ==========
Supplemental disclosure of noncash
information - equipment acquired under capital lease $ - 8,190
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 1998
(1) Organization, Liquidity and Summary of Significant Accounting Policies
Organization
EchoCath, Inc. (the Company) was initially organized as a general
partnership on February 14, 1990 in the state of New Jersey under the
name of Catheter Technology Company, which name was subsequently changed
to EchoCath, Ltd. (the Partnership), to develop and market medical
devices using ultrasound imaging technology. On September 21, 1992, the
partners of the Partnership exchanged their partnership interests for
equivalent ownership interest in the common stock of the Company. Since
inception, the Company has been engaged primarily in research and
development activities. The Company recognized its first significant
product sales during fiscal 1997 and, accordingly, is no longer
considered a development stage enterprise.
Liquidity
The accompanying financial statements have been prepared on a going
concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary
course of business. The Company's operations have not generated
significant revenues to date. The Company has incurred substantial losses
since inception in 1990 and expects that losses will continue in the
foreseeable future. The Company incurred a net loss before preferred
dividends of $1,780,464 for the year ended August 31, 1998, and as of
August 31, 1998 had an accumulated deficit of $12,901,884 and negative
working capital of $734,120. The Company expects to incur additional
expenditures for further development and to expand its product lines.
Management's plans for the next 12 months include consideration of the
sale of additional equity securities under appropriate market conditions,
alliances or other partnership agreements with entities interested in and
with resources to support the Company's research and development and
product commercialization, or other business transactions which may
generate sufficient resources to ensure continuation of the Company's
operations and research programs. However, no assurance can be given that
the Company will be successful in raising additional capital, entering
into a business alliance or realizing profitable product sales. Further,
there can be no assurance, assuming the Company successfully raises
additional funds or enters into a business alliance, that the Company
will achieve profitability or positive cash flow. The accompanying
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Beyond the next 12 months, the Company may need substantial additional
financing in order to commercialize and continue development of certain
of its proposed products and other potential products. The Company has no
binding commitments from any third parties to provide funds to the
Company. There can be no assurance that the Company will be able to
obtain financing from any other sources on acceptable terms or at all.
F-6
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(1), Continued
On July 23, 1997, the Company was notified by NASDAQ that based on its
May 31, 1997 Form 10-Q filing, the Company did not satisfy NASDAQ's
minimum equity requirement of $1 million, and that if the Company did not
correct this matter it would be delisted from the NASDAQ exchange.
Subsequently, the Company has negotiated two transactions with Alliance
Partners and Medtronic, Inc. (see notes 15 and 8) which increased the
Company's equity and effectively satisfied NASDAQ's minimum equity
requirement. On February 26, 1998, NASDAQ notified the Company that based
on the new net tangible assets test, the Company was not in compliance
and would be scheduled for delisting. The Company subsequently appealed
the delisting decision, but remains out of compliance. On November 16,
1998, NASDAQ formally delisted the Company from the NASDAQ Small Cap
Market and is now traded on the NASDAQ bulletin boards.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
All cash and cash equivalents are held in U.S. financial institutions.
The Company maintains a $55,000 letter of credit for certain obligations.
The letter of credit is for a one-year term. The carrying amount of cash
and cash equivalents approximates its fair value due to its short-term
nature.
Revenue Recognition
Revenue from product sales is recognized upon shipment and passage of
title to the customer. Revenue from license and development fees is
recognized when earned.
Intangibles
Costs incurred in filing for patents and trademarks are capitalized.
Capitalized costs related to unsuccessful patent applications are
expensed when it becomes determinable that such applications will be
rejected. Capitalized costs related to successful patent applications and
trademarks are amortized on a straight-line basis over a period not to
exceed 20 years or the remaining life of the patent or trademark,
whichever is shorter.
Inventory
Inventory is valued at the lower of cost or market, cost being determined
using the first-in, first-out method.
Furniture, Equipment and Leasehold Improvements
Major additions and replacements of assets are capitalized at cost.
Maintenance, repairs and minor replacements are expensed as incurred.
Equipment acquired under capital leases is recorded at the present value
of minimum lease payments at the inception of the lease.
F-7
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(1), Continued
Furniture and equipment are depreciated using the straight-line method
over five years. Leasehold improvements and equipment acquired under
capital leases are amortized using the straight-line method over the
estimated useful life of the asset or the lease term, whichever is
shorter. Upon retirement or sale, the cost of the assets disposed of and
the related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is credited or charged to operations.
Accounting for Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
The measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits which are not expected to
be realized. The effect on deferred income tax assets and liabilities of
a change in tax rates is recognized in the period in which such tax rate
changes are enacted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Stock-based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. On September 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
F-8
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(1), Continued
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows, and measures the impairment, if any, using
discounted cash flows. Adoption of SFAS No. 121 in fiscal 1997 did not
have a material impact on the Company's financial position, operating
results or cash flows.
Concentration of Credit Risk
The Company invests its excess cash in deposits with major U.S. financial
institutions and money market funds. The Company has established
guidelines relative to diversification and maturities that maintain
safety and liquidity. To date, the Company has not realized any
significant gains or losses on its investments.
Research and Development Costs
Research and development costs are expensed as incurred.
Net Loss Per Share
Basic and dilutive net loss per common share for fiscal 1997 and 1998 is
calculated based upon net loss after preferred dividends of $37,800 and
$75,600, respectively, divided by the weighted average number of shares
of common stock outstanding. The assumed exercise of common stock
equivalents is not considered, as the effect would be anti-dilutive.
Financial Instruments
The carrying amounts of cash and cash equivalents and other current
assets and current liabilities approximate fair value due to the
short-term maturity of these instruments.
(2) Inventory
Inventory as of August 31, 1998 consists of the following:
<TABLE>
<S> <C>
Raw materials $ 96,659
Work in progress 15,605
Finished goods 76,857
---------
$189,121
=========
</TABLE>
F-9
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(3) Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements as of August 31, 1998
consists of the following:
<TABLE>
<S> <C>
Laboratory and production equipment $361,424
Office equipment 309,241
Leasehold improvements 19,347
----------
690,012
Less accumulated depreciation and amortization 435,832
----------
Furniture, equipment and leasehold
improvements, net $254,180
==========
</TABLE>
As of August 31, 1998, equipment acquired under capital leases (see note
6) amounted to $143,020 and related accumulated amortization was
$105,461. The Company recognized depreciation expense of $97,945 and
$97,056 for the fiscal years ended August 31, 1998 and 1997,
respectively.
(4) Intangible Assets
Intangible assets as of August 31, 1998 consists of the following:
<TABLE>
<S> <C>
Patents and trademarks $323,094
Patent application costs 34,009
----------
357,103
Less accumulated amortization 74,958
----------
$282,145
==========
</TABLE>
(5) Notes Payable
On September 24, 1993, the Company entered into an exclusive worldwide
development, supply and license agreement with Bard Radiology, C.R. Bard,
Inc. (Bard). As part of this agreement, Bard provided to the Company an
advance of $540,000 in order to assist the Company with its manufacturing
obligations. This advance was evidenced by a note payable issued by the
Company to Bard, which is secured by virtually all of the Company's
inventory, furniture and equipment. In accordance with the agreement with
Bard, the note is repayable by the Company by offsetting future
receivables from Bard arising from the sale of certain products to Bard
against the principal amount of the note. There have been no sales made
to Bard by the Company. The Bard agreement was terminated on October 28,
1996. The note does not bear interest during the four years commencing
with the first purchase order issued by Bard. However, if the Bard
agreement is terminated prior
F-10
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(5), Continued
to full satisfaction of the note, the remaining principal balance of the
note will become payable within 60 days or, at the option of the Company,
within 24 months, including interest at the prime rate plus 1%. The
carrying amount of this note approximates its fair value due to the
variable nature of interest rates. Bard has agreed to a maturity date of
December 31, 1998. The principal and accrued interest due as of August
31, 1998 is $665,080.
(6) Obligations under Capital Leases
Equipment under capital leases is capitalized using interest rates
(ranging from 7.3% to 25.26%) in effect at the inception of the lease.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of August 31, 1998:
<TABLE>
<S> <C>
1999 $16,887
2000 14,580
2001 10,588
2002 2,604
2003 422
---------
Total minimum lease payments 45,081
Less amount representing interest 6,614
---------
Present value of net minimum
lease payments 38,467
Less current portion of obligations under
capital lease 16,069
---------
Long-term portion of obligations
under capital lease $22,398
=========
</TABLE>
(7) Stockholders' Deficit
Voting Rights
The holders of the Company's Series B common stock maintain "super
voting" rights, whereby they are entitled to 5 votes per share. The
holders of the Company's Series A common shares are entitled to one vote
per share.
F-11
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(7), Continued
Forfeitable Shares
In connection with the initial public offering, the underwriter required
that certain stockholders of the Company, primarily officers, directors
and other employees, agree to contribute an aggregate of 833,000 shares
of Class B common stock to the Company without consideration if specified
earnings levels or market price targets are not met (the Forfeitable
Shares). The Forfeitable Shares are not assignable or transferable. The
restrictions on the Forfeitable Shares will be released only if any of
the following occur:
(a) the Company's net income before provision for income taxes,
exclusive of any extraordinary earnings (the Minimum Pretax
Income), amounts to at least $3.4 million during the fiscal year
ending on August 31, 1998; or
(b) the Minimum Pretax Income amounts to at least $5.0 million during
the fiscal year ending on August 31, 1999; or
(c) the Minimum Pretax Income amounts to at least $6.6 million during
the fiscal year ending on August 31, 2000; or
(d) the Minimum Pretax Income amounts to at least $8.5 million during
the fiscal year ending on August 31, 2001; or
(e) commencing at the effective date of the IPO and ending 42 months
after the effective date of the IPO, the bid price of the
Company's Class A common stock shall average in excess of $12.50
per share (subject to adjustment in the event of any reverse stock
splits or other similar events) for 30 consecutive business days;
or
(f) commencing 42 months from the effective date of the IPO and ending
60 months after the effective date of the IPO, the bid price shall
average in excess of $16.75 per share (subject to adjustment in
the event of any reverse stock splits or other similar events) for
30 consecutive business days.
If none of the foregoing targets are met, on November 30, 2001 the
Forfeitable Shares will be placed in the Company's treasury and canceled.
In the event that the restrictions on the Forfeitable Shares are
released, the Company would be required to record compensation expense
equal to the fair market value of the stock at the date the restrictions
are released.
Preferred Stock and Related Litigation
The Company's Certificate of Incorporation authorizes the issuer of a
maximum of 5,000,000 shares of preferrred stock on terms which may be
fixed by the Company's Board of Directors without further shareholder
action.
The Company entered into a subscription agreement dated February 27, 1997
through which EP MedSystems, Inc. (EP) 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 conversion of Series B cumulative convertible
preferred stock to Class A common stock will be at the conversion rate of
one share of Class A common stock for each 1.2 shares of Series B
cumulative preferred stock
F-12
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(7), Continued
through 1999. Thereafter, the conversion rate shall be one share of Class
A common stock for each 1.3 shares of Series B cumulative convertible
preferred stock. The Series B cumulative convertible preferred stock
contains certain priority claims to assets and dividends and special
voting rights. On October 22, 1998, EP MedSystems served a notice
upon the Company demanding registration of the Series B Preserred
Stock which EP MedSystems holds.
On October 16, 1997, EP delivered to the Company a 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 pursuant to the subscription
agreement dated February 27, 1997. EP alleges that the Company violated
Section 10(b) of the Securities and Exchange Act of 1934 and committed
common law fraud in connection with EP's purchase of securities from the
Company. EP requested unspecified compensatory damages, costs, attorney's
fees and punitive damages. Upon motion of the Company, on October 20,
1998, the suit was dismissed with prejudice. The Company's counterclaims
for legal fees are still pending.
Convertible Debentures
The Company issued two convertible debentures to Investment Partners of
America, L.P. (IPA), a New Jersey limited partnership, in the amounts of
$250,000 on September 18, 1998 and $275,000 on October 27, 1998. The
first debenture was issued directly to IPA and the second debenture was
issued to IPA on behalf of eight of its regular customers, all of whom
are accredited investors. The debentures pay 6+% interest and mature six
months from the date of issuance. The debentures are convertible into
shares of the Company's Class A common stock at the then-current market
price, but no greater than $2.00 per share and no less than $1.00 per
share. The shares of Class A common stock issuable upon conversion of the
debentures carry price protection, in that the holders of such shares
will receive additional shares equal to the price difference if the
Company sells shares to a third party at a price less than the conversion
price. In addition, an affiliate of IPA received a six-month consulting
agreement with the Company for $5,000 monthly on October 27, 1998.
(8) Development and License and Distribution Agreements
On December 30, 1996, the Company entered into an exclusive license
agreement with Medtronic, Inc. (Medtronic) for the licensing of
EchoMark'r' and ColorMark'r' proprietary technologies for certain medical
procedures. Under the agreement the Company is entitled to receive a
series of payments totaling up to $950,000 after the completion of
certain milestones. As of August 31, 1998, total payments under this
agreement amounted to $200,000.
The Company entered into an exclusive license agreement dated February
27, 1997 with EP. The agreement provides that certain products of the
Company can be incorporated into the EP diagnostic catheter line. The
Company is entitled to receive development milestone payments of up to
$700,000 if certain milestones are met. 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
F-13
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(8), Continued
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 August 31,
1998, the Company has $113,400 of accrued Series B cumulative preferred
stock dividends.
On October 30, 1997, the Company announced it had reached a second
definitive licensing and development agreement with Medtronic. Pursuant
to the terms of this agreement, the Company, among other things: (i)
granted Medtronic an exclusive license to make, have made, use, sell and
have sold products utilizing the Company's ColorMark'r' and EchoMark'r'
technologies in guiding devices during cardiothoracic surgical
procedures; and (ii) granted Medtronic the exclusive right and option at
any time until October 31, 1998 to acquire a worldwide exclusive license
to the Company's EchoEye'r' and EchoFlow'r' technologies for use in
guiding devices 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: (i) $800,000 paid to the Company in
upfront nonrefundable licensing fees which was recognized as revenue
during fiscal 1998 and (ii) $1,000,000 for the purchase of 363,636
restricted shares of the Company's Class A common stock issued to
Medtronic Asset Management, Inc. a wholly-owned subsidiary of Medtronic.
In addition, Medtronic's will pay the Company certain future minimum
annual royalties upon product commercialization.
The Company entered into an agreement dated June 10, 1997 with Medison
Co. Ltd. (Medison) of Seoul, Korea for the distribution of ColorMark'r'
systems throughout the Far East. Medison has agreed to order a certain
minimum number of ColorMark'r' systems within 12 months from the
agreement date. Medison and the Company had agreed to delay Medison's
minimum purchase order requirements until early calendar year 1998.
Medison has not been able to complete the minimum purchase requirements.
As of August 31, 1998, the Company has not cancelled the contract.
(9) Income Taxes
As of August 31, 1998, the Company has available net operating loss
carryforwards of approximately $12,188,000 for income tax reporting
purposes which are available to offset future federal and state taxable
income, if any, through 2013 and 2005, respectively. The Company also has
research and development tax credit carryforwards of approximately
$284,000 for federal income tax purposes which are available to reduce
federal income taxes, if any, through 2011. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended, the annual utilization of
the Company's net operating loss and research credit carryforwards may be
limited if the Company experiences a change in ownership of more than 50%
within a three-year period. The Company believes that one or more of such
ownership changes may have occurred since 1996. Therefore, the Company's
ability to use its net operating loss carryforwards and research credits
may be subject to certain limitations.
F-14
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(9), Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
August 31, 1998 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $4,875,200
Tax credit carryforward 284,020
Accrued expenses 23,844
Inventory 28,531
Technology rights 199,334
------------
Total gross deferred tax assets 5,410,929
Less valuation allowance 5,399,667
------------
Net deferred tax assets 11,262
Deferred tax liabilities - furniture, equipment and
leasehold improvement, primarily due to differ-
ences in depreciation 11,262
------------
Net deferred tax liability $ --
============
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1997
was $4,687,942. The net change in the total valuation allowance for the
year ended August 31, 1998 was an increase of $711,725.
(10) Related-Party Transactions
During the years ended August 31, 1997 and 1998, the Company incurred
$12,835 and $9,071, respectively, of management and administrative
services from the parent company of a common stockholder. Management
believes that the expenses charged approximate those that would have been
charged by unrelated parties performing similar services.
(11) Profit Sharing 401(k) Plan
In February 1996, the Company established its own 401(k) profit sharing
plan. All eligible employees may elect to contribute a portion of their
wages to the 401(k) plan, subject to certain limitations. The Company is
required to contribute 25% of the employee contributions subject to a
maximum equal to 6% of the employees' compensation. The Company
contributed $14,491 and $14,805 to the plan for the years ended August
31, 1997 and 1998, respectively.
F-15
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(12) Commitments and Contingencies
The Company leases office and laboratory facilities, equipment and
vehicles under various noncancellable operating lease arrangements.
Future minimum rental commitments required by such leases as of August
31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 260,549
2000 301,641
2001 295,948
2002 171,427
------------
$1,029,565
=============
</TABLE>
Rental expense aggregated $239,839 and $243,333 for the years ended
August 31, 1997 and 1998, respectively.
(13) Stock Option Plans
On August 24, 1995, as amended March 5, 1998, the Company adopted a stock
option plan (the 1995 option plan) which provides for the grant of
incentive stock options, nonqualified stock options and stock
appreciation rights. The total number of Class A common stock shares
eligible for grant under the new stock option plan is 1,020,000 shares.
The Company has adopted the disclosure-only provisions of SFAS No. 123
and applies APB Opinion No. 25 in accounting for its plans and,
accordingly, has not recognized compensation cost for stock option plans
and stock purchase plans in its financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net loss
and net loss per share amounts would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net loss less preferred dividend -
as reported $(2,853,712) (1,856,064)
Net loss less preferred dividend -pro forma
(2,979,385) (2,012,615)
=========== ==========
Net loss per share less preferred dividend -
as reported $ (1.25) (.71)
Net loss per share less preferred dividend -
pro forma (1.31) (.77)
=========== ==========
</TABLE>
F-16
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(13), Continued
The fair value of the stock options granted for the years ended August
31, 1997 and 1998 is estimated at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for
1997 and 1998: dividend yield of 0%; expected volatility of 50.1%; a
risk-free interest rate of 6.5%; and expected lives of 7 years. The
weighted average fair value at the date of grant for options granted
during the years ended August 31, 1997 and 1998 was $1.037 and $1.351,
respectively.
Presented below is a summary of the stock option plans for the years
ended August 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------------------- ------------------------
Weighted Weighted
average average
exercise exercise
Shares price* Shares price
------ ------ ------ ------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 150,000 $ 5.000 742,500 $ 3.375
Granted 742,500 3.375 50,000 2.000
Exercised - - - -
Forfeited/expired 150,000 5.000 - -
---------- ----------
Options outstanding at end
of year 742,500 3.375 792,500 3.290
========== ===== =========== =====
</TABLE>
*Exercise price reset from $5.00 to $3.375 pursuant to a Board
of Directors resolution in April, 1997.
At August 31, 1998, the Company has 558,500 exercisable outstanding
options.
(14) Accrued Expenses
Accrued expenses as of August 31, 1998 consists of the following:
<TABLE>
<S> <C>
Professional fees $187,143
Payroll and benefits 94,744
Rent 138,797
Accrued interest expense on bond note payable 125,080
Other 4,535
Dividends payable 113,400
----------
$663,699
==========
</TABLE>
F-17
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(15) Alliance Agreement
On August 10, 1994, the Company entered into an agreement with Alliance
Partners (Alliance) which provided for the sale of between 15% and 45% of
the Company's Class B common stock to Alliance in exchange for $425,000
in cash to be paid in installments; the assumption by Alliance of a
guarantee of outstanding borrowings under the bank demand note payable in
the amount of $750,000; and Alliance's undertaking to invest or cause to
be invested an additional $5,750,000 through a private placement or
public offering of not greater than 40% of the Company's Class A common
stock plus Alliance arranging unsecured bridge loan financing for the
Company to be provided through an underwriter in an amount of not less
than $1,000,000. In the event that the total financing provided and
arranged by Alliance is less than $7,000,000 at the end of the six-month
period after the closing of the private placement or public offering,
then Alliance is obligated to return to the Company a pro rata portion of
the Company's common stock owned by Alliance equal to the difference
between $7,000,000 and the amount of financing actually invested in the
Company. However, in no event shall Alliance receive less than 10% of the
outstanding common stock of the Company.
As of January 1996, the Company had received $1,050,368 in cash from
Alliance under this agreement. The agreement included an additional
capital contribution of $75,000 as the result of a repurchase agreement
for certain technology rights for $575,000, of which $500,000 was paid
from the proceeds of the offering and $75,000 was paid by Alliance. The
Company charged $575,000 to operations relating to the agreement.
Amendment to Alliance Agreement
On July 7, 1995, the Company entered into an agreement to amend its
previously existing agreement with Alliance. In accordance with the new
agreement, the partners of Alliance and certain other entities and
individuals became entitled to receive a 35% equity interest in the
Company in exchange for Alliance's repayment of the Company's $750,000 of
outstanding borrowings under its 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. On October 31,
1997, Alliance released the $750,000 contingent payment in exchange for
the issuance of 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
common share and has a life of 6 years. This transaction was treated as a
capital contribution, consistent with the original Alliance transaction.
F-18
<PAGE>
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements, Continued
(16) Investment Plan
In February 1997, the Company adopted an Investment Plan (the Investment
Plan) covering 300,000 shares of Class A Common Stock. The Investment
Plan provides eligible employees of the Company with an opportunity to
purchase shares of Class A Common Stock through payroll deductions, or
otherwise, and to receive options to purchase Class A Common Stock. The
Investment Plan is administered by the Company's Compensation and Stock
Option Committee, or by a Plan Administrator appointed by the Company's
Compensation and Stock Option Committee.
Under the terms of the Investment Plan, options may be granted to
participants upon the purchase of shares under the Investment Plan. The
number of options to be granted in connection with each purchase of
shares is a function of the degree to which the Company attains
pre-designated performance goals.
Two of the Company's employees participated in the Investment Plan during
the fiscal year ended August 31, 1998. During the fiscal year ended
August 31, 1998, no shares of Class A Common Stock were issued under the
Investment Plan.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
F-19
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table sets forth the name and positions of the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Frank A. DeBernardis(1) 56 Chief Executive Officer,
President and Director
David Vilkomerson 57 Executive Vice President,
Director of Research and
Development, Assistant
Secretary and Director
Daniel M. Mulvena(1)(2)(3) 50 Chairman of the Board of
Directors
Anthony J. Dimun(2) 55 Director
Irwin M. Rosenthal(3) 70 Secretary and Director
</TABLE>
- ----------
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
FRANK A. DEBERNARDIS has served as Chief Executive Officer, President and a
director of the Company since its inception. From 1989 to 1992, Mr. DeBernardis
served as President and was the sole stockholder of Implemed, Inc., a
privately-held corporation which provided consulting services in the area of
medical device manufacturing ("Implemed").
DAVID VILKOMERSON, Ph.D., has served as Executive Vice President, Vice
President Research and Development, Assistant Secretary and a director of the
Company since its inception. Dr. Vilkomerson is a founder of Ultramed and served
as President and Chairman of the Board of Ultramed from March 1982 to September
1992. Dr. Vilkomerson has authored or co-authored approximately 30 technical
papers and received over 30 United States patents.
DANIEL M. MULVENA has served as Chairman of the Board since September 1997
and as a Co-Chairman of the Board from August 1995 to September 1997. Mr.
Mulvena is President of Commodore Associates, a private firm providing
consulting services. Mr. Mulvena served as Vice-President and General Manager of
the Mansfield Division of Boston Scientific, a publicly-traded
corporation which manufactures and sells minimally invasive medical products,
beginning in February 1992. Mr. Mulvena left Boston Scientific in April 1995
as Group Vice President Cardio/Cardiology responsible for Mansfield, Cardiac
Assist and Mansfield Electrophysiology Divisions of Boston Scientific.
Mr. Mulvena formerly served as Vice Chairman of the Board of Directors of
Life Medical Sciences, Inc. ("Life Medical"), a publicly-held corporation
engaged in the research and development of technologies for use in medical
applications, from July 1992 to May 1995. Since May 1997, Mr. Mulvena has served
on the Board of Directors of Thoratec Laboratories Corporation, since January
1998 has been acting Chairman of the Board of Magna-Lab Inc. ("Magna-Lab"), and
since April 1998, a director of Zoll Medical, all of which are publicly-held
corporations involved in medical technology.
ANTHONY J. DIMUN has served as a director of the Company since inception,
served as Secretary of the Company until August 1995 and served as a Vice
President and Treasurer of the Company until November 1996. Mr. Dimun has been a
certified public accountant since 1968. Mr. Dimun has served as the Chief
Financial Officer and Executive Vice President and Director of Vital Signs, Inc.
("Vital Signs") since March 1991, its Secretary and
31
<PAGE>
<PAGE>
Treasurer since December 1991, and as a director since August 1987. He is
also a director of Bionx Implants Inc., a publicly-traded medical device
company.
IRWIN M. ROSENTHAL has served as a director of the Company since August
1995 and as Secretary of the Company since September 1995. Mr. Rosenthal is a
co-founder of Life Medical, has served as a director of Life Medical since its
inception in 1990 and currently serves as both its Secretary and Treasurer. Mr.
Rosenthal is an attorney and since 1960 has specialized in securities law. He is
currently a partner at Graham & James LLP. Prior to July 1998, Mr. Rosenthal was
a partner at Rubin Baum Levin Constant & Friedman. Mr. Rosenthal serves as
Secretary and as a director of Magar Inc. a private investment firm ("Magar"),
of which he is a principal stockholder. Mr. Rosenthal is also a director of
Magna-Lab and Symbollon Corporation, a publicly-traded chemical and medical
technology company, and is a general partner of Alliance, which is a partnership
which invests in companies and may take on a management role in such companies.
See "Certain Transactions."
Dr. Herbert Moskowitz, who had been a director of the Company since August
1995, chose not to run for reelection to the Board at the most recent annual
meeting of shareholders.
All directors of the Company are elected by the shareholders, or in the
case of a vacancy, by the directors then in office, to hold office until the
next annual meeting of shareholders of the Company and until their successors
are elected and qualified or until their earlier resignation or removal.
The Company has obtained key-person life insurance coverage in the face
amount of $2,000,000 for each of Mr. DeBernardis and Dr. Vilkomerson naming the
Company as beneficiary under such policies. The Company has agreed to maintain
such policies in force for a minimum period of three years from the date of the
Company's Initial Public Offering or the respective terms of the employment
agreements between the Company and such officers, whichever period is longer.
Board Committees
The Company has established an Executive Committee, a Compensation and
Stock Option Committee, and an Audit Committee. The Executive Committee,
consisting of Messrs. Frank A. DeBernardis, and Daniel M. Mulvena, exercises all
the power and authority of the Board of Directors in the management and affairs
of the Company between meetings of the Board of Directors, to the extent
permitted by law.
The Compensation and Stock Option Committee, consisting of Anthony J. Dimun
and Daniel M. Mulvena, makes recommendations to the Board of Directors
concerning compensation, including incentive arrangements, of the Company's
officers and key employees and others, administers the Company's Option Plan and
determines the officers, key employees and others to be granted options under
the Option Plan and the number of shares subject to such options.
The Audit Committee, consisting of Daniel M. Mulvena and Irwin M.
Rosenthal, reviews the engagement of the Company's independent accountants and
the independence of the accounting firm, the audit and non-audit fees of the
independent accountants and the adequacy of the Company's internal control
procedures.
Key Personnel
The Company's Key Personnel are as follows:
David Lyons, (50), Vice-President of Engineering--Mr. Lyons has been Vice
President of Engineering at the Company since April 1997. Prior to serving as
Vice-President of Engineering, Mr. Lyons served as Manager, Electronic R&D since
1991 where he was responsible for the Company's design and development of
electronics and software related to real-time three dimensional ultrasound
imaging, ultrasound beacon systems, Doppler blood flow velocity measurement and
Doppler signal processing methods. Prior to that time, since 1988, Mr. Lyons
worked for Ultramed where he conducted similar design and development research.
Alec Colleoni, (50), Manager of Manufacturing--Mr. Colleoni, a graduate of
MITC in Italy, has managed the manufacturing of a number of medical electronic
companies, including Princeton Electronic Products and
32
<PAGE>
<PAGE>
Ultramed, with over ten years experience in various FDA and GMP compliance
requirements. He held positions with Johnson & Johnson and PA Associates and has
received several patents in the United States.
Bayard Gardineer, (68), Vice President--Mr. Gardineer has served as a
Vice-President at the Company since September 1992. Currently, Mr. Gardineer
spends 70% of his working time at the Company. Prior to that he was a Vice
President of Ultramed from 1982 to 1992. Mr. Gardineer, a graduate of
Massachusetts Institute of Technology, has over 40 years experience in
mechanical design and production, primarily with International Business Machine
and Johnson & Johnson. He has been granted numerous patents.
Morton Lefar, Ph.D., (60), Manager, Regulatory Affairs and Quality
Systems--Dr. Lefar has served as Manager, Regulatory Affairs and Quality Systems
at the Company since August 1997. Currently, Dr. Lefar works on a part-time, as
needed basis for the Company. Dr. Lefar has worked in both the pharmaceutical
and medical device industries for over 30 years. Dr. Lefar received his Ph.D. in
chemistry from Rutgers University. Following graduation at Rutgers University,
Dr. Lefar was employed by the FDA. Dr. Lefar has also held senior level
positions at American Hoechst, National Medical Care and Banner Pharmacaps. Dr.
Lefar was a founder and partner of Epolin Inc., a research and development firm.
Dr. Lefar is the former Editor and Chief of the Journal of Regulatory Affairs
and is Regulatory Affairs Certified.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains provisions to indemnify
its directors and officers to the fullest extent permitted by New Jersey law,
and also includes provisions to eliminate the personal liability of its
directors and officers to the Company and its shareholders to the fullest extent
permitted by New Jersey law. Under current law, such exculpation would extend to
an officer's or director's breaches of fiduciary duty, except for (i) breaches
of such person's duty of loyalty, (ii) those instances where such person is
found not to have acted in good faith and (iii) those instances where such
person received an improper personal benefit as a result of such breach.
The Company's bylaws provide that the Company may indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under New Jersey law.
The Company has entered into Indemnification Agreements ("Indemnification
Agreements") with each of its directors and officers. Each Indemnification
Agreement provides that the Company will indemnify the indemnitee against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with any civil or criminal action or administrative proceeding
arising out of his or her performance of his or her duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful. Each
Indemnification Agreement also requires that the Company indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law.
Each Indemnification Agreement permits the director or officer that is
party thereto to bring suit to seek recovery of amounts due under such
Indemnification Agreement and require that the Company indemnify the director or
other party thereto in all cases to the fullest extent permitted by applicable
law. The Company has directors' and officers' liability insurance.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company knows of no late filings pursuant to Section 16(a) of the
Exchange Act.
33
<PAGE>
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company for the fiscal years ended August
31, 1998, 1997 and 1996 to Frank A. DeBernardis, the Company's Chief Executive
Officer, David Vilkomerson, the Company's Executive Vice President, and Daniel
M. Mulvena, the Company's Chairman of the Board (the "Named Executive
Officers"). No other executive officer received annual compensation in excess of
$100,000 for the fiscal years ended August 31, 1998, 1997 or 1996.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS PAYOUTS
------------ ------------
SECURITIES
UNDERLYING ALL
OTHER OPTIONS/ OTHER
NAME AND PRINCIPAL SALARY BONUS ANNUAL SARS COMPENSATION
POSITION YEAR ($) ($) COMPENSATION ($) ($)
- ------------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Frank A. DeBernardis 1998 $130,000 ----- ----- ----- -----
Chief Executive Officer 1997 $130,000 $16,000 ----- 150,000(1)(2) -----
1996 $151,000 $25,000 ----- 20,000(1)(3) -----
David Vilkomerson 1998 $134,600 ----- ----- -----
Executive Vice President 1997 $130,000 $16,000 ----- 150,000(1)(2) -----
1996 $151,000 $25,000 ----- 90,000(1)(4) -----
Daniel M. Mulvena 1998 $ 60,681 ----- -----
Chairman of the Board 1997 $103,667 50,000(1)(5) -----
1996 $ 81,333 20,000(1)(3) -----
</TABLE>
- ----------
(1) The security underlying all options is Class A Common Stock.
(2) Each option vested as to 50,000 shares on April 29, 1998 and vests as to
50,000 shares on April 29, 1999, and as to 50,000 shares on April 29, 2000.
(3) Such option vests in five equal installments commencing in January 1996
through January 2000.
(4) Such option vests in three equal installments commencing in January 1996
through January 1998.
(5) Such option vested as to 25,000 shares in April 1997 and as to the
remaining 25,000 shares on December 31, 1997.
Stock Option Tables
OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth the
options granted to the Named Executive Officers during the fiscal year ended
August 31, 1998. The Company granted no stock appreciation rights ("SARs") or
Stock Options during such fiscal year. However, during the fiscal year ending
August 31, 1999, the Company has granted options to its directors and certain of
its officers to purchase 50,000 shares of the Class A Common Stock. Such options
were all issued pursuant to the Options Plan and are exercisable for ten years
following the date of grant.
34
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS MARKET
PRICE
NUMBER OF TOTAL AS REPORTED
SECURITIES OPTIONS/SARS ON BULLETIN
UNDERLYING GRANTED TO EXERCISE OR BOARD ON
OPTIONS/SARS EMPLOYEES IN BASE DATE EXPIRATION
NAME GRANTED(1) FISCAL YEAR(1) PRICE($/SH) OF GRANT DATE
<S> <C> <C> <C> <C> <C>
Frank A. DeBernardis None
Chief Executive Officer
David Vilkomerson None
Executive Vice President
Daniel M. Mulvena None
Chairman of the Board
</TABLE>
- ----------
(1) In fiscal 1998, the Company granted no options under the Option Plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES The following table sets forth information (on an aggregate
basis) concerning each exercise of stock options during the fiscal year ended
August 31, 1998 by each of the Named Executive Officers and the final year-end
value of unexercised options. The table reflects options exercisable within 60
days of the date of this Report.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED "IN-
OPTIONS/SARs AT THE MONEY" OPTIONS/SARs
SHARES FISCAL YEAR-END AT FISCAL YEAR END(2)
ACQUIRED VALUE
ON EXERCISE REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
(1)
<S> <C> <C> <C> <C> <C> <C>
Frank DeBernardis
Chief Executive Officer 0 0 116,000 54,000 0 0
David Vilkomerson
Executive Vice President 0 0 140,000 100,000 0 0
Daniel Mulvena
Chairman of the Board 0 0 68,000 2,000 0 0
</TABLE>
- ----------
(1) As of the date of this Report, none of the Named Executive Officers have
exercised any of their options.
(2) Options are "in-the-money" at the fiscal year-end if the fair market value
of the underlying securities on such date exceeds the exercise price of the
option. The last sales price of the securities underlying the options on
December 8, 1998, was $1 1/8 per share, and the exercise price of the
applicable options has been reset from $5.00 per share to $3.375 per share
on April 29, 1997.
(3) Value realized is the closing market price of the stock on the date of
exercise less the option price, multiplied by the number of shares acquired
on exercise.
Compensation of Directors
The Company pays all outside directors $500 for each board or committee
meeting attended. Outside directors may also be reimbursed for expenses incurred
by them in acting as a director or as a member of any committee of the Board of
Directors. There were no options granted to directors during the fiscal year
ended August 31, 1998.
Employment Agreements
The Company entered into employment agreements with Mr. Frank DeBernardis,
to serve as President and Chief Executive Officer of the Company, and Dr. David
Vilkomerson, to serve as Executive Vice President and
35
<PAGE>
<PAGE>
Director of Research and Development of the Company, which expired in November
1996. Pursuant to such agreements, Mr. DeBernardis and Dr. Vilkomerson received
a base salary of $130,000 at the time of expiration of the agreements. The
employment agreements provided that each such agreement could be terminated by
the Company only if such executive officer had materially breached his
obligations under the agreement, engaged in willful misconduct against the
Company or was found guilty of a felony by a court of competent jurisdiction
which, in the discretion of the Board of Directors, would interfere with the
performance of such executive officer's duties and responsibilities or would
materially adversely affect the Company. The agreements also contained
confidentiality and non-competition provisions. Dr. David Vilkomerson signed an
extended employment agreement on March 10, 1998. Under the terms of the
agreement his base salary increased from $130,000 in the first year of his
agreement, ending November 1, 1997, to $135,000 in the second year at his
agreement, ending November 1, 1998, and $140,600 the last year of his agreement.
The agreement terminates on November 1, 1999. The terms of the extended
agreement are similar to the original agreement. Mr. DeBernardis is currently in
discussion with the Compensation Committee to extend his employment agreement.
The Company entered into a consulting agreement with Mr. Mulvena which
expired on June 30, 1997. Pursuant to such agreement, Mr. Mulvena provided
consulting services to the Company from July 1, 1995 through June 30, 1997, for
up to 27 days per quarter, at a rate of $1,000 per day. The agreement provided
for Mr. Mulvena to be reimbursed for his reasonable expenses and to be provided
with Company benefits. The agreement also contained confidentiality and
non-compete provisions. An extension of such consulting agreement is currently
being negotiated and it is anticipated that Mr. Mulvena will enter into a new
consulting agreement on substantially similar terms.
Option Plan
In August 1995, the Board of Directors adopted and the shareholders
approved the Option Plan. The Option Plan provides for the grant of incentive
stock Option ("ISOs") (within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and non-qualified stock options ("NQSOs")
to certain directors, officers and employees of the Company. The Option Plan
further provides for the grant of NQSOs and stock appreciation rights ("SARs")
to directors, agents of, and consultants to, the Company, whether or not
employees of the Company. The purpose of the Option Plan is to attract and
retain employees, agents, consultants and directors. Options and SARs granted
under the Plan may not be exercisable for terms in excess of 10 years from the
date of grant. In addition, no options or SARs may be granted under the Option
Plan later than 10 years after the Option Plan's effective date. The total
number of shares of Class A Common Stock with respect to which options and SARs
will be granted under the Option Plan is 1,020,000. The shares subject to and
available under the Option Plan may consist, in whole or in part, of authorized
but unissued stock or treasury stock not reserved for any other purpose. Any
shares subject to an option or SAR that terminates, expires or lapses for any
reason, and any shares purchased pursuant to an option and subsequently
repurchased by the Company pursuant to the terms of the option, shall again be
available for grant under the Option Plan.
The Option Plan is administered by the Board of Directors of the Company,
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, NQSOs or SARs, or a combination
thereof, and the number of shares of Class A Common Stock to be subject to such
options or SARs. The Board of Directors of the Company may, in its discretion,
delegate its power, duties and responsibilities under the Option Plan to a
committee consisting of two or more "Non-Employee" directors within the meaning
of (b)(3) of Rule 16b-3 promulgated under the Exchange Act. The Compensation and
Stock Option Committee, which is responsible for administering the Option Plan,
is composed of Daniel Mulvena and Anthony Dimun. The exercise price of options
granted under the Plan shall not be less than the fair market value per share on
the date of grant, as determined by the Board of Directors.
The Option Plan contains certain limitations applicable only to ISOs
granted thereunder. To the extent that the aggregate fair market value, as of
the date of grant, of the shares to which ISOs become exercisable for the first
time by an optionee during the calendar year exceeds $100,000, the ISO will be
treated as a NQSO. In addition, if an optionee owns more than 10% of the
Company's stock at the time the individual is granted an ISO, the option price
per share cannot be less than 110% of the fair market value per share and the
term of the option cannot exceed five years.
36
<PAGE>
<PAGE>
The Company plans to seek shareholder approval at the next annual meeting
of shareholders of an amendment to the Option Plan to increase the number of
shares of Class A Common Stock available for grant thereunder.
Profit Sharing 401(k) Plan
In February 1996, the Company established a 401(k) plan. All eligible
employees may elect to contribute a portion of their wages to the 401(k) plan,
subject to certain limitations. The Company is required to contribute 25% of the
employee contributions subject to a maximum equal to 6% of the employees
compensation. The Company contributed approximately $14,805 in the fiscal year
ended August 31, 1998.
Investment Plan
In February 1997, the Company adopted an Investment Plan (the "Investment
Plan") covering 300,000 shares of Class A Common Stock. The Investment Plan
provides eligible employees of the Company with an opportunity to purchase
shares of Class A Common Stock through payroll deductions, or otherwise, and to
receive options to purchase Class A Common Stock. The Investment Plan is
administered by the Company's Compensation and Stock Option Committee, or by a
Plan Administrator appointed by the Company's Compensation and Stock Option
Committee.
Under the terms of the Investment Plan, options may be granted to
participants upon the purchase of shares under the Investment Plan. The number
of options to be granted in connection with each purchase of shares is a
function of the degree to which the Company attains pre-designated performance
goals.
Two of the Company's employees participated in the Investment Plan during
the fiscal year ended August 31, 1998. During the fiscal year ended August 31,
1998, no shares of Class A Common Stock were issued under the Investment Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 4, 1998, certain information
as to the stock ownership and voting power of all persons (or groups of persons)
known by the Company to be the beneficial owner of more than five percent (5%)
of the Common Stock or the Series B Cumulative Convertible Preferred Stock, each
director of the Company, each of the executive officers included in the Summary
Compensation Table and all directors and executive officers as a group.
37
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OF VOTING
BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP(1)(2)(3) CLASS POWER
<S> <C> <C> <C> <C>
Cathtech Corp.(6) Class B Common Stock 311,953 26.6% 18.4%
c/o Vital Signs, Inc.
20 Campus Road
Totowa, New Jersey 07512
Anthony Dimun(7) Class A Common Stock 50,000 2.1% 0.9%
c/o Vital Signs, Inc. Class B Common Stock 4,366 0.4%
20 Campus Road
Totowa, New Jersey 07512
Ultramed, Inc.(8) Class B Common Stock 234,544 20.0% 13.8%
c/o Frank Joworisak
EchoCath, Inc.
P.O. Box 7224
Princeton, New Jersey 08543
David Vilkomerson(9)(13) Class A Common Stock 190,000 8.1% 4.8%
c/o EchoCath, Inc. Class B Common Stock 44,068 3.8%
P.O. Box 7224
Princeton, New Jersey 08543
Frank DeBernardis(10) Class A Common Stock 116,000 4.9% 4.0%
c/o EchoCath, Inc. Class B Common Stock 44,362 3.8%
P.O. Box 7224
Princeton, New Jersey 08543
Terence D. Wall(5) Class A Common Stock 50,000 2.1% 8.8%
c/o Vital Signs, Inc. Class B Common Stock 139,607 11.9%
20 Campus Road
Totowa, New Jersey 07512
Vital Signs, Inc.(6) Class B Common Stock 311,953 26.6% 18.4%
20 Campus Road
Totowa, New Jersey 07512
Medtronic, Inc.(4) Class A Common Stock 363,636 15.5% 4.3%
7000 Central Ave. NE
Minneapolis, MN 55482
Irwin M. Rosenthal(11) Class A Common Stock 83,334 3.6% 5.6%
c/o Irwin Rosenthal Class B Common Stock 78,750 6.7%
885 Third Avenue
21st Floor
New York, New York 10022
Daniel M. Mulvena(12) Class A Common Stock 124,000 5.3% 1.5%
6 Fuller Lane
Marblehead, Mass. 01945
Bradley Resources Corporation Class B Common Stock 95,810 8.2% 5.7%
107 John Street
Southport, Ct. 06490
EP MedSystems, Inc. Series B Cumulative 280,000 100.0% 3.3%
58 Route 46 West Convertible Preferred
Budd Lake, New Jersey 07828 Stock
All officers and directors as a Class A Common Stock 559,334 23.8% 16.7%
group (6 persons)(14) Class B Common Stock 171,460 14.6%
</TABLE>
38
<PAGE>
<PAGE>
- --------
* Denotes less than 1%.
(1) Unless otherwise set forth herein, all shares set forth are shares of the
Company's Class B Common Stock. The Class A Common Stock has one vote per
share and the Class B Common Stock has five votes per share. All shares are
beneficially owned and sole voting and investment power is held by the
persons named, except as otherwise noted.
(2) Certain holders have agreed that up to a portion of his or its shares of
the Class B Common Stock are subject to transfer to the Company for no
consideration upon the failure of certain conditions to occur by certain
dates. So long as such shares are subject to such conditions, the holder
may vote but not dispose of such shares.
(3) Does not include shares of Class A Common Stock underlying options not
exercisable within 60 days following December 4, 1998.
(4) Represents shares of Class A Common Stock held by Medtronic Asset
Management, Inc., a Minnesota corporation and a wholly-owned subsidiary of
Medtronic through which Medtronic holds certain investments. The amount of
shares beneficially owned by Medtronic is based upon a Schedule 13D filed
by Medtronic and Medtronic Asset Management, Inc. on November 10, 1997.
(5) Mr. Wall is a former director of the Company. Mr. Wall is currently an
officer, a director and a principal stockholder of Vital Signs and an
officer and director of Cathtech Corp., a privately-held corporation and
wholly-owned subsidiary of Vital Signs ("Cathtech"). Such shares include
139,607 shares of Class B Common Stock held directly by Mr. Wall, as
reported in a Schedule 13G filed by Mr. Wall on February 14, 1997, and an
option to purchase 50,000 shares of Class A Common Stock, which option is
exercisable within 60 days of December 4, 1998. These shares also include
the 311,953 shares of Class B Common Stock owned by Cathtech.
(6) Cathtech is the beneficial owner of approximately 13% of the Common Stock
of Ultramed. Vital Signs may be deemed to be a beneficial owner of the
311,953 shares of Class B Common Stock owned by Cathtech. The amount of
shares beneficially owned by Cathtech is based upon a Schedule 13G filed by
Cathtech and Vital Signs on February 14, 1997
(7) Mr. Dimun is an officer and a director of Vital Signs and Cathtech. These
shares do not include the 311,953 shares of Class B Common Stock owned by
Cathtech, as to which Mr. Dimun disclaims beneficial ownership, since Mr.
Dimun is not a principal stockholder of Vital Signs. These shares include
an option to purchase 50,000 shares of Class A Common Stock, which option
is exercisable within 60 days following December 4, 1998.
(8) All of the shares have been pledged to Vital Signs as collateral for a loan
and accounts payable, respectively. The pledgees disclaim beneficial
ownership of such shares. The amount of shares beneficially owned by
Ultramed is based upon a Schedule 13G filed by Ultramed on February 14,
1997.
(9) Includes (i) options granted by Ultramed to Dr. Vilkomerson to purchase
from Ultramed 7,526 shares of Class B Common Stock, which options are
exercisable within 60 days following December 4, 1998, and (ii) an option
granted by the Company to Dr. Vilkomerson to purchase 90,000 shares of
Class A Common Stock, which option is exercisable within 60 days following
December 4, 1998. Excludes (i) options granted by Ultramed to Dr.
Vilkomerson to purchase from Ultramed 1,882 shares of Class B Common Stock
of the Company, which options are not exercisable within 60 days following
December 4, 1998, and (ii) 234,544 shares of Class B Common Stock owned by
Ultramed (of which he is an officer, director and approximately 13%
stockholder), as to which Dr. Vilkomerson disclaims beneficial ownership.
Also excludes an option to purchase 150,000 shares of Class A Common Stock,
which option vested as to 50,000 shares on April 29, 1998, and vests as to
50,000 on April 29, 1999, and as to 50,000 shares on April 29, 2000.
(10) Includes options granted by the Company to Mr. DeBernardis to purchase
116,000 shares of Class A Common Stock, which options are exercisable
within 60 days following December 4, 1998. Excludes (i) 10,006 shares of
Class B Common Stock held in a trust for the benefit of Mr. DeBernardis'
children, as to which Mr. DeBernardis disclaims beneficial ownership and
(ii) options to purchase 8,000 shares of Class A Common Stock which are not
yet vested. Also excludes an option to purchase 150,000 shares of Class A
Common Stock, which option vests as to 50,000 shares on April 29, 1998, as
to 50,000 shares on April 29, 1999, April 29, 1999, and as to 50,000 shares
on April 29, 2000.
(11) Such shares include 16,667 shares of Class A Common Stock, and an option to
purchase 16,667 shares of Class A Common Stock, issued to Mr. Rosenthal in
connection with the Alliance Agreement. The option to purchase 16,667
shares of Class A Common Stock is exercisable within 60 days following
December 4, 1998. These shares also include an option to purchase 50,000
shares of Class A Common Stock, which option is exercisable within 60 days
following December 4, 1998.
(12) Includes options granted by the Company to Mr. Mulvena to purchase 70,000
shares of Class A Common Stock, which options are exercisable within 60
days following December 4, 1998. These shares also include an option to
purchase 50,000 shares of Class A Common Stock, which option is exercisable
within 60 days following December 4, 1998.
(13) Includes 100,000 shares of Class A Common Stock and 7,526 shares of Class B
Common Stock issuable upon exercise of options exercisable within 60 days
following December 4, 1997. Excludes (i) 1,882 shares of Class B Common
Stock underlying options that are not exercisable within 60 days following
December 4, 1998 and (ii) options to purchase 104,000 shares of Class A
Common Stock which are not yet vested.
39
<PAGE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since October 1, 1992, Vital Signs has provided certain management services
to the Company and incurred certain out-of-pocket expenses on behalf of the
Company. In January 1996, the Company paid Vital Signs approximately $82,000 for
such services and costs incurred. Management believes that the fees incurred by
the Company did not exceed fees that would have been charged by unrelated
parties for similar services. Vital Signs provided legal services to the Company
for a portion of the fiscal year ended August 31, 1998.
In September 1992, the Company sold 95,400 shares of Class B Common Stock
of the Company to Eli Lilly for $2,250,000. The investment was part of a
strategic alliance between the Company and HRT, pursuant to which HRT and the
Company entered into the HRT Agreement. In August 1995, Eli Lilly transferred
its Class B Common Stock to Guidant Corporation. In January 1996, the Company
entered into an agreement to repurchase its rights under the HRT Agreement from
Guidant Corporation for $575,000. Of such amount, $75,000 was paid by Alliance.
Pursuant to an agreement, dated July 7, 1995, between Alliance and the
Company the Alliance Agreement, Alliance satisfied a bank loan of the Company in
the principal amount of $750,000 and in exchange the Company agreed to repay
Alliance if the Company receives at least $23,040,000 in gross proceeds from the
exercise of the Class B Warrants. In November 1995, Alliance loaned the Company
$100,000, which loan bore interest at a rate of 9% per annum and was repaid in
January 1996. In January 1996, Alliance agreed to arrange for the payment of
$750,000 by certain of the Company's existing shareholders in connection with
the Company's repurchase of rights under the HRT Agreement. A portion of such
payment was made by Alliance.
As of October 30, 1997, the Company amended certain provisions of the
Alliance Agreement. Under the terms of the Alliance Agreement, the Company had
agreed, among other things, to pay $750,000 to Alliance upon the receipt by the
Company of $23,040,000 in proceeds from the exercise of the Company's
outstanding Class B Warrants. The $750,000 Contingent Payment is reflected on
the Company's balance sheet as a capital contribution subject to repayment.
Under the terms of the Amendment to the Alliance Agreement, Alliance has agreed
to release and discharge the Company from making the Contingent Payment and the
Company has agreed to issue to Alliance (i) 50,000 shares of Class A Common
Stock and (ii) a six-year option to purchase 50,000 shares of Class A Common
Stock at an exercise price of $2.00 per share. Upon the closing of the
Amendment, the Contingent Payment was reclassified as equity of the Company.
Irwin M. Rosenthal, a director, and Herbert Moskowitz, a former director of
the Company, are partners of Alliance. Irwin M. Rosenthal is also a partner of
Graham & James LLP, counsel to the Company.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of the
Company.(3)
3.3 By-Laws of the Company.(1)
4.1 Subscription Agreement, dated February 27, 1997, by and between the
Company and EP MedSystems.(2)
4.2 Subscription Agreement, dated October 29, 1997, by and between the Company
and Medtronic Asset Management, Inc.(4)
10.1 1995 Stock Option Plan of the Company.**(1)
10.2 Form of Indemnification Agreement to be entered into between the Company
and each officer and Director of the Company.(1)
10.3 Employment Agreement, dated as of June 11, 1991 between the Company and
Frank DeBernardis, as extended and amended.**(1)
10.4 Employment Agreement, dated as of June 11, 1991 between the Company and
David Vilkomerson, as extended and amended.**(1)
10.5 Letter Agreement, dated as of May 12, 1995, between the Company and Daniel
Mulvena.**(1)
10.6 Form of Medical Advisory Agreement between the Company and Dr. Kurt
Isselbacher.**(1)
40
<PAGE>
<PAGE>
10.7 Form of Consulting Agreement between the Company and Daniel Mulvena.**(1)
10.8 Patent Assignment dated as of October 30, 1992 from Catheter Technology to
the EchoCath, Ltd.(1)
10.9 Patent Assignment dated as of October 30, 1992 from EchoCath, Ltd. to the
Company.(1)
10.10 Patent Assignment dated as of November 11, 1992 from EchoCath, Ltd. to the
Company.(1)
10.11 Development and Licensing Agreement, by and between Heart Rhythm
Technologies, Inc. and the Company, effective as of September 21, 1992.(1)
10.12 Stock Purchase Agreement effective as of September 21, 1992 by and between
the Company and Eli Lilly and Company.(1)
10.13 Development, Supply and License Agreement dated September 24, 1993 by and
between the Company and Bard Radiology, C.R. Bard, Inc., as amended.(1)
10.14 Lease Agreement, dated as of November 22, 1991, by and between BGS Realty
and EchoCath, Ltd.(1)
10.15 Agreement, dated as of July 7, 1995 by and between the Company and
Alliance.(1)
10.16 Agreement, dated as of July 14, 1995 by and between the Company and
Alliance.(1)
10.17 Agreement, dated as of November 30, 1995, among the Company, Guidant
Corporation and Heart Rhythm Technologies, Inc.(1)
10.18 Agreement, dated as of January 3, 1996, among the Company, Guidant
Corporation and Heart Rhythm Technologies, Inc.(1)
10.19 Form of Warrant Agreement among the Company, the D.H. Blair and American
Stock Transfer & Trust Company, including forms of Class A and Class B
Warrant Certificates.(1)
10.20 Form of Stock Restriction Agreement among the Company, certain holders of
the Class B Common Stock and D.H. Blair Investment Banking Corp.(1)
10.21 Second Amendment to Lease effective April 1, 1996 by and between the
Company and BGS Realty.(5)
10.22 Distribution Agreement, effective as of April 1, 1997, by and between the
Company and Medison.(6)
10.23 License and Development Agreement, dated as of October 29, 1997, by and
between the Company and Medtronic.(7)
10.24 Agreement, dated October 30, 1997, by and between the Company and
Alliance.(8)
10.25 Employment Agreement, dated as of March 10, 1998, between the Company and
David Vilkomerson.*(9)
24 Power of Attorney (included in signature page hereto).*
27 Financial Data Schedule.*
- -------------
* Filed herewith.
** A management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Registrant's Registration Statement on form
SB-2 (Reg. No. 33-97688) which was declared effective by the Securities and
Exchange Commission on January 17, 1996.
(2) Incorporated by reference to Exhibit 3 of the Company's Form 10-QSB for the
quarter ended February 28, 1997.
(3) Incorporated by reference to Exhibit 4 of the Company's Form 10-QSB for the
quarter ended February 28, 1997.
(4) Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K dated
October 31, 1997.
(5) Incorporated by reference to Exhibit 10.21 of the Company's Form 10-KSB for
the fiscal year ended August 31, 1996.
(6) Incorporated by reference to Exhibit 10.22 of the Company's Form 10-QSB for
the quarter ended May 31, 1997.
(7) Incorporated by reference to Exhibit 99.3 of the Company's Form 8-K dated
October 31, 1997.
(8) Incorporated by reference to Exhibit 99.4 of the Company's Form 8-K dated
October 31, 1997.
(9) Incorporated by reference to Exhibit 10.25 of the Company's Form 10-QSB for
the quarter ended February 28, 1998.
41
<PAGE>
<PAGE>
(b) Reports on Form 8-K
During the quarter ended August 31, 1998, no reports on Form 8-K were filed
by the Company.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ECHOCATH, INC.
By: /s/ Frank A. DeBernardis
-------------------------------------------
Frank A. DeBernardis, Chief Executive
Officer and President (principal executive
officer and principal financial and
accounting officer)
December 14, 1998
42
<PAGE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Frank A. DeBernardis and David
Vilkomerson, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report and all documents relating thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Exchange Act, this Report has
been signed by the following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frank A.DeBernardis Chief Executive Officer, December 14, 1998
- ---------------------------- President and Director
Frank A. DeBernardis (principal executive offider
and principal financial and
accounting officer)
/s/ David Vilkomerson Executive Vice President and December 14, 1998
- ---------------------------- Director
David Vilkomerson
/s/ Anthony J. Dimun Treasurer and Director December 14, 1998
- ----------------------------
Anthony J. Dimun
/s/ Irwin M. Rosenthal Secretary and Director December 14, 1998
- ----------------------------
Irwin M. Rosenthal
/s/ Daniel M. Mulvena Chairman of the Board December 14, 1998
- ---------------------------- and Director
Daniel M. Mulvena
</TABLE>
43
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as...........'r'
The trademark symbol shall be expressed as.....................'TM'
The service mark symbol shall be expressed as..................'sm'
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-1-1997
<PERIOD-END> AUG-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 256,234
<SECURITIES> 0
<RECEIVABLES> 4,905
<ALLOWANCES> 0
<INVENTORY> 189,121
<CURRENT-ASSETS> 556,709
<PP&E> 676,959
<DEPRECIATION> 422,779
<TOTAL-ASSETS> 1,112,765
<CURRENT-LIABILITIES> 1,177,429
<BONDS> 0
<COMMON> 11,271,689
0
1,393,889
<OTHER-SE> (12,901,884)
<TOTAL-LIABILITY-AND-EQUITY> 1,112,765
<SALES> 20,985
<TOTAL-REVENUES> 1,075,399
<CGS> 9,357
<TOTAL-COSTS> 9,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,100
<INCOME-PRETAX> (1,780,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,780,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,780,464)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
