<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended May 31, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
Commission File Number : 0-27380
ECHOCATH, INC.
-------------------------------------------------------------------
(Exact Name of Small Business Issuer as specified in its charter)
<TABLE>
<S> <C>
New Jersey 22-3273101
----------------------------------------------- --------------------------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
</TABLE>
P.O. Box 7224, Princeton, NJ 08543
- ---------------------------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number. . .(609) 987-8400
--------------------------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Check whether Issuer (1) has filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
-------- -------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<CAPTION>
CLASS OF COMMON EQUITY OUTSTANDING AT JULY 12, 1999
- ----------------------------------- ----------------------------
<S> <C>
Class A common stock (No Par Value) 2,352,018
Class B common stock (No Par Value) 1,172,018
</TABLE>
Transitional Small Business Disclosure Format (check one)
YES NO X
-------- -------
<PAGE>
PART 1: FINANCIAL INFORMATION
PART 2: OTHER INFORMATION
ECHOCATH, INC.
INDEX
<TABLE>
<S> <C>
Item 1: Financial Statements Page
----
Balance Sheets,
August 31, 1998 and May 31, 1999 (Unaudited) 3
Statements of Operations for the three months ended
May 31, 1998 (Unaudited), and May 31, 1999 (Unaudited) 4
Statements of Operations for the nine months ended
May 31, 1998 (Unaudited), and May 31, 1999 (Unaudited) 5
Statements of Cash Flows for the nine months ended
May 31, 1998 (Unaudited), and May 31, 1999 (Unaudited) 6
Notes to Financial Statements 7 - 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operation 9 - 11
Signatures 12
</TABLE>
2
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
ECHOCATH, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1999
--------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 256,234 $ 209,240
Accounts receivable 4,905 ------
Inventory 189,121 172,612
Prepaid expenses 106,449 32,967
------- ------
Total current assets 556,709 414,819
Furniture, equipment and leasehold improvements, net 254,180 206,288
Intangible assets, net 282,145 277,771
Debt issuance cost ------ 173,000
Other assets 19,731 19,322
------- ---------
$1,112,765 $1,091,000
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 540,000 $ 1,065,000
Accounts payable 71,061 101,393
Deferred income ------ 200,000
Accrued expenses 550,299 722,080
Obligations under capital leases, less current portion 16,069 17,863
--------- ----------
Total current liabilities 1,177,429 2,106,336
6.5% Convertible Notes ------ 558,094
Obligations under capital leases 22,398 21,799
Other liabilities 149,244 147,850
---------- ---------
Total liabilities 1,349,071 2,834,079
---------- ---------
Stockholders' deficit:
Preferred stock, no par value, 5,000,000 shares authorized;
280,000 shares of Series B cumulative convertible issued and
outstanding, senior in liquidation to Class A and Class B common
stock, (liquidation value $1,400,000) 1,393,889 1,393,889
Class A common stock, no par value, 18,500,000 shares authorized;
2,352,078 issued and outstanding as of May 31, 1999 and
2,332,078 as of August 31, 1998 7,248,219 7,421,834
Class B common stock, no par value, 1,500,000 shares authorized;
1,172,018 shares issued and outstanding, 327,982 shares retired and
transferred to Class A shares; convertible into one share of Class A
common stock 4,023,470 4,023,470
Accumulated deficit (12,901,884) (14,582,072)
------------ ------------
Total stockholders' deficit (236,306) (1,742,879)
----------- ------------
$ 1,112,765 $1,091,200
=========== ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
ECHOCATH, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1998 AND
MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
REVENUE:
License fees $ 254,414 $ 110,000
Product sales 16,080 1,438
----------- ----------
Total revenue 270,494 111,438
Cost of sales 10,696 404
----------- ----------
Gross profit 259,798 111,034
Operating expenses:
Research & Development 242,064 329,130
Marketing and G&A 324,694 241,564
----------- ----------
Total operating expenses 566,758 570,694
----------- ----------
Loss from operations (306,960) (459,660)
Net interest income (expense) (3,255) (24,669)
----------- ----------
Net loss (310,215) (484,329)
----------- ----------
Preferred dividends 18,900 18,900
----------- ----------
Net loss to common stockholders $ (329,115) $ (503,229)
=========== ==========
Basic and diluted net (loss) per share $ (0.12) $ (0.19)
Weighted average shares outstanding 2,690,636 2,691,000
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
ECHOCATH, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1998 AND
MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
REVENUE:
License fees $ 1,054,414 $ 275,000
Product sales 16,080 25,198
----------- -----------
Total revenue 1,070,494 300,198
Cost of sales 10,696 15,703
----------- -----------
Gross profit 1,059,798 284,495
Operating expenses:
Research & Development 938,563 1,047,950
Marketing and G&A 1,204,125 797,816
----------- -----------
Total operating expenses 2,142,688 1,845,766
----------- -----------
Loss from operations (1,082,890) (1,561,271)
Net interest income (expense) (35) (62,216)
----------- -----------
Net loss (1,082,925) (1,623,487)
----------- -----------
Preferred dividends 56,700 56,700
----------- -----------
Net loss to common stockholders $(1,139,625) $(1,680,187)
=========== ===========
Basic and diluted earnings per share $ (0.44) $ (0.62)
Weighted average shares of Common Stock 2,602,840 2,691,000
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
ECHOCATH, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MAY 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss to common stockholders $(1,082,925) $(1,623,487)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 88,929 82,705
Deferred income ------ 200,000
Change in operating assets & liabilities:
(Increase) decrease in trade accounts receivable (69,120) 4,905
Decrease in inventory 8,900 16,509
Decrease in prepaid expenses and other current assets 61,059 58,482
(Increase) decrease in deferred financing costs (15,000) 15,000
(Increase) decrease in other assets (570) 409
(Decrease) increase in accounts payable (9,090) 62,437
Increase in accrued expenses 14,304 146,377
Increase (decrease) in other liabilities 46,294 (8,094)
--------- -----------
Net cash used in operating activities (957,219) (1,044,757)
--------- -----------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (28,646) (19,393)
Purchase of intangible assets (31,215) (11,047)
--------- -----------
Net cash used in investing activities (59,861) (30,440)
---------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (10,612) 1,194
Proceeds from employee stock purchase plan 223 615
Issuance of Class A common stock 1,049,000 ------
Class B preferred dividends (56,700) (56,700)
Proceeds from IPA notes --- 525,000
Net proceeds from 6.5% convertible notes --- 558,094
--------- ---------
Net cash provided by financing activities 981,911 1,028,203
--------- ---------
Net decrease in cash & cash equivalents (35,169) (46,994)
Cash and cash equivalents, beginning of year 788,933 256,234
--------- ---------
Cash and cash equivalents, end of period $ 753,764 $ 209,240
========= =========
Supplemental disclosure of cash flow information:
Interest expense $ 44,424 $ 66,394
--------- ---------
Supplemental disclosure of noncash information:
Equipment acquired under capital lease $ 8,190 $ 13,337
========= =========
Debt issuance cost of 6.5% converted notes $ --- $ 173,000
========= =========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
ECHOCATH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A: GENERAL AND BUSINESS
The summary financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the management of EchoCath, Inc. (the "Company") believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these summary financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's Form 10-KSB for the fiscal year ended August 31, 1998.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position,
results of operation and cash flows at May 31, 1998 and 1999 have been made.
NOTE B:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1999
--------------- ------------
<S> <C> <C>
Raw Materials $ 96,659 $ 96,230
Work in Process 15,605 11,598
Finished Goods 76,857 64,784
------- --------
$ 189,121 $ 172,612
======= ========
</TABLE>
NOTE C:
SALE OF TAX BENEFITS
As of February 1, 1999, The Company sold $220,000 of New Jersey tax benefits to
a related party for $165,000 under the New Jersey Technology Business Tax
Certificate Program. The transaction is subject to final regulations and the
issuance of the Tax Certificate. As a result, the $165,000 is reflected as
deferred income.
NOTE D:
LICENSE AGREEMENTS
On December 30, 1996 the Company announced that it entered into an exclusive
license agreement with Medtronic, Inc. for the licensing of EchoMark(R) and
ColorMark(R) proprietary technologies for certain medical procedures. The total
payments to the Company under the December 1996 Medtronic Agreement have been
$265,000, including a payment of $65,000 pursuant to a termination agreement in
February 1999.
The Company entered into an exclusive license agreement dated February 27, 1997
with EP MedSystems, Inc. (EP MedSystems). The agreement provides that certain
products can be incorporated into the EP MedSystems' diagnostic catheter line.
The Company may potentially receive development milestone payments of up to
$150,000. Milestones include the sale of a limited quantity of product. When
products are commercially available the Company will receive royalties under the
terms of the agreement. The Company has received no milestone payment but it has
earned minimum royalties of $30,000 per quarter starting with calendar quarter
beginning January 1999 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 May 31,
1999, $50,000 of royalties due have been used to reduce accrued dividends. As of
May 31, 1999 the Company has $120,100 of accrued preferred stock dividends,
which is included as a component of accrued expenses on the accompanying
Balance Sheet.
7
<PAGE>
On October 30, 1997, the Company announced it had reached a second definitive
licensing and development agreement with Medtronic, Inc. Pursuant to the terms
of the October 1997 Medtronic Agreement, the Company granted Medtronic (i) a
worldwide exclusive license to make, have made, use, sell and have sold products
utilizing the Company's ColorMark and EchoMark technologies in guiding devices
during cardiothoracic surgical procedures: and (ii) the exclusive right and
option at any time within six (6) months of the effective date of the October
1997 Medtronic Agreement, to acquire a worldwide exclusive license to the
Company's EchoEye and EchoFlow technologies for use in guiding device during
cardiothoracic surgical procedures. This option expired on December 31, 1998
after the granting of several extensions after the initial six months.
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, which amount
included, (i) $800,000 paid to the Company in upfront licensing fees and (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. Additionally,
the Company may receive minimum annual royalties from Medtronic upon product
commercialization. The Company has received $250,000 payment for the completion
of "Concept Design Validation" for the EchoFlow instrument under this agreement.
The Company entered into an option agreement on January 11, 1999 with another
company for the licensing of certain technology. The term of the option was
three months and the consideration received for the option was $100,000. The
Company extended the option to June 11, 1999 for additional consideration of
$60,000, but did not renew the option beyond June 11, 1999. The option has now
expired.
The Company entered into an option agreement on April 16, 1999 with another
company for the licensing of certain technology. The term of the option is three
months, and the consideration received for the option was $35,000 which has been
deferred. The option may be extended at the election of the holder for up to
three one-month periods upon payment to the Company of $10,000 per month.
NOTE E :
EARNINGS PER SHARE
Basic and dilutive loss per share is based on net loss for the relevant period,
adjusted for cumulative Series B preferred stock dividends of $56,700 and
$18,900 for the nine and three month periods ended May 31,1999 and 1998,
respectively, divided by the weighted average number of shares outstanding
during the period. For purposes of the diluted loss per share calculation, the
exercise or conversion of all potential common shares is not included since
their effects would be antidilutive for all periods presented.
NOTE F :
CONVERTIBLE DEBT
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 which are included in notes
payable at May 31, 1999. 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 6.5% interest and
mature six months from the date of issuance and will be extended to December 31,
1999 in the event that the placement agents for the offering described in Note G
do not raise at least $1,500,000, or upon receipt of $1,500,000 of private
placement proceeds in such offering, the debentures will convert into the same
convertible notes as in such private placement. The debentures are convertible
into shares of the Class A common stock at the then current market price, but
not 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. In the event that at least $1,500,000 of the proposed financing is
complete, IPA will convert its existing $525,000 notes into the same convertible
debt offering described in Note G.
8
<PAGE>
NOTE G:
PRIVATE PLACEMENT FINANCING
On May 11 and May 14, 1999 and on July 8 and July 9, 1999, the Company conducted
closings on an aggregate of $725,000 worth of securities as of May 31, 1999 the
Company booked $650,000 less closing costs of $91,906, a portion of the
Company's private placement offering to accredited investors. The offering is
for a minimum of 16 units and a maximum of 80 units, each unit consisting of a 6
1/2% convertible promissory note in the principal amount of $25,000 and a
three-year warrant to purchase 33,333 shares of Class A common stock of the
Company. In connection with the warrants issued, the Company recorded debt
issuance cost totaling $173,000. The warrants were valued at 20[c] per share
using the Black-Scholes model. The discount will be amortized over the life of
the debt. Beginning 90 days after the closing of the Offering, the notes are
convertible into shares of Class A Common Stock at any time at the option of
the holder, and at the option of the Company beginning one year after the
closing of the private placement. The notes are convertible at the lesser of
$0.75 per share or the market price at the time of conversion (but no less
than $0.25 per share). The Company has agreed to use its best efforts to
register the resale of the stock underlying the securities sold in the private
placement.
NOTE H :
COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of financial Accounting
Standard No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of SFAS 130 had no impact on the Company's results
of operations for the three and nine months ended May 31, 1998 and 1999. The net
loss of $310,215 and $484,329 recorded for the three months ended May 31, 1998
and 1999 and the net loss of $1,082,925 and $1,623,487 recorded for the nine
months ended May 31, 1998 and 1999, respectively, is equal to the comprehensive
loss for those periods.
NOTE I :
NEED FOR ADDITIONAL FINANCING
At May 31, 1999 the Company had a working capital deficiency of $1,691,517. The
Company is in immediate need of additional financing and does not expect its
existing cash, together with funds anticipated to be generated through
operations, to be sufficient to meet the Company's cash requirements beyond July
1999.
On May 11 and May 14, 1999 and on July 8 and July 9, 1999, the Company conducted
closings on an aggregate of $725,000 worth of securities, a portion of the
Company's private placement offering to accredited investors. The offering is
for a minimum of 16 units and a maximum of 80 units, each unit consisting of a 6
1/2% convertible promissory note in the principal amount of $25,000 and a
three-year warrant to purchase 33,333 shares of Class A common stock of the
Company. Beginning 90 days after the closing of the Offering, the notes are
convertible into shares of Class A Common Stock at any time at the option of the
holder, and at the option of the Company beginning one year after the closing of
the private placement. The notes are convertible at the lesser of $0.75 per
share or the market price at the time of conversion (but no less than $0.25 per
share). The Company has agreed to use its best efforts to register the resale of
the stock underlying the securities sold in the private placement.
Although the Company is presently seeking additional financing, there can be no
assurances that such financing will be obtained within the necessary time frame
on terms acceptable to the Company, or at all. Failure to obtain additional
financing would have a material adverse effect on the Company and could require
the Company to severely limit or cease its operations.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Certain statements in this Report on Form 10-QSB ("Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and elsewhere constitute "forward-looking statements" within the
meaning of Private Securities Litigation Reform Act of 1995, including, without
limitation, statements regarding future cash requirements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: limited
commercial operations; no assurances of success; need for additional financing;
uncertainty of market acceptance; reliance on collaborative agreements;
competition and rapid technological change; failure to receive or delays in
receiving regulatory approval; limited manufacturing and assembly experience;
limited marketing and sales experience; dependence upon, and need for, key
personnel; uncertain protection of patent and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; potential adverse impact of FDA and other government regulations;
limitations on third party reimbursement; potential adverse impact of
anti-remuneration laws; potential product liability; risk of loss in lawsuit;
risk of low-priced stocks; and other factors referenced in this Report and
described in the Company's Report on Form 10-KSB for the fiscal year ended
August 31, 1998. 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," "estimates,"
"projects," "believes," "expects" and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Nine Months Ended May 31, 1999 and 1998
REVENUES:
The Company had revenues of $300,198 which included $275,000 of license fees and
$25,198 of product sales for the nine months ended May 31, 1999 as compared to
license fees of $1,054,414 and product sales of $16,080 for the nine months
ended May 31, 1998. The nine months ended May 31, 1998 included the payment of
$1,054,414 of license fees paid by Medtronic, Inc. described in Note D.
The Company had cost of sales of $15,703 for the nine months ended May 31, 1999
as compared to $10,696 for the nine months ended May 31, 1998.
RESEARCH AND DEVELOPMENT:
Research and Development expenses increased $109,387 or 11.7% from $938,563 to
$1,047,950 during the nine months ended May 31, 1999 as compared to the nine
months ended May 31, 1998, because of an increased allocation of facilities
space and payroll, which increase was partially offset by a decrease related to
expenditures made to upgrade the Company's computer system during the nine
months ended May 31, 1998.
10
<PAGE>
MARKETING, GENERAL AND ADMINISTRATIVE:
Marketing, General and Administrative expenses decreased $406,409 or 33.8% from
$1,204,125 during the nine months ended May 31, 1998 to $797,816 for the nine
months ended May 31, 1999. The nine months ended May 31, 1998 included legal
expenses for the EP MedSystems litigation, satisfying listing requirements on
the NASDAQ Small Cap Market, a license agreement with Medtronic, and an
agreement with Alliance Partners to reclassify a contingent liability to
permanent capital. The Company also recognized $49,000 of compensation
associated with the issuance of Class A common stock to Alliance Partners. The
decreased allocations of certain payroll and facility expenses in the nine
months ended May 31, 1999 contributed to the decline in Marketing, General and
Administrative expenses.
RESULTS OF OPERATIONS
Three Months Ended May 31, 1999 and 1998
REVENUES:
The Company had revenues of $111,438 which included $1,438 of product sales and
$110,000 of license fees for the three months ended May 31, 1999 as compared
with revenues of $270,494 which included $16,080 of product sales and $254,414
in license fees for the three months ended May 31, 1998. The three months ended
May 31, 1998 included the payment of $254,414 of license fees paid by Medtronic,
Inc. described in Note D.
RESEARCH AND DEVELOPMENT:
Research and development expenses increased $87,066 or 36.0% from $242,063
during the three months ended May 31, 1998 to $329,130 during the three months
ended May 31, 1999 because of an increased allocation of facilities space and
payroll, effective as of May 31, 1999. In addition, the three months ended
May 31, 1998 included reimbursement of certain costs that reduced expenses
for the period.
MARKETING, GENERAL AND ADMINISTRATIVE:
Marketing, General and Administrative expenses decreased $83,130 or 25.6% from
$324,694 to $241,564 during the three months ended May 31, 1999 because of a
decreased allocation of certain payroll and facility expenses in the three
months ended May 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
NEED FOR ADDITIONAL FINANCING
At May 31, 1999 the Company had a working capital deficiency of $1,691,517. The
Company is in immediate need of additional financing and does not expect its
existing cash, together with funds anticipated to be generated through
operations, to be sufficient to meet the Company's cash requirements beyond July
1999.
On May 11 and May 14, 1999 and on July 8 and July 9, 1999, the Company conducted
closings on an aggregate of $725,000 worth of securities, a portion of the
Company's private placement offering to accredited investors. The offering is
for a minimum of 16 units and a maximum of 80 units, each unit consisting of a 6
1/2% convertible promissory note in the principal amount of $25,000 and a
three-year warrant to purchase 33,333 shares of Class A common stock of the
Company. Beginning 90 days after the closing of the Offering, the notes are
convertible into shares of Class A Common Stock at any time at the option of the
holder, and at the option of the Company beginning one year after the closing of
the private placement. The notes are convertible at the lesser of $0.75 per
share or the market price at the time of conversion (but no less than $0.25 per
share). The Company has agreed to use its best efforts to register the resale of
the stock underlying the securities sold in the private placement.
11
<PAGE>
Although the Company is presently seeking additional financing, there can be no
assurances that such financing will be obtained within the necessary time frame
on terms acceptable to the Company, or at all. Failure to obtain additional
financing would have a material adverse effect on the Company and could require
the Company to severely limit or cease its operations.
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 2000 could result in errors or system 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 has assurance 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 has queried 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 completed its assessment, and
currently believes that costs of addressing this issue will not have material
adverse impact on the Company's financial position. However, if 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.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings - None
Item 2: Changes in Securities and Use of Proceeds - None
Item 3: Defaults Upon Senior Securities - None
Item 4: Submission of Matters to a Vote of Security Holders - None
Item 5: Other Information - None
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
I 10.26 Form of 6 1/2% Convertible Promissory Note
II 10.27 Form of Warrant to Purchase Shares of Class A Common Stock
III 27 Financial Data Schedule
b) Reports on Form 8-K - None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: July 14, 1999
EchoCath, Inc.
----------------------------
(Registrant)
By: /s/ Frank DeBernardis
----------------------------
Frank DeBernardis
President, Chief Executive Officer,
Principal Financial and Accounting Officer
13
STATEMENT OF DIFFERENCES
------------------------
The cent sign shall be expressed as....................................... [c]
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE
UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO
THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED,
ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
_____________, 1999 $[25,000]
=========
EchoCath, Inc.
4326 US Route 1
Monmouth Junction, New Jersey 08852
6 1/2% CONVERTIBLE PROMISSORY NOTE
EchoCath, Inc., a New Jersey corporation (the "Company"), for value
received, promises to pay to ______________________ or registered assigns (each,
a "Holder"), the principal amount of [Twenty-Five Thousand dollars ($25,000)],
on ____________, 2002 [three years from the final closing date] (the "Maturity
Date") or sooner if made pursuant to the terms hereof, and to pay interest on
the unpaid principal balance at the rate of 6.5% per year. Payment of principal
and accrued and unpaid interest shall be made at the offices of the Company in
Princeton, New Jersey, in lawful money of the United States of America, and
shall be mailed to the registered owner or owners hereof at the address
appearing on the books of the Company. This Note is issued by the Company in
connection with the Company's placement of units with accredited investors, each
full unit consisting of one 6 1/2% convertible promissory note and a warrant to
purchase 33,333 shares of the Class A common stock, no par value, of the Company
(the "Common Stock").
1. Conversion. (a) The Holder or Holders of this Note may at any time prior
to the Maturity Date, convert the principal amount hereof (and accrued and
unpaid interest) into shares (the "Shares") of Common Stock, at the conversion
rate of one Share of Common Stock for each $0.75 of principal and accrued and
unpaid interest on this Note. To convert this Note, the Holder or Holders hereof
must surrender the same at the office of the Company, together with a written
instrument of transfer in a form satisfactory to the Company, properly completed
and executed and with a written notice of conversion.
(b) The Company, on the Maturity Date, may, in its sole discretion, require
the Holder to convert the principal amount hereof (and accrued and unpaid
interest) into Shares of the Common Stock, at a conversion rate equal to the
lesser of (i) $0.75 per Share or (ii) the market price (as defined in paragraph
1(e) hereof) immediately prior to the Maturity Date, but no less than $0.25 per
Share.
<PAGE>
(c) The Company, following ________________, 2000 [the first anniversary of
the final closing] but prior to the Maturity Date, by giving 30 day's written
notice, may require the Holder to convert the principal amount hereof (and
accrued and unpaid interest) into Shares of Common Stock at a conversion rate
equal to the lesser of (i) $0.75 per Share or (ii) the market price (as defined
in paragraph 1(e) hereof) immediately prior to the Company's notice of such
election, but no less than $0.25 per Share.
(d) The principal and accrued and unpaid interest of this Note shall
automatically be converted into Shares of Common Stock at a conversion rate
equal to $0.75 per Share in the event that the Company receives notice from
Nasdaq that the Common Stock shall be listed on The Nasdaq SmallCap Market
pending conversion of the Notes into Shares of Common Stock.
(e) The term "market price" for purposes of determining the price of a
Share of the Common Stock under this Note, shall mean the average of the last
sales prices of the Common Stock in the over the counter market, for each of the
five trading dates prior to the date on which market price is to be determined
(or, for any of such five days where there is no sale price, such day's average
of the bid and asked price).
(f) The Company shall, promptly following the conversion of this Note
pursuant to this paragraph 1, issue and deliver to the Holder certificates for
the appropriate number of securities to which the Holder shall be entitled as
aforesaid.
2. Adjustments to Conversion. (a) If the Company pays to the Holders of the
Common Stock a dividend in Common Stock, the number of Shares of the Common
Stock issuable upon the conversion of this Note (the "Conversion Shares") shall
be proportionally increased, effective at the close of business on the record
date for determination of the Holders of the Common Stock entitled to the
dividend.
(b) In case of any consolidation with or merger of the Company with or into
another corporation (other than a merger or consolidation in which the Company
is the surviving or continuing corporation), or in case of any sale, lease, or
conveyance to another corporation of the property and assets of any nature of
the Company as an entirety or substantially as an entirety, such successor,
leasing, or purchasing corporation, as the case may be, shall (i) execute with
the Holder an agreement providing that the Holder shall have the right
thereafter to receive upon conversion of this Note solely the kind and amount of
shares of stock and other securities, property, cash, or any combination thereof
receivable upon such consolidation, merger, sale, lease, or conveyance by a
holder of the number of shares of Common Stock into which this Note might have
been converted immediately prior to such consolidation, merger, sale, lease, or
conveyance, and (ii) make effective provision in its certificate of
incorporation or otherwise, if necessary, to effect such agreement.
(c) In case of any reclassification or change of the shares of Common Stock
issuable upon conversion of this Note (other than a change in par value or from
a specified par value to no par, or as a result of a subdivision or combination,
but including any change in the shares into two or more classes or series of
shares), or in case of any consolidation or merger of another corporation into
the Company in which the Company is the continuing corporation and in which
there is a reclassification or change (including a change to the right to
receive cash or other
2
<PAGE>
property) of the shares of Common Stock (other than a change in par value, or
from no par value to a specified par value, or as a result of a subdivision or
combination, but including any change in the shares into two or more classes or
series of shares), the Holder shall have the right thereafter to receive upon
conversion of this Note solely the kind and amount of shares of stock and other
securities, property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Common Stock for which this Note might have been converted immediately
prior to such reclassification, change, consolidation, or merger.
(d) Notwithstanding anything to the contrary herein contained, in the event
of a transaction contemplated by paragraph 2(b) in which the surviving,
continuing, successor, or purchasing corporation demands that all outstanding
convertible notes and warrants be extinguished prior to the closing date of the
contemplated transaction, the Company shall give prior notice (the "Merger
Notice") thereof to the Holders advising them of such transaction. The Holders
shall have ten days after the date of the Merger Notice to elect to (i) convert
the Notes in the manner provided herein or (ii) receive from the surviving,
continuing, successor, or purchasing corporation the same consideration
receivable by a holder of the number of shares of Common Stock for which this
Note might have been converted immediately prior to such consolidation, merger,
sale, or purchase reduced by such amount of the consideration as has a market
value equal to the Exercise Price, as determined by the board of directors of
the Company, whose determination shall be conclusive absent manifest error. If
any Holder fails to timely notify the Company of its election, the Holder shall
be deemed for all purposes to have elected the option set forth in (ii) above.
Any amounts receivable by a Holder who has elected the option set forth in (ii)
above shall be payable at the same time as amounts payable to stockholders in
connection with any such transaction.
(e) The above provisions of this paragraph 2 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
3. Fractional Shares. In lieu of issuing any fraction of a Share of Common
Stock upon the conversion of this Note, the Company shall pay to the Holder
hereof for any fraction of a Share of the Common Stock otherwise issuable upon
the conversion, cash equal to the same fraction of the then current per share
market price of the Common Stock, as determined in accordance with paragraph
1(e).
4. Prepayment. The Company may, without penalty or premium, at any time
following __________, 2000 [first anniversary of final closing date] prepay in
whole or in part, the principal amount, plus accrued interest to the date of
prepayment, of this Note, upon 30 days' written notice by certified or
registered mail to the Holder. Such notice shall be mailed to the Holder's
address appearing on the Company's books. The Holder shall have until the last
day of such 30 day period to convert the Note into Common Stock, pursuant to
paragraph 1.
5. Interest. Interest on this Note shall accrue at the rate of 6 1/2% per
year. The Company may pay the interest accruing hereon without penalty or
premium at any time prior to the Maturity Date.
3
<PAGE>
6. Events of Default. If any one or more of the following events shall
occur:
(a) The Company shall fail to pay any amount under this Note when the same
shall become due and payable, whether at maturity or by acceleration or
otherwise; or
(b) (i) the Company shall commence any action (A) under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an
order for relief entered with respect to the Company or its debts; or (B)
seeking appointment of a custodian, receiver or similar official for the Company
or any substantial part of its property; or (ii) any action of a nature referred
to above shall be commenced against the Company and results in an order for
relief or is not dismissed, discharged or fully bonded within 30 days; or (iii)
there shall be commenced against the Company any action seeking attachment,
execution or similar process against any substantial part of the Company's
property, which action is not within 30 days discharged or stayed or fully
bonded; or (iv) the Company shall, by act or omission, indicate its consent to
or acquiescence in any of the foregoing, without regard to the grace periods set
forth above; or (v) the Company shall be unable, or admit in writing inability,
to pay the Company's debts as they become due; or (vi) the Company shaft
transfer or conceal its property with intent, to hinder, delay or defraud any
creditors or to benefit any class of creditors or creditors generally or shall
suffer for 30 days or longer while insolvent any lien on the Company's property
resulting from judicial proceedings; or
(c) the dissolution or other winding up of the Company, then, in such event
and at any time thereafter, if such event shall then be continuing, Holder may,
at its option upon written notice to the Company, declare this Note to be due
and payable, whereupon (or without the necessity for in the case of any event
described in clause (i) or (ii) of subparagraph 6(b) above) the entire balance
of this Note shall forthwith become and be due and payable.
7. Release of Shareholders, Officers and Directors. This Note is the
obligation of the Company only, and no recourse shall be had for the payment of
any principal or interest hereon against any shareholder, officer or director of
the Company, either directly or through the Company, by virtue of any statute
for the enforcement of any assessment of otherwise. The Holder, by the
acceptance hereof, and as part of the consideration for this Note, releases all
such claims and waives all such liabilities against the foregoing persons in
connection with this Note.
8. Company's Representations. The Company represents and warrants to
Holder, to induce it to purchase this Note, that (a) this Note has been duly
authorized and represents a legal, valid and binding obligation of the Company
and (b) the Conversion Shares will, upon issuance in accordance with the terms
of this Note, be legally issued, fully-paid and nonassessable.
9. Securities Laws Matters. This Note and the Conversion Shares are being
issued pursuant to an exemption from the registration provisions of the
Securities Act of 1933, as amended (the "Act"), and neither the Note nor the
Conversion Shares may be sold, assigned or transferred in any manner whatsoever
without an opinion of counsel, satisfactory to the Company, that such sale,
transfer or assignment is not in violation of the registration provisions of the
Act and applicable state securities laws.
4
<PAGE>
10. Subscription Agreement. All Notes of this issue are subject to, and
have the benefit of, the obligations and rights set forth in a Subscription
Agreement between the Company and Holder, of even date herewith, including,
without limitation, registration rights of the Conversion Shares.
11. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York (without reference to its
rules as to conflicts of law).
IN WITNESS WHEREOF, the Company has caused this Note to be signed this ____
day of ____________, 1999.
ECHOCATH, INC.
By:
------------------------------
Name:
Title:
ATTEST:
By:
---------------------------
Name:
Title:
5
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
ECHOCATH, INC.
Warrants for the Purchase of Shares of Class A Common Stock,
no par value per share
These Warrants Expire on ______________, 2002
No. ____ [33,333] Warrants
THIS CERTIFIES that, for value received, ________________________, with an
address at _________________________________________________________ (including
any permitted transferee, the "Holder"), is the registered holder of the number
of warrants set forth above, each of which represents the right to purchase one
fully paid and nonassessable share of the Class A common stock, no par value
("Common Stock"), of EchoCath, Inc., a New Jersey corporation (the "Company"),
at an initial exercise price equal to $0.75 (Seventy-Five cents) per share
(subject to adjustment as provided herein) (the "Exercise Price") upon the terms
and conditions set forth herein, at any time or from time to time before 5:00
P.M. on _________________, 2002, New York time (the "Exercise Period").
This warrant certificate is one of a series of warrant certificates
evidencing warrants held by the Holder (collectively, including any warrants
issued upon the exercise or transfer of any such warrants in whole or in part,
the "Warrants") issued pursuant to an offering (the "Offering") by the Company
of units, each unit consisting of (i) a 6 1/2% convertible promissory note in
the principal amount of $25,000 (collectively, with all notes included in the
units, the "Notes"), and (ii) a warrant to purchase 33,333 shares of Common
Stock, pursuant to a Confidential Information Memorandum, dated March 17,
1999, as it may be amended or supplemented (the "Memorandum"). As used herein,
the term "this Warrant" shall mean and include this Warrant and any Warrant or
Warrants hereafter issued as a consequence of the exercise or transfer of this
Warrant in whole or in part.
1
<PAGE>
The number of shares of Common Stock issuable upon exercise of the Warrants
(the "Warrant Shares") and the Exercise Price may be adjusted from time to time
as hereinafter set forth.
The Holder is also entitled to all rights described in the subscription
agreement between the Company and the original holder of this Warrant,
including, without limitation, certain registration rights.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company, 4326
US Route 1, Monmouth Junction, New Jersey 08852, Attention: Dr. David
Vilkomerson, or at such other place as is designated in writing by the Company.
Such executed election must be accompanied by payment in an amount equal to the
Exercise Price multiplied by the number of Warrant Shares for which this Warrant
is being exercised. Such payment may be made by certified or bank cashier's
check payable to the order of the Company.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Warrant Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. (a) Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a Warrant Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Warrant on the Warrant Register as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration or transfer of Warrants which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Warrant shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding
2
<PAGE>
the foregoing, the Company shall have no obligation to cause Warrants to be
transferred on its books to any person if, in the opinion of counsel to the
Company, such transfer does not comply with the provisions of the Act and the
rules and regulations thereunder.
(b) The Holder acknowledges that the Holder has been advised by the Company
that neither this Warrant nor the Warrant Shares have been registered under the
Act, that this Warrant is being or has been issued and the Warrant Shares may be
issued on the basis of the statutory exemption provided by Section 4(2) of the
Act or Regulation D promulgated thereunder, or both, relating to transactions by
an issuer not involving any public offering, and that the Company's reliance
thereon is based in part upon the representations made by the original Holder in
the original Holder's subscription agreement, dated the date hereof between the
Company and the original Holder hereof (the "Subscription Agreement"), executed
and delivered in accordance with the terms of the Offering. The Holder
acknowledges that he has been informed by the Company of, or is otherwise
familiar with, the nature of the limitations imposed by the Act and the rules
and regulations thereunder on the transfer of securities. In particular, the
Holder agrees that no sale, assignment or transfer of this Warrant or the
Warrant Shares issuable upon exercise hereof shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of this
Warrant or such Warrant Shares is registered under the Act, it being understood
that neither this Warrant nor such Warrant Shares are currently registered for
sale and that the Company has no obligation or intention to so register this
Warrant or such Warrant Shares except as specifically provided herein, or (ii)
this Warrant or such Warrant Shares are sold, assigned or transferred in
accordance with all the requirements and limitations of Rule 144 promulgated
under the Act, it being understood that Rule 144 is not available at the time of
the original issuance of this Warrant for the sale of this Warrant or such
Warrant Shares and that there can be no assurance that Rule 144 sales will be
available at any subsequent time, or (iii) such sale, assignment, or transfer is
otherwise exempt from registration under the Act.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
the Warrants, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable upon exercise of this Warrant, upon receipt by the Company of the full
purchase price therefor, shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
5. (a) In case the Company shall at any time after the date the Warrants
were first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common Stock,
(iii) combine the outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of its capital stock by reclassification of the Common
Stock (including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Exercise Price, and the number of Warrant Shares issuable upon exercise of
this Warrant, in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination, or reclassification, shall
be proportionately adjusted so that the Holder after such time shall be entitled
to receive the aggregate number and kind of shares which, if such Warrant
3
<PAGE>
had been exercised immediately prior to such time, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05 (which amount will be proportionately adjusted in
the event of stock splits or the like); provided, however, that any adjustments
which by reason of this Section 5 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 5 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(c) In any case in which this Section 5 shall require that an adjustment in
the Exercise Price be made effective as of a record date for a specified event,
the Company may elect to defer, until the occurrence of such event, issuing to
the Holder, if the Holder exercised this Warrant after such record date, the
shares of Common Stock, if any, issuable upon such exercise over and above the
shares of Common Stock, if any, issuable upon such exercise on the basis of the
Exercise Price in effect prior to such adjustment; provided, however, that the
Company shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(d) Whenever there shall be an adjustment as provided in this Section 5,
the Company shall promptly cause written notice thereof to be sent by certified
or registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(e) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of this
Warrant. If any fraction of a share would be issuable on the exercise of this
Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the market price of
such share of Common Stock on the date of exercise of this Warrant, as
determined in good faith by the Company's Board of Directors.
6. (a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise, of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
4
<PAGE>
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5 above.
(b) In case of any reclassification or change of the shares of Common Stock
issuable upon exercise of this Warrant (other than a change in par value or from
a specified par value to no par, or as a result of a subdivision or combination,
but including any change in the shares into two or more classes or series of
shares), or in case of any consolidation or merger of another corporation into
the Company in which the Company is the continuing corporation and in which
there is a reclassification or change (including a change to the right to
receive cash or other property) of the shares of Common Stock (other than a
change in par value, or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Warrant solely the kind and amount
of shares of stock and other securities, property, cash, or any combination
thereof receivable upon such reclassification, change, consolidation, or merger
by a holder of the number of shares of Common Stock for which this Warrant might
have been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) Notwithstanding anything to the contrary herein contained, in the event
of a transaction contemplated by Section 6(a) in which the surviving,
continuing, successor, or purchasing corporation demands that all outstanding
convertible notes and warrants be extinguished prior to the closing date of the
contemplated transaction, the Company shall give prior notice (the "Merger
Notice") thereof to the Holders advising them of such transaction. The Holders
shall have ten days after the date of the Merger Notice to elect to (i) exercise
the Warrants in the manner provided herein or (ii) receive from the surviving,
continuing, successor, or purchasing corporation the same consideration
receivable by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, or purchase reduced by such amount of the consideration as has a
market value equal to the Exercise Price, as determined by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error. If any Holder fails to timely notify the Company of its
election, the Holder shall be deemed for all purposes to have elected the option
set forth in (ii) above. Any amounts receivable by a Holder who has elected the
option set forth in (ii) above shall be payable at the same time as amounts
payable to stockholders in connection with any such transaction.
(d) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose to:
(a) pay any dividend or make any distribution on shares of Common Stock in
shares of Common Stock or make any other distribution (other than regularly
scheduled
5
<PAGE>
cash dividends which are not in a greater amount per share than the most recent
such cash dividend) to all holders of Common Stock; or
(b) issue any rights, warrants, or other securities to all holders of
Common Stock entitling them to purchase any additional shares of Common Stock or
any other rights, warrants, or other securities; or
(c) effect any reclassification or change of outstanding shares of Common
Stock, or any consolidation, merger, sale, lease, or conveyance of property,
described in Section 6; or
(d) effect any liquidation, dissolution, or winding-up of the Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by certified or registered mail, postage prepaid, to the Holder
at the Holder's address as it shall appear in the Warrant Register, mailed at
least 15 days prior to (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, (ii) the date on
which any such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the exercise of this
Warrant, and the delivery of certificates or other instruments representing such
shares or other securities, shall be made without charge to the Holder for any
tax or other charge in respect of such issuance. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of any certificate in a name other than that
of the Holder and the Company shall not be required to issue or deliver any such
certificate unless and until the person or persons requesting the issue thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.
9. The Warrant Shares issued upon exercise of the Warrants shall be subject
to a stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws and neither such securities nor any interest therein may be
offered, sold, pledged, assigned or otherwise transferred unless (1) a
registration statement with
6
<PAGE>
respect thereto is effective under the Act and any applicable state
securities laws, or (2) the Company receives an opinion of counsel to the
holder of such securities, which counsel and opinion are reasonably
satisfactory to the Company, that such securities may be offered, sold,
pledged, assigned or transferred in the manner contemplated without an
effective registration statement under the Act or applicable state
securities laws."
10. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses and indemnity reasonably satisfactory to the Company, the
Company shall execute and deliver to the Holder thereof a new Warrant of like
date, tenor, and denomination.
11. The Holder of any Warrant shall not have solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
12. This Warrant has been negotiated and consummated in the State of New
Jersey and shall be construed in accordance with the laws of the State of New
Jersey applicable to contracts made and performed within such State, without
regard to principles governing conflicts of law.
13. Each of the Company and the Holder of this Warrant, irrevocably
consents to the jurisdiction of the courts of the State of New Jersey and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Warrant, any document or instrument delivered
pursuant to, in connection with or simultaneously with this Warrant, or a breach
of this Warrant or any such document or instrument. In any such action or
proceeding, the Company waives personal service of any summons, complaint or
other process and agrees that service thereof may be made in accordance with
Section 15 hereof.
14. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or by Federal Express, Express Mail or similar overnight
delivery or courier service or delivered (in person or by telecopy, telex or
similar telecommunications equipment) against receipt to the party to whom it is
to be given, (i) if to the Company, at 4326 US Route 1, Monmouth Junction, New
Jersey 08852, Attention: Dr. David Vilkomerson, (ii) if to the Holder, at its
address set forth on the first page hereof, or (iii) in either case, to such
other address as the party shall have furnished in writing in accordance with
the provisions of this Section 15. Notice to the estate of any party shall be
sufficient if addressed to the party as provided in this Section 15. Any notice
or other communication given by certified mail shall be deemed given at the time
of certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof. Any notice given by other
means permitted by this Section 15 shall be deemed given at the time of receipt
thereof.
7
<PAGE>
15. No course of dealing and no delay or omission on the part of the Holder
in exercising any right or remedy shall operate as a waiver thereof or otherwise
prejudice the Holder's rights, powers or remedies. No right, power or remedy
conferred by this Warrant upon the Holder shall be exclusive of any other right,
power or remedy referred to herein or now or hereafter available at law, in
equity, by statute or otherwise, and all such remedies may be exercised singly
or concurrently.
16. This Warrant may be amended or any of its provisions waived only by a
written consent or consents executed by the Company and Holders of Warrants
representing a majority of the shares underlying the Warrants issued and
outstanding to investors pursuant to the Memorandum. Any amendment or waiver
shall be binding upon all existing and future Holders.
Dated: __________________, 1999
ECHOCATH, INC.
By: ________________________________
Name:
Title:
8
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ___________________ hereby sells, assigns, and
transfers unto _____________________________ ______________ Warrants, each
Warrant conveys the right to purchase one (1) share of Class A Common Stock, no
par value, of EchoCath, Inc. (the "Company"), together with all right, title,
and interest therein, and does hereby irrevocably constitute and appoint
_____________________________ attorney to transfer such Warrant on the books of
the Company, with full power of substitution.
Dated:
-----------------
Signature:
------------------------
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
9
<PAGE>
To: EchoCath, Inc.
P.O. Box 7224
Princeton, New Jersey 08543
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase ______
Warrant Shares covered by the within Warrant certificate and tenders payment
herewith in the amount of $_____________ in accordance with the terms thereof,
and requests that certificates for such securities be issued in the name of, and
delivered to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print Name, Address and Social Security or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Name:
--------------------- ----------------------
(Print)
Address:
-------------------------------------------------------------------
---------------------
(Signature)
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-1-1998
<PERIOD-END> MAY-31-1999
<PERIOD-TYPE> 9-MOS
<CASH> 209,240
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 172,612
<CURRENT-ASSETS> 414,819
<PP&E> 709,403
<DEPRECIATION> 503,117
<TOTAL-ASSETS> 918,200
<CURRENT-LIABILITIES> 2,106,336
<BONDS> 558,094
<COMMON> 11,272,304
0
1,393,889
<OTHER-SE> (14,582,072)
<TOTAL-LIABILITY-AND-EQUITY> 918,200
<SALES> 0
<TOTAL-REVENUES> 300,198
<CGS> 0
<TOTAL-COSTS> 1,861,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,216
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,623,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,623,487)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
