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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, 2000
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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)
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)
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
-----------------------------------------------------------------
(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.
___ X ___ Yes ____ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended August 31, 2000 were $154,166.
The aggregate market value of the issuer's outstanding voting stock held by
non-affiliates on November 27, 2000, based on the closing sale price of its
common stock on the Nasdaq OTC Bulletin Board on such date, was approximately
$6,300,000.
As of November 20, 2000, there were 7,990,623 outstanding shares of the issuer's
Class A Common Stock, no par value.
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, those listed
under Item 1. Business - Risk Factors. 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.
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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 has developed four proprietary
ultrasound technologies: one that characterizes blood flow; two that enable
ultrasound imaging to, among other things, identify devices during
interventional procedures such as needle biopsies and catheterizations; and one
that provides intraluminal imaging. The Company's technologies include: a
proprietary transcutaneous, epivascular, and catheter-based sensor and
electronics system ("EchoFlow(TM)") which is intended to 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 intra-vascular 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 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.
Additionally, the Company has negative working capital and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. 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 allows 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 EchoCath is engaged in ongoing research and development of the
EchoFlow technology. The Company has commercialized its first product
incorporating the EchoFlow technology, the BVM-1, which is intended to provide
data on the blood flow through internal vessels during intra-operative
procedures. Other applications include 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 pre-clinical 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. (Portions of this presentation were published in American Journal of
Surgery in August 1998, authored by Dr. M. Skladany and associates). Continued
product definition took place at the Annual Meeting of the Society of Vascular
Surgeons (SVS) in June 1998. (Professor William Abbott of Harvard Medical
School, a member of EchoCath's Medical Advisory Board, was President of the
SVS).
The Company applied for 510(k) clearance to market its first EchoFlow
product, the BVM-1 Blood Velocity Meter for inter-operative use in February
1999. It received clearance on September 23, 1999. The initial device is being
marketed to vascular surgeons for intra-operative measurements and potentially
for intensive care monitoring of circulatory status. The initial commercial
units of this product have been placed in 10 demonstration sites, and one unit
has been sold.
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. 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.
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 most
commercially available ultrasound imaging systems. On the EchoMark
Salpingography Catheter, the sensor captures ultrasound signals and relays them
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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 piezo plastic 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. On March 31, 1998, EP MedSystems announced the successful use
of EchoMark in connection with guiding electrophysiology devices under
ultrasound imaging. See "Collaborative Agreements".
Additional products that 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, Inc.,
Advanced Technology Laboratories, Inc. ("ATL"), Hewlett-Packard Inc., Siemens
Medical Systems Inc., Toshiba and other ultrasound systems. The Company will
seek 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 piezo ceramic 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 guidewires and can operate with most currently
available color ultrasound systems. 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 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.
The ColorMark technology was licensed by the Company to Medtronic (in
conjunction with the license for EchoMark) for guidance of pacemaker lead
implantation and this license agreement has terminated, except for a continuing
right of last refusal, which will end in 2002. The ColorMark technology has also
been licensed to Medtronic MICS Division for cardiac surgery applications, and
to EP MedSystems for guided placement of electrophysiology catheters. Critical
Care Concepts, Inc., presently holds an option to purchase a license agreement
from the Company for the use of ColorMark technology for soft tissue biopsies
and cancer therapy guidance; that option will expire on December 30, 2000.
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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. Medtronic received an
option from the Company 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 are intended to provide data on
the blood flow in vessels. Applications are expected to include cardiac output,
displacing an indirect and non-continuous 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 intends to initially sell its first EchoFlow product, the
BVM-1 Blood Velocity Meter, to vascular surgeons for intraoperative
applications. The continued full commercialization of this products will depend
on the Company's ability to obtain additional financing through joint ventures,
licensing agreements or other collaborative arrangements or otherwise.
Currently, the Company has no method for generating funds sufficient to complete
commercialization efforts.
Two distinct, but related, instruments will be developed from the
EchoFlow technology provided that additional financing becomes available: an
"evaluator" instrument, the first EchoFlow product, and a "portable" instrument.
While the instruments will share signal-processing electronics, each will have
its distinct operating interfaces and displays. The evaluator instrument, which
is a pole-mounted, wall-powered unit, 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 portable
system will be a battery-powered, portable unit to perform the same functions
without the flexibility of operation inherent in the computer-based evaluator
unit.
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Evaluator Instrument -- The evaluator instrument is aimed initially at
the vascular surgery market. The vascular surgeon's work involves restoring
circulation and management believes that the evaluator instrument will be a
vital intra-operative tool to ensure the success of any such revascularization.
The Company believes that the vascular surgeon could also use the evaluator
instrument for "graft surveillance", post-operatively examining the flow in any
peripheral graft to ensure its survival. The Company will 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. However, the present
unit is not FDA approved for cardiac use, and such approval will be required
before it can be sold for such use.
The Company also intends to market the evaluator instruments to plastic
surgeons. An integral part of advanced plastic surgery is moving of tissue
flaps. Ensuring continuous blood supply is a crucial element in the success of
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.
Portable Instrument -- The portable instrument is planned to be
produced in the coming year. Since the basic electronic functions of the
portable instrument are the same as for the evaluator instrument, the major
development will be in creating the appropriate software for this non-computer
based instrument and its functional implementation. .
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 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.
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 electrophysiology
catheters than present X-ray techniques. As such, this product represents a
potentially significant improvement in this procedure. Pursuant to the terms of
the license agreement between the Company and EP MedSystems, the Company granted
EP MedSystems the exclusive right to make, have made, use and sell products
using 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 the EchoMark PTA Catheter will save
significant costs with as good or superior clinical outcomes. Market resistance
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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 discussing an alliance to
begin 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 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 Company has granted an option to Clinical Concepts,
Incorporated, for the soft-tissue biopsy application. See "Collaborative
Agreements".
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 catheterization where anticoagulants are involved, such as
angioplasty and stenting procedures. Additionally, procedures involving large
bore catheters (such as placement of intra-aortic balloon pumps) also represent
potential opportunities for the ColorMark Clip. Management believes that the
ColorMark Clip is well suited for these patients and that the ColorMark Clip
makes this procedure easier to perform accurately, and allows clinicians to
delegate the procedure to less skilled persons, saving time, and increasing
laboratory volume. A disadvantage to using the ColorMark Clip is the requirement
for its use in conjunction with a color flow 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
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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. EP MedSystems 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 $12,021,000
(excluding the value of the technology contributed at inception by Ultramed,
Inc., a privately-held corporation ("Ultramed")), of research and development
expenses from its inception through August 31, 2000, including approximately
$1,635,000 during the fiscal year ended August 31, 2000 and approximately
$1,218,000 during the fiscal year ended August 31, 1999. 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.
The Company conducts all of its research and development on the
premises of its facility in Princeton, New Jersey. The Company has six full time
employees dedicated to research and development activities and one part-time
employee dedicated to regulatory activities.
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Collaborative Agreements
Medtronic Agreements
October 1997 Medtronic Agreement Pursuant to the terms of the Medtronic
Agreement entered into in October 1997 between the Company and Medtronic (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 a $250,000 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). Medtronic acquired the exclusive option at
any time until October 31, 1998, for a payment of at least $1.5 million for 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. However, no additional agreements have been reached.
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 October 1997 Medtronic Agreement is 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 sell and have sold, 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 defibrillators 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; and (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."
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.
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Following previous extensions of the note maturity date, on November
23, 1999, the Company reached an agreement to refinance its Bard Debt. The
Company was required to pay $75,000 immediately, 10% of net funds that are
received from subsequent financing activity through December 31, 2000 with a
minimum payment of $150,000, and beginning with the first calendar quarter of
2001 and continuing thereafter 7.5% of net revenue and financing received in
that quarter, with a minimum payment of $75,000 every six months until the
indebtedness is repaid. Interest on the unpaid balance of the debt shall accrue
at the rate of prime plus 1%.
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 the next four years.
Thereafter, the Company will be required to raise significant additional
capital, attract and retain experienced personnel, purchase or lease additional
equipment and comply with extensive government regulations with respect to its
facilities. Further, even if the Company manufactures its products directly, it
will continue to depend upon subcontractors to manufacture and deliver certain
components of its products in a timely, cost effective 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 has entered into collaborative agreements for the marketing
and sale of certain of its products. Such collaborative agreements include the
October 1997 Medtronic Agreement and the EP MedSystems 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
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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 does
not believe that these systems are competitive with EchoFlow instrumentation.
There are other hemodynamic sensing systems that are used in animal
studies, utilizing Doppler or transit-time ultrasound, or electromagnetic
flowmeters, to measure blood flow. 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.
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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 Company's
EchoMark technology, is not designed to be mounted onto a catheter. ATL is now a
susidiary of Philips, a large multi-national company.
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 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 P.D. Access(TM) marketed by
Escalon. The P.D. Access(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 P.D. Access(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 products, management believes these modifications do not fully improve
visualization sufficiently during needle biopsy and vascular access procedures.
EchoEyeManagement 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 believes that CVIS is 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. For
example, Endomedix Inc. and Aloka Inc. have imaging systems that are approved
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for laparoscopic cholecystectomy. However, unlike EchoEye, if successfully
developed, neither of these systems provide real-time, three-dimensional images
of the visualized area. At least two other manufacturers, Multigon Inc. and
Tetrad Inc., are seeking to develop their own ultrasound imaging systems.
Management does not believe that any competing three-dimensional, real-time
ultrasound imaging systems are currently in development for minimally invasive
surgery applications. However, many of the companies that are undertaking
development of imaging systems that may compete with products utilizing the
EchoEye technology have greater financial, manufacturing, marketing,
distribution, and technical resources than the Company.
General The health care industry is characterized by extensive research
efforts and rapid technological change. Future innovations could render the
Company's current and proposed products obsolete. Competition in the market for
imaging catheters is intense and is expected to increase. The Company's current
and proposed products are expected to compete against other types of imaging
systems (such as CT, optical scanning, X-ray and MRI) as well as other
ultrasound imaging products. Manufacturers of non-imaging therapeutic catheters
or external ultrasound imaging devices could also enter the market with
competitive products. Such companies may succeed in developing products that are
more effective or less costly than those developed by the Company and may be
more successful than the Company in manufacturing and marketing their products.
Many companies are engaged in research and development of new devices that may
address the same clinical applications as the Company's products. The future
success of the Company will depend, in part, on the degree of clinical
acceptance of ultrasound imaging as opposed to competing technologies as well as
on acceptance of the Company's products for ultrasound imaging applications.
Many of the Company's competitors and potential competitors have substantially
greater financial, technological, manufacturing, marketing, distribution,
operating, technical and other resources than the Company. Academic
institutions, hospitals, governmental agencies, and other public and private
research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies on their own or
through joint ventures. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
and/or less costly than those developed or being developed by the Company,
thereby rendering the Company's technologies not competitive or obsolete.
Patents and Proprietary Rights
Patents and Patent Applications All of the Company's technologies have
been invented by officers and employees of the Company or employees of Ultramed,
which was founded to manufacture ultrasonic duplex vascular imaging systems, and
the rights to such technologies have been 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 five 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 additional 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. In October
1999 an additional U.S. patent on an integrated means of driving needles for
detection by ColorMark technology was issued; that patent will expire in 2016.
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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 has several patent applications pending, and 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, record keeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in civil penalties,
recall, injunction or seizure of products, refusal to permit products to be
imported into the United States, refusal of the government to approve or clear
product approval applications or to allow the Company to enter into government
supply contracts, withdrawal of previously approved applications and criminal
prosecution.
In order to obtain FDA approval of a new device, companies must
generally submit proof of safety and efficacy. In some cases such proof entails
extensive clinical and pre-clinical 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 record keeping regulations, GMP, 510(k)
pre-market 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 post-market 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
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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
pre-market 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 pre-clinical and human clinical trial data, to prove
the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days to
review a PMA application once it is filed, although PMA application reviews more
often occur over a significantly protracted time period, and generally take
approximately two years or more from the date of filing to complete.
If human clinical trials of a proposed device are required and the
device presents "significant risk," the manufacturer or distributor of the
device will have to file an Investigational Device Exemption ("IDE") application
with the FDA prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved, human clinical trials may begin at
a specified number of investigational sites with the number of patients approved
by the FDA.
Sales of devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country must generally be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.
The conduct of laboratory studies must be done in conformity with the
FDA's good laboratory practice 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
non-approved 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.
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The Company began animal trials with EchoFlow products in early 1997.
Clinical trials began in early 1999, and received 510(k) clearance to market the
BVM-1 Blood Velocity Meter on September 23, 1999. The Company has also received
510(k) authorization for the ColorMark Clip and Driver, the EchoMark EP
Catheter, the EchoMark PTA Catheter and the EchoMark Guidewire.
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. 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 its current and proposed
products will be cost-effective and that hospitals will have an incentive to use
the Company's proposed products. Medicare reimburses non-surgical 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
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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 or personal services contracts) may be subject to
scrutiny if they do not qualify for the safe harbor. Several states also have
statutes or regulations prohibiting financial relationships with referral
sources that are not limited to services for which Medicare or Medicaid payment
may be made. State laws vary and have been infrequently interpreted by courts or
regulatory agencies. Sanctions under these federal and state anti-remuneration
laws may include civil money penalties, license suspension or revocation,
exclusion of providers or practitioners (but under current law not
manufacturers) from participation in Medicare and Medicaid, and criminal fines
or imprisonment.
The Company will compensate its 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
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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 15, 2000, the Company employed 16 full time employees.
Six employees provide research and development services, five work in
production, five employees provide management and administrative services and
one part-time employee provides services related to compliance with regulatory
requirements.
The Company's employees are not party to any collective bargaining
agreements. The Company believes that it has good relations with its employees.
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Medical Advisors
The following is a list of the medical advisors (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.
Name Affiliation
Dr. William Abbott Professor of Surgery, Harvard Medical School,
Boston, Massachusetts, Chief of Vascular Surgery
at the Massachusetts General Hospital, Boston,
Massachusetts.
Dr. Valentin Fuster Professor of Medicine of Mount Sinai School of
Medicine, New York, New York, Director
Cardiovascular Institute, Mount Sinai Medical
Center.
Dr. 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.
Each of the Medical Advisors has entered into a medical advisory
agreement (collectively the "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 and Dr. Isselbacher receives $15,000
per annum, Dr. Fuster receives $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 that was reset to $3.325 per share on April
29, 1997, 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 of $1.125 per share, 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 and 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 become the property of
their respective hospitals pursuant to agreements between the Medical Advisors
and their respective hospitals.
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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 0.848 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. In connection with the 1999 Private Placement
Offering all of the holders of the Company's Class B Common Stock converted
their shares into Class A Common Stock.
Risk Factors
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 operates, 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.
Stockholders' Deficit; Expectation Of Substantial Future Losses From
its inception through August 31, 2000, the Company has incurred a cumulative net
loss of $20,773,000. At August 31, 2000, the Company had a working capital
deficit of $45,000 and a stockholders' deficit of $1,372,000. Net losses for the
years ended August 31, 1999 and 2000 were $2,107,000 and $2,594,000,
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. See Item 5. "Market for Common Equity and Related
Shareholder Matters - Recent Sales of Unregistered Securities."
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 may result from the outcome of this uncertainty.
Uncertainty Of Market Acceptance The commercial success of the
Company's EchoFlow, EchoMark, 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
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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
sub-distribute its technologies. As a result, the Company may not market
products 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. To date, the
Company has not received any royalty payments from any licensing agreement,
which it has entered into with any licensee. 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.
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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 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 CE Mark, 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 five 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
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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.
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, record keeping 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 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.
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.
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
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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. 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.
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 has changed as a result of the closing
of the 6.5 % Convertible Notes for the Private Placement Financing as of
November 1, 1999. As a condition to the offering, holders of a minimum of
900,000 shares of the Company's Class B Common Stock were required to convert
their shares into Class A Common Stock. The Class B Common Stock is essentially
identical to the Class A Common Stock, except that the Class B Common Stock is
entitled to 5 votes per share and the Class A Common Stock is entitled to 1 vote
per share. During fiscal 2000, all Class B Common Stock has converted into Class
A Common Stock. The Company has agreed to grant to the converting Class B Common
Stockholders five-year warrants, exercisable at $0.75 per share, to purchase a
number of shares of Class A Common Stock equal to the number of shares converted
of Class B Common Stock.
Possible Adverse Effects Of Authorization Of Preferred Stock;
Anti-Takeover ProvisionsThe Company's 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. Furthermore, the Company's
Certificate of Incorporation authorizes the issuance 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
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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". 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 in 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 orquoted 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
$294,000 for the fiscal year ended August 31, 2000 and approximately $294,000
for each fiscal year thereafter through March 2002. Such lease also provides for
payment by the Company of real estate taxes and certain operating expenses. The
Company has an option to purchase the entire facility for a purchase price of
$2,000,000 plus certain 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
26
<PAGE>
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 the opinion of the Management of the Company, the property described
herein is adequately covered by insurance.
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
subsequently amended (the "Complaint") filed in the United States District Court
for the District of New Jersey (the "Court") 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 Section 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 October 20, 1998, the Court dismissed the suit with
prejudice, but did not decide on the Company's outstanding counterclaims against
EP MedSystems. On June 9, 1999 EP MedSystems filed an appeal of that dismissal.
If the appeal is successful, the suit will be reinstated. The appellate court
heard oral arguments of the appeal on December 7, 1999. The court has yet to
rule on the appeal.
Item 4. Submission Of Matters To A Vote Of Security Holders.
---------------------------------------------------
A. The Annual Meeting of Stockholders of the Company was
held on September 29,2000;
B The following is a list of all of the Directors of
the Company who were elected at the Meeting and whose
term of office continued after the meeting until the
next annual meeting
Frank A. DeBernardis
Anthony J. Dimun
Daniel M. Mulvena
Joseph J. Prischak
Irwin M. Rosenthal
David Vilkomerson
Malcolm Dale
C. There were present at the Meeting, in person or by
proxy, 4,478,610 shares of Class A Common Stock and 0
shares of Series B Convertible Preferred Stock
entitled to vote at the Meeting. In the aggregate
there were 4,478,610 shares represented at the
Meeting out of a total of 7,024,598 shares entitled
to vote. Common Stock and Preferred Stock voted
together as a single class on all matters presented
at the Meeting;
27
<PAGE>
D. To ratify the appointment of KPMG LLP, as the
Company's independent public accountants for the
fiscal year ending August 31, 2001;
E. To approve and ratify the adoption of an amendment to
the Company's Restated Certificate of Incorporation,
as amended, increasing the total number of shares of
authorized capital stock of the Company from
twenty-five million (25,000,000) shares to fifty-five
million (55,000,000) shares, increasing the total
number of shares of the Company's Class A Common
Stock, no par value (the "Class A Common Stock"),
from eighteen million five hundred thousand
(18,500,000) shares to fifty million (50,000,000)
shares;
F. To approve an amendment to the Company's 1995 Stock
Option Plan, as amended (the "1995 Stock Plan"), to
increase the maximum number of shares of Class A
Common Stock available for issuance under the 1995
Stock Plan from 1,020,000 shares of Class A Common
Stock to 3,000,000 shares;
G. To approve and ratify the termination of forfeiture
provisions of 833,000 of the Company's Class A Common
Stock, which were formerly 833,000 shares of Class B
Common Stock, no par value.
H. The results of the vote taken at the Meeting by
ballot and by proxy as solicited by the Company on
behalf of the Board of Directors were as follows:
1. The results of the vote taken at the Meeting for
the election of the nominees for the Board of
Directors were as follows:
Nominee For Withheld
------- --- --------
Frank A DeBernardis 4,470,910 7,700
Anthony Dimun 4,470,910 7,700
Daniel M. Mulvena 4,470,910 7,700
Joseph J. Prischak 4,470,910 7,700
Irwin M. Rosenthal 4,331,303 147,307
David Vilkomerson 4,470,910 7,700
Malcolm Dale 4,470,910 7,700
2. A vote was taken on the proposal to ratify the
appointment of KPMG LLP as independent auditors of
the Company for the year ending August 31,2001. The
results of the vote taken were as follows:
For Against Abstain
--- ------- -------
4,459,110 500 19,000
3. The proposal to approve and ratify the adoption of
an amendment to the Company's Restated Certificate
of Incorporation. The results of the vote taken were
as follows:
For Against Abstain
--- ------- -------
4,453,410 10,000 15,200
28
<PAGE>
4. The proposal to amend the 1995 Stock Option Plan to
increase the maximum number of shares of Class A
Common Stock available for issuance under the
1995Stock Option Plan for 1,020,000shares of Class A
Common Stock to 3,000,000 shares. The results of the
vote taken were as follows:
For Against Abstain
--- ------- -------
4,455,331 10,079 13,200
5. The proposal to approve and ratify the termination
of forfeiture provisions of 833,000 shares of the
Company's Class A Common Stock, which were formerly
833,000 shares of Class B Common Stock.. The results
of the vote taken were as follows:
For Against Abstain
--- ------- -------
1,277,077 3,145,433 27,500
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, markdown or commission and may not
represent actual transactions.
QUARTER ENDED HIGH LOW
-------------------------------------------- ----------- -----------
November 30, 1998 2 7/8 1
February 28, 1999 1 1/4 3/4
May 31, 1999 1/2 3/8
August 31, 1999 7/8 1/2
November 30, 1999 1 1/8 17/32
February 29, 2000 15/16 1/4
May 31, 2000 15/16 5/16
August 31, 2000 21/62 5/16
September 1, 2000 through November10, 2000 15/62 3/8
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 on November 15,
2000 was approximately 52. The Company believes that there is in excess of 550
beneficial owners of the Class A Common Stock whose shares are held in "Street
Name."
29
<PAGE>
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 registration
under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
the exemption provided by Section 42 thereunder, each of the purchasers
represented that it was an accredited investor and the offer did not involve a
general solicitation.
Convertible Debentures On October 29, 1999 the Company completed a
private placement offering. The offering consisted of Units (i) a $25,000
convertible promissory note and (ii) a three-year warrant to purchase 33,333
shares of Class A Common Stock. A total of 3,366,633 warrants were issued. The
notes bear interest at 6.5% per annum and mature three-years from the date of
the final closing (October 29, 1999), unless previously converted into Class A
Common Stock. A total of $2,525,000 notes were issued through the private
placement, of which $1,250,000 are convertible into shares of Common Stock (i)
at the option of the holder, at any time prior to the maturity date, at a rate
of one share of Class A Common Stock for each $0.75 of debt (plus accrued and
unpaid interest) and $1,275,000 of which are convertible at the market price on
the date of conversion, but not less than $0.25 (plus accrued and unpaid
interest)., (ii) at the option of the Company at any time beginning one year
after October 29, 1999, at a conversion price equal to the lesser of $0.75 or
the average closing sale price of the share of Class A Common Stock over the
five day period immediately prior to the maturity date, but not less than $0.25
per share. Each warrant entitles the holder to purchase one share of Class A
Common Stock at an exercise price of $0.75 per share. The offering resulted in
net proceeds of $1,784,358 and the conversion of $525,000 of 6.5% convertible
debentures into the same convertible debt offered under the private placement
described above. In connection with the warrants issued, the Company recorded
debt issuance costs totaling $225,000. The warrants were valued at $0.20 per
share using the Black-Scholes pricing model. The debt issuance costs will be
amortized over the life of the debt.
As a condition to the private placement offering, holders of a minimum
of 900,000 shares of the Company's Class B Common Stock were required to convert
their shares into Class A Common Stock. All such shares have been converted to
Class A Common Stock.
The Placement Agents for the offering have been paid cash compensation
equal to 10% of the gross proceeds of the offering and five year warrants to
purchase up to 400,000 shares of Class A Common Stock at $0.75 per share.
On February 23, 2000, the Company offered its 6.5% convertible promissory
noteholders the opportunity to purchase four shares of Class A Common Stock at
$0.75 per share for every warrant they exercise at the same price. The Company
issued a total of 1,500,000 million shares in this offering. The number of
shares that were purchased was proportional to the number of units purchased in
the 6.5% convertible promissory note offering. For each unit purchased in the
6.5% convertible promissory note offering, the noteholder purchased up to 14,850
new shares at $0.75 per share and exercised warrants for 3,712 shares at $0.75
per share. If a noteholder did not purchase the shares available to them, those
shares were made available to the other noteholders participating in this
offering. The Company received proceeds of $1,405,888, including the exercise of
375,000 warrants.
30
<PAGE>
The Company asked the 6.5% convertible promissory noteholders to release
it from any obligation it may have for a rights offering described above. A
majority of such noteholders have agreed to release the Company from such
obligation.
On July 15, 2000, a Director of the Company purchased 1,333,333 units for
$0.75 per unit for which the Company received $1,000,000 in net proceeds. Each
unit consisted of a shre of Class A common stock and a three-year warrant to
purchase an additional share of Class A common stock at $0.75 per share.
On November 15, 2000, a Director of the Company purchased 1,333,333 units
for $0.75 per unit for which the Company received $1,000,000 in net proceeds.
Each unit consisted of a shre of Class A common stock and a three-year warrant
to purchase an additional share of Class A common stock at $0.75 per share.
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, 2000 Compared To Fiscal Year Ended August
31, 1999 Revenues: The Company had product sales revenue for the fiscal year
ended August 31, 2000 ("fiscal 2000") of $7,500 and revenue of $146,666 from
license fees.
The fiscal 2000 product sales were $7,500 as compared to fiscal year
ended August 31, 1999 (fiscal 1999) product sales of $25,197. The difference in
product sales were immaterial, but fiscal 2000 sales were from EchoFlow. The
fiscal 1999 fees from technology license and development fees were $370,000.
Fiscal 1999 option fees totaled $225,000 with two different companies and two
different technologies. The fiscal 2000 fees were from one company for the
license of its technology.
The cost of products sold was $5,767 for fiscal 2000 and $142,746 for
fiscal 1999. Fiscal 1999 included a charge of $127,043 for a write off of work
in process and finished goods inventory. The charge was a result of the
discontinuance of two product lines that the Company plans to continue its
efforts to license.
The Company incurred research and development expenses for fiscal 2000
of $1,634,716. Research and development expenses increased 34.2% during fiscal
2000 when compared to the fiscal 1999 in which such expenses were $1,217,838.
The increase is attributable primarily to a $165,000 reimbursement of certain
development expenses under the terms of a joint venture partnership with a
related company in fiscal 1999 and an increase in materials, payroll, and
consulting services in fiscal 2000.
The Company had marketing, general and administrative expenses of $1,010,353 for
fiscal 2000. Selling general and administrative expenses decreased 3% during
fiscal 2000 when compared to fiscal 1999, in which such expenses were
$1,045,588. The decline in marketing, general and administrative expenses from
fiscal 1999 is attributable primarily to a decline in consultant fees in fiscal
2000.
The increase in interest expense was the result of the issuance of the
6.5% convertible debentures, the majority of which were issued in fiscal 2000.
Income tax benefit in fiscal 2000 of $447,956 consisted of proceeds
received for the sale of $6,600,000 of the Company's State tax net operating
loss carryforwards under the New Jersey Corporation Business Tax Benefit
Certificate Transfer Program, which allows certain New Jersey taxpayers to sell
their state tax benefits to third parties. Historically, the Company had
recognized a 100% valuation allowance against these net operating loss
carryforwards.
31
<PAGE>
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 $20,773,000 through August 31,
2000. These losses resulted primarily from research and development expenses
aggregating approximately $12,789,000 relating to the Company's technologies and
products, and expenses aggregating approximately $9,864,000 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
equity and debt financing, representing an aggregate of $21,124,000. As of
August 31, 2000, the Company had negative working capital of approximately
$45,000 an accumulated deficit of approximately $17,759,000 and a stockholders'
deficit of approximately $1,372,000.
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.
On October 29, 1999, the Company completed its private placement
offering. The offering resulted in gross cash proceeds of $2,000,000 and the
conversion of $525,000 of 6.5% convertible debentures into the same convertible
debt offered under this private placement. The notes and warrants were offered
in the form of units, each unit consisting of a 6.5 % convertible three-year
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 at $0.75 per
share. In general, the principal and accrued interest on the notes are
convertible at the option of the holder into shares of Class A Common Stock at
the rate of $0.75 per share at the time beginning ninety days after October
29,1999. A portion of the notes sold in the offering are convertible by the
holder at the lesser of $0.75 per share or the market price at the time of
conversion. but at not less than $0.25 per share. The notes are also convertible
at the option of the Company at any time beginning one year after October 29,
1999 at the lesser of $0.75 per share or market. The cancellation of the
indebtedness to the placement agent resulted in the conversion of the debt into
the purchase of 21 units in the offering and the issuance of 48,426 shares of
the Company's Class A Common Stock as full payment of the interest.
As a condition to the Private Placement Offering, holders of a minimum
of 900,000 shares of the Company's Class B Common Stock were required to convert
their shares into Class A Common Stock. All such shares have been converted to
Class A Common Stock.
The Placement Agents for the Private Placement Offering have been paid
cash compensation equal to 10% of the gross proceeds of the offering and five
year warrants to purchase up to 400,000 shares of Class A Common Stock at $0.75
per share.
On February 23, 2000, the Company offered its 6.5% convertible promissory
noteholders the opportunity to purchase four shares of Class A Common Stock at
$0.75 per share for every warrant they exercise at the same price. The Company
issued a total of 1,500,000 million shares in this offering. The number of
shares that were purchased was proportional to the number of units purchased in
the 6.5% convertible promissory note offering. For each unit purchased in the
6.5% convertible promissory note offering, the noteholder purchased up to 14,850
new shares at $0.75 per share and exercised warrants for 3,712 shares at $0.75
per share. If a noteholder did not purchase the shares available to them, those
shares were made available to the other noteholders participating in this
offering. The Company received proceeds of $1,405,888, including the exercise of
375,000 warrants.
In July 2000, a Director of the Company purchased 1,333,333 units from
the Company for $0.75 per unit, for which the Company received $1,000,000 in net
proceeds. Each unit consisted of a share of Class A common stock and a
three-year warrant to purchase an additional share of Class A common stock at
$0.75 per share.
A second sale to the same Director of the Company on November 15, 2000
of 1,333,333 units for $0.75 per unit resulted in net proceeds to the Company of
$1,000,000. Each unit consisted of a share of Class A common stock and a
three-year warrant to purchase an additional share of Class A common stock at
$0.75 per share.
32
<PAGE>
During fiscal year 2000, options to purchase 705,000 shares at $0.39
per share were granted, to certain directors, officers and employees. The grants
issued to management and non-management Board members were subject to
shareholder approval which occurred on September 29, 2000 when the Board
increased the maximum number of shares authorized under the 1995 Option Plan to
3,000,000 shares. Such options were all issued pursuant to the options plan and
are exercisable for ten years following the date of grant. The date of
shareholder approval represents the measurement date. As the fair market value
on the measurement date exceeded the exercise price of the options, the Company
will record a significant amount of deferred compensation in the first quarter
of fiscal 2001 which will be amortized on a straight-line basis to expense over
the respective vesting periods.
During the 12-month period following the date of this Report, the
Company intends to focus its efforts on marketing and production of its EchoFlow
products. The Federal Food and Drug Administration cleared for marketing the
first EchoFlow product, the BVM-1, on September 23, 1999. During such period,
the Company will also continue its efforts in exploiting the ColorMark and
EchoMark technologies, will continue the testing of its EchoEye technology, and
will seek support of an alliance partner or partners for all of its
technologies. The Company may also commence research and development of other
products utilizing its technologies, and seek the requisite regulatory approvals
for certain of the Company's other proposed products during this 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 the second quarter of fiscal 2001 and is
therefore in need of additional funds. The Company expects that additional cash
resources will be available either through financing provided by the completion
of license agreements (see Item 1. "Description of Business-Collaborative
Agreements") and strategic alliances, the sale of its New Jersey tax benefits
under the State of New Jersey Tax Benefit Certificate Transfer Program,
additional equity and debt financing, 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.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended, becomes effective for our
financial statements for the fiscal year beginning September 1, 2000. SFAS No.
133 requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and measure them at fair value. We do not
expect the adoption of this Statement to have material impact on our financial
statements.
In December 1999 the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 requires the company to adopt its guidance not
later than the forth quarter of its fiscal year 2001 with a cumulative effect of
change in accounting principle calculated as of September 1, 2000. We are
evaluating SAB 101 and the effect it may have on our financial statements and
its current revenue recognition policy.
33
<PAGE>
Item 7. Financial Statements.
--------------------
The financial statements required to be filed pursuant to this Item 7
are included in this report on pages F-1 through F-27.
Item 8. Changes in and Disagreements with Accountants and Financial Disclosure
----------------------------------------------------------------------
N/A.
34
<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:
Name Age Position with the Company
Malcolm Dale 65 Director
Frank A. DeBernardis(1) 58 Chief Executive Officer,
President and Director
Anthony J. Dimun(2) 57 Director
Daniel M. Mulvena(1)(2)(3) 52 Chairman of the Board of
Directors
Joseph J. Prischak 69 Director
Irwin M. Rosenthal(3) 72 Secretary and Director
David Vilkomerson 59 Executive Vice President,
Director of Research and
Development, Assistant
Secretary and Director
-------------
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
MALCOLM DALE has served as a Director of the Company since June 2000.
Mr. Dale is Vice President of DB Alex Brown, an investment banking/brokerage
company with whom he has been associated since 1995. He previously held similar
positions at C.J. Lawrence and Prescott, Ball & Turban.
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").
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 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.
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
35
<PAGE>
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. Since December 1999, Mr. Mulvena has served on the Board of
Directors of Cambridge Heart, Inc., a publicly held company.
JOSEPH J. PRISCHAK has served as a Director since December 1999. Mr.
Prischak is founder, President and Chief Executive Officer of the The Plastek
Group of Erie, Pennsylvania, an international tool making and plastic molding
company in the field of plastic packaging for consumer products.
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 Greenberg Traurig, formerly Graham & James LLP. Prior to
July 1998, Mr. Rosenthal was a partner at Rubin Baum Levin Constant & Friedman.
Mr. Rosenthal is also a director of Magna-Lab and Symbollon Corporation, a
publicly traded chemical and medical technology company.
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.
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.
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, (52), Vice-President of Engineering, has held this
position with the Company since April 1997. Prior to serving as Vice-President
of Engineering, Mr. Lyons served from 1991 to 1999, as Manager, Electronic R&D
for the Company. 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. From 1988 to 1991 Mr. Lyons worked for
Ultramed where he conducted similar design and development research.
36
<PAGE>
Alec Colleoni, (52), Manager of Manufacturing, Mr. Colleoni, a graduate
of Feltrinelli Technical College in Italy, has managed the Company's
manufacturing of a number of medical electronic companies, including Princeton
Electronic Products and 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.
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 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.
37
<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, 2000, 1999, 1998 to Frank A. DeBernardis, the Company's Chief Executive
Officer and David Vilkomerson, the Company's Executive Vice President (the
"Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for the fiscal years ended August 31, 2000,
1999, 1998.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long Term
Compensation
Awards Payouts
---------- -------------
Securities
Underlying All Other
Name and Principal Other Annual Options/SARs Compensation
Position Year Salary Bonus Compensation ($) ($)
------------------- ---- -------- ----- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Frank A. DeBernardis 2000 $130,000 -- -- -- --
Chief Executive Officer 1999 $130,000 -- -- -- --
1998 $130,000 -- -- -- --
David Vilkomerson 2000 $140,600 -- -- -- --
Executive Vice President 1999 $139,560 -- -- -- --
1998 $134,600 -- -- -- --
</TABLE>
-------------
(1) Mr. DeBernardis and Dr. Vilkomerson voluntarily deferred a portion of their
compensation to preserve cash flow until the consummation of a private
placement in October 1999. After the private placement was consummated, the
deferred compensation was paid. The table reflects the compensation due
before the voluntary deferral.
(2) The security underlying all options is Class A Common Stock.
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 2000.
During fiscal year 2000, options to purchase 705,000 shares at $0.39 per share
were granted, to certain directors, officers and employees. The grants to
management and non-management Board members were subject to shareholder
approval. At a meeting of the Shareholders on September 29, 2000, a proposal to
amend to the Option Plan to increase the maximum number of shares of Class A
Common Stock available for issuance from 1,020,000 shares to 3,000,000 was
approved. Such options were all issued pursuant to the options plan and are
exercisable for ten years following the date of grant. The date of shareholder
approval represents the measurement date. As the fair market value on the
measurement date exceeded the exercise price of the options, the Company will
record a significant amount of deferred compensation in the first quarter of
fiscal 2001 which will be amortized on a straight-line basis to expense over the
respective vesting periods.
38
<PAGE>
Individual Grants
<TABLE>
<CAPTION>
Percent of
Number of Total
Securities Options/SARs Market Price as
Underlying Granted to Exercise or Reported on
Options/SARs Employees in Base Bulletin Board on Expiration
Name Granted Fiscal Year(1) Price($/Sh) Date of Grant Date
<S> <C> <C> <C> <C> <C>
Frank DeBernardis
CEO 250,000 35.5% 0.39 0.39 10/6/09
Anthony Dimun
Director 50,000 7.1% 0.39 0.39 10/6/09
Irwin Rosenthal
Director 50,000 7.1% 0.39 0.39 10/6/09
Daniel Mulvena
Chairman 90,000 12.8% 0.39 0.39 10/6/09
David Vilkomerson
Executive VP 250,000 35.5% 0.39 0.39 10/6/09
</TABLE>
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, 2000 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 Value Of Unexercised "In-
Unexercised Options/SARs At Fiscal The Money" Options/SARs At
Year-End Fiscal Year End(2)
Shares
Name Acquired on Value
Exercise (1) Realized(3) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Frank DeBernardis
Chief Executive Officer 0 0 336,740 83,260 0 0
David Vilkomerson
Executive Vice President 0 0 406,740 83,260 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
November 10 was $0.625 per share, and the exercise price on 90,000 shares 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.
39
<PAGE>
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 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. 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 of his agreement, ending November 1, 1998, and
$140,600 the last year of his agreement. Dr. David Vilkomerson signed an
extended employment agreement on March 10, 1998. That agreement has expired as
of November 1, 1999. The terms of an extended agreement should be similar to the
original agreement.
Mr. DeBernardis has worked without a contract extension since November
1996, but is currently in discussion with the Compensation Committee to extend
his employment agreement. The terms of an extended agreement should be similar
to the original 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 has been
negotiated and Mr. Mulvena will provide services up to four days per quarter, at
a rate of $1,700 per day. Upon the extension of his contract with the Company,
Mr. Mulvena was granted an option to purchase 40,000 shares of Class A Common
Stock at an exercise price of $0.39 per share. The option vested immediately
upon grant and has a term of ten years.
Option Plan
In August 1995, the Board of Directors adopted and the shareholders
approved option plan (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.
At the annual stockholders meeting on September 29, 2000, the shareholders
approved a proposal to increase the maximum number of shares of common stock
available for issuance under the option plan from 1,020,000 to 3,000,000 shares.
The total number of shares of Class A Common Stock with respect to which
options and SARs will be granted under the Option Plan are 3,000,000. 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,
40
<PAGE>
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.
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.
On October 9, 1999, the Board of Directors approved a compensation
committee recommendation and granted options for 500,000 shares to management,
vesting over three years, 190,000 shares to the non-management members of the
Board that vest immediately, and 15,000 shares to employees and consultants that
vest equally over the next three years. The grants issued to management and the
non-management Board members were subject to shareholder approval which occurred
on September 29, 2000 when the Board increased the maximum number of shares
authorized under the 1995 Option Plan to 3,000,000 shares. The date of the
shareholder approval represents the measurement date. As the fair market value
on the measurement date exceeded the exercise price of the options, the Company
will record a significant amount of deferred compensation in the first quarter
of fiscal 2001 which will be amortized on a straight-line basis to expense over
the respective vesting periods.
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 $12,569 in the fiscal year ended August
31, 2000.
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.
One of the Company's employees participated in the Investment Plan during
the fiscal year ended August 31, 1999. During the fiscal year 2000 activity, 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 certain information regarding beneficial
ownership of the Class A Common Stock and Series B Preferred Stock as of
November 15, 2000 by (i) each person who is known by the Company to own
beneficially more than five percent of the Class A Common Stock and the Series B
Preferred Stock, (ii) each of the Directors, nominees for Director and Named
Officers of the Company and (iii) all current Directors and executive officers
as a group. Unless indicated otherwise, the address of each of these persons is
c/o EchoCath, Inc., 4326 U.S. Route 1, Monmouth Junction, New Jersey 08852.
41
<PAGE>
<TABLE>
<CAPTION>
Amount
and Nature of
Name and Address Beneficial Percent Percent of
of Beneficial Owners Title of Class Ownership(1)(2) of Class(3) Voting Power(3)
-------------------- -------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Cathtech Corp.(4)....................Class A 623,906 6.7 6.7
c/o Vital Signs, Inc. Common Stock
20 Campus Road
Totowa, New Jersey 07512
Anthony Dimun(5)(14).................Class A 208,732 2.3 2.3
c/o Vital Signs, Inc. Common Stock
20 Campus Road
Totowa, New Jersey 07512
Frank DeBernardis(6)(14).............Class A 567,424 5.8 5.8
c/o EcoCath, Inc. Common Stock
P.O. Box 7224
Princeton, New Jersey 08543
Daniel M. Mulvena(8)(14).............Class A 300,000 3.2 3.2
6 Fuller Lane Common Stock
Marblehead, Mass. 01945
Joseph J. Prischak(9)................Class A 9,821,621 81.9 81.9
c/o EchoCath, Inc. Common Stock
P.O. Box 7224
Princeton, NJ 08543
Irwin M. Rosenthal(10)(14)...........Class A 382,958 4.1 4.1
c/o Irwin Rosenthal Common Stock
885 Third Avenue
21st Floor
New York, New York 10022
Ultramed, Inc.(11)...................Class A 468,906 5.0 5.0
c/o Frank Joworisak Common Stock
EchoCath, Inc.
Princeton, New Jersey 08543
David Vilkomerson(12)(14)............Class A 577,350 6.1 6.1
c/o EchoCath, Inc. Common Stock
P.O. Box 7224
Princeton, New Jersey 08543
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Amount
and Nature of
Name and Address Beneficial Percent Percent of
of Beneficial Owners Title of Class Ownership(1)(2) of Class(3) Voting Power(3)
-------------------- -------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Vital Signs, Inc.(4).................Class A 623,906 6.7 6.7
20 Campus Road Common Stock
Totowa, New Jersey 07512
EP MedSystems, Inc...................Series B Preferred 280,000 100 3.0
58 Route 46 West Stock
Budd Lake, New Jersey
07828(13)
All executive officers...............Class A 12,058,085 95.1 95.1
and Directors as a group (7 Common Stock
persons)(14)
</TABLE>
----------------------
(1) Except as indicated in the footnotes to this table, and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Class A
Common Stock and Series B Preferred Stock. All shares are beneficially
owned and sole voting and investment power is held by the persons
named, except as otherwise noted.
(2) Class A Common Stock subject to options, warrants and convertible
securities (excluding accrued interest) currently exercisable or
exercisable on or prior to 60 days after November 15, 2000 are deemed
outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Applicable percentage of ownership is based on 6,774,598 shares of
Class A Common Stock outstanding, plus any Class A Common Stock
equivalents held by such holders.
(4) 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 623,906 shares of Class A Common Stock owned by Cathtech.
(5) Mr. Dimun is an officer and a director of Vital Signs and Cathtech.
These shares do not include the 623,906 shares of Class A 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 presently exercisable.
43
<PAGE>
(6) Includes options granted by the Company to Mr. DeBernardis to purchase
336,740 shares of Class A Common Stock, which options are presently
exercisable. Excludes (i) 10,006 shares of Class A 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
83,260 shares of Class A Common Stock which are not yet vested and
which do not vest within 60 days after August 15, 2000. Also excludes
an option to purchase 250,000 shares of Class A Common Stock that is
subject to shareholder approval.
(7) 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.
(8) Includes options granted by the Company to Mr. Mulvena to purchase
210,000 shares of Class A Common Stock, which options are presently
exercisable. These shares exclude an option to purchase 90,000 shares
of Class A Common Stock, which option is subject to shareholder
approval.
(9) Includes warrants to purchase an aggregate of 2,134,171 shares of Class
A Common Stock and the conversion of a promissory note in the aggregate
principal amount of $1,150,000 which may be converted into 1,533,333
shares of Class A Common Stock, and the open market purchase of 25,000
shares of Class A Common Stock.
(10) 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 presently
exercisable. These shares also include an option to purchase 50,000
shares of Class A Common Stock, which option is presently exercisable.
(11) 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.
(12) Includes (i) options granted by Ultramed to Dr. Vilkomerson to purchase
from Ultramed 7,526 shares of Class A Common Stock, which options are
presently exercisable, and (ii) an option granted by the Company to Dr.
Vilkomerson to purchase 400,740 shares of Class A Common Stock, which
option is presently exercisable. Excludes (i) options granted by
Ultramed to Dr. Vilkomerson to purchase from Ultramed 1,882 shares of
Class A Common Stock of the Company, which options are not presently
exercisable, and (ii) 234,544 shares of Class A 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 83,260 shares of Class A
Common Stock which are not yet vested and which do not vest within 60
days after August 15, 2000. Also excludes an option to purchase 250,000
shares of Class A Common Stock that is subject to shareholder approval.
(13) Represents 215,385 shares of Class A Common Stock (on an as-converted
to Common Stock basis) eligible to vote at the Annual Meeting.
(14) Options were issued to Dr. Vilkomerson and Messrs. DeBernardis, Dimun,
Rosenthal and Mulvena to purchase in the aggregate 690,000 shares of
Class A Common Stock. These options received shareholder approval at a
meeting of shareholders held on September 29, 2000.
44
<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 fiscal 2000, the Company paid Vital Signs approximately $13,740
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
in fiscal year ended August 31, 2000.
In February 1999, the Company entered into a joint venture with Vital
Signs, Inc., a related party. Certain members of the Company's Board of
Directors are also members of Vital Signs, Inc. management. The joint venture
will develop technology related to the use of the Company's EchoFlow technology
in conjunction with the joint venture partner's technology. The joint venture
partner received a 50% ownership in return for the contribution of certain
technology valued at $665,000, as well as cash and services valued at $185,000.
The Company received 50% ownership in the joint venture in return for
contribution of its research and development efforts on the technology
contributed by the partner. Additional funding of the joint venture is at the
sole discretion of the joint venture partners. During 2000, the Company incurred
research and development expenditures totaling $514,000 on behalf of the joint
venture.
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 to repay a
demand note due by the Company to a bank in connection with the Company's
repurchase of rights under the HRT Agreement. Alliance paid $75,000 of the
$575,000.
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. 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, is a director, and a partner of Alliance. Irwin M.
Rosenthal is also a partner of Greenberg & Traurig, counsel to the Company.
For a description of employment and consulting agreements with, and
options granted to, certain officers and directors of the Company, see Item 10.
Executive Compensation.
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)
45
<PAGE>
10.1 1995 Stock Option Plan of the Company.**(1)
10.2 Form of Indemnification Agreement to be entered into between the Company
and each officer and Director of the Company.(1)
10.3 Employment Agreement, dated as of June 11, 1991 between the Company and
Frank DeBernardis, as extended and amended.**(1)
10.4 Employment Agreement, dated as of June 11, 1991 between the Company and
David Vilkomerson, as extended and amended.**(1)
10.5 Letter Agreement, dated as of May 12, 1995, between the Company and Daniel
Mulvena.**(1)
10.6 Form of Medical Advisory Agreement between the Company and Dr. Kurt
Isselbacher.**(1)
10.7 Form of Consulting Agreement between the Company and Daniel Mulvena.**(1)
10.8 Patent Assignment dated as of 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)
46
<PAGE>
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)
10.26 Forms of 6 1/2% Convertible Promissory Notes issued in 1999.
10.27 Forms of Warrants to purchase Class A Common Stock issued in 1999 to
purchasers of 6 1/2% Convertible Promissory Notes.
10.28 Form of Warrants issued for conversion of Class B Common Stock to Class A
Common Stock.
10.29 Certificate of Amendment to the Restated certificate of Incorporation of
EchoCath, Inc.
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.
(b) Reports on Form 8-K
During the quarter ended August 31, 1999, no reports on Form 8-K were filed
by the Company.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ECHOCATH, INC.
By: s/ Frank A. DeBernardis
-------------------------
Frank A. DeBernardis, Chief Executive
Officer and President (principal executive
officer and principal financial and
accounting officer)
December 11, 2000
48
<PAGE>
CERTIFICATE OF AMENDMENT
TO
THE RESTATED CERTIFICATE OF INCORPORATION
OF
ECHOCATH, INC.
In accordance with the provisions of Sections 14A:9-2(4) and 14A:9-4(3) of
the New Jersey Business Corporation Act, the undersigned corporation executes
this certificate of Amendment to its Restated Certificate of Incorporation.
1. The name of the Corporation is EchoCath, Inc. (the "Corporation").
2. Article V of the Restated Certificate of Incorporation is hereby
amended and replaced in its entirety with the following:
Article V Authorized Capital Stock
----------------------------------
The total authorized capital stock of the Corporation shall be 55,000,000
shares, consisting of:
1. 5,000,000 shares of Preferred Stock, no par value ("preferred Stock");
and
2. 50,000,000 shares of Class A Common Stock (the "Class A Common Stock"),
no par value.
Shares of authorized capital stock of each class may be issued for such
consideration as may be determined from time to time by the Board of Directors.
3. The foregoing amendment to the restated Certificate of Incorporation of
the Corporation, was adopted by the shareholders of the Corporation at
the Annual Meeting of Shareholders on September 29, 2000.
4. The number of shares of the Corporation entitled to vote on the
foregoing amendment is 6,744,598 shares of Class A Common Stock and
280,000 shares of Series B Convertible Preferred Stock (the"Series B
Preferred Stock), both classes voting together as a single class.
5. The number of shares of Class A Common Stock and Series B Preferred
Stock voted for the foregoing amendment is 4,478,610 and 0,
respectively; the number of shares of Class A Common Stock and Series B
Preferred Stock voted against the foregoing Amendment is 10,000 and 0,
respectively.
6. This certificate of Amendment to the Restated Certificate of
Incorporation shall be effective upon its filing.
IN WITNESS WHEREOF, the undersigned, being a duly authorized officer of
the Corporation, does hereby execute this Certificate of Amendment to the
Restated Certificate of Incorporation this 2nd day of November, 2000.
By: s/Frank A DeBernardis
----------------------
Name: Frank A DeBernardis
Title: President and Chief Executive Officer
49
<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, President and December 11, 2000
-------------------------------
Frank A. DeBernardis Director (principal executive officer and
principal financial and accounting officer)
/s/ David Vilkomerson Executive Vice President and Director December 11, 2000
-----------------------------
David Vilkomerson
/s/ Malcolm Dale Director December 11, 2000
------------------------
Malcolm Dale
/s/ Anthony J. Dimun Treasurer and Director December 11, 2000
----------------------------
Anthony J. Dimun
/s/ Irwin M. Rosenthal Secretary and Director December 11, 2000
------------------------------
Irwin M. Rosenthal
/s/ Daniel M. Mulvena Chairman of the Board and Director December 11, 2000
-----------------------------
Daniel M. Mulvena
</TABLE>
50
<PAGE>
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'
51
<PAGE>
ECHOCATH, INC.
Financial Statements
August 31, 2000
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
EchoCath, Inc.:
We have audited the accompanying balance sheet of EchoCath, Inc. as of August
31, 2000, and the related statements of operations, stockholders' deficit, and
cash flows for each of the years in the two-year period ended August 31, 2000.
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 auditing standards generally accepted
in the United States of America. 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,
2000, and the results of its operations and its cash flows for each of the years
in the two-year period ended August 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
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.
/s/ KPMG LLP
-----------------
Princeton, New Jersey
October 6, 2000, except as to the second paragraph of Note 17
which is as of November 15, 2000.
F-1
<PAGE>
ECHOCATH, INC.
Balance Sheet
August 31, 2000
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 822,704
Inventory 115,392
Prepaid expenses and other assets 68,024
-----------
Total current assets 1,006,120
Furniture, equipment and leasehold improvements, net 133,795
Intangible assets, net 325,528
Debt issuance cost, net 693,807
Other assets 26,393
-----------
Total assets $ 2,185,643
===========
Liabilities and Stockholders' Deficit
Current liabilities:
Note payable 150,000
Obligations under capital leases 14,119
Accounts payable 127,423
Accrued expenses 709,864
Deferred revenue 50,000
-----------
Total current liabilities 1,051,406
Note payable, less current portion 126,000
Convertible notes 2,112,500
Obligations under capital leases, less current portion 6,566
Other liabilities 261,146
-----------
Total liabilities 3,557,618
-----------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value, 5,000,000 shares authorized; 280,000 shares
of Series B cumulative convertible issued and outstanding (liquidation
value $1,438,000) 1,393,889
Class A common stock, no par value, 50,000,000 shares authorized;
7,809,731 shares issued and outstanding 14,993,092
Accumulated deficit (17,758,956)
-----------
Total stockholders' deficit (1,371,975)
Total liabilities and stockholders' deficit $ 2,185,643
===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ECHOCATH, INC.
Statements of Operations
Years ended August 31, 1999 and 2000
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Revenues:
License and development fees and royalties $ 370,000 146,666
Product sales 25,197 7,500
------------- -------------
395,197 154,166
------------- -------------
Operating expenses:
Cost of sales 142,746 5,767
Research and development 1,217,838 1,634,716
Marketing, general and administrative 1,045,588 1,010,353
------------- -------------
2,406,172 2,650,836
------------- -------------
Loss from operations (2,010,975) (2,496,670)
------------- -------------
Other income (expense):
Interest income 5,109 28,022
Interest expense (100,687) (578,627)
------------- -------------
(95,578) (550,605)
------------- -------------
Net loss before income tax benefit (2,106,553) (3,047,275)
------------- -------------
Income tax benefit -- 447,956
Net loss (2,106,553) (2,599,319)
-------------- --------------
Preferred stock dividends (75,600) (75,600)
-------------- --------------
Net loss to common stockholders $ (2,182,153) (2,674,919)
============= =============
Basic and diluted net loss per common share $ (.81) (.71)
=== ===
Weighted average shares outstanding 2,691,000 3,792,000
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ECHOCATH, INC.
Statements of Stockholders' Deficit
Years ended August 31, 1999 and 2000
<TABLE>
<CAPTION>
Class B Class A Class B
preferred common common Accumulated
stock stock stock deficit Total
----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Balance (deficit) at August 31, 1998 $ 1,393,889 7,248,219 4,023,470 (12,901,884) (236,306)
Employee stock purchase plan - 615 - - 615
Issuance of Class A common stock warrants in
connection with debt financing - 225,000 - - 225,000
Dividends on preferred stock - - - (75,600) (75,600)
Net loss - - - (2,106,553) (2,106,553)
----------- --------- --------- ----------- ----------
Balance (deficit) at August 31, 1999 $ 1,393,889 7,473,834 4,023,470 (15,084,037) (2,192,844)
Issuance of Class A common stock warrants in
connection with debt financing - 798,794 - - 798,794
Conversion of Class B common stock to Class A
common stock - 4,023,470 (4,023,470) - -
Conversion of Convertible Notes and interest to Class A
common stock, net of debt issuance costs - 291,106 - - 291,106
Sale of Class A common stock and exercise of warrants - 1,405,888 - - 1,405,888
Sale of units of Class A common stock and Class A
common stock warrants - 1,000,000 - - 1,000,000
Dividends on preferred stock - - - (75,600) (75,600)
Net loss - - - (2,599,319) (2,599,319)
----------- ---------- --------- ----------- ----------
Balance (deficit) at August 31, 2000 $ 1,393,889 14,993,092 - (17,758,956) (1,371,975)
=========== ========== ========= ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ECHOCATH, INC.
Statements of Cash Flows
Years ended August 31, 1999 and 2000
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,106,553) (2,599,319)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 111,456 116,373
Amortization of debt issuance costs - 439,236
Change in operating assets and liabilities:
Decrease in trade accounts receivable 4,905 -
Decrease (increase) in inventory 144,796 (71,067)
Decrease in prepaid expenses and other current assets 19,546 3,879
(Increase) in other assets (41,672) 35,010
Increase (decrease) in accounts payable 106,005 (49,643)
Increase (decrease) in accrued expenses 317,491 (96,320)
Increase in deferred revenue - 50,000
(Decrease) in other liabilities (12,494) (88,410)
------------ ----------
Net cash used in operating activities (1,456,520) (2,260,261)
------------ ===========
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements (19,391) (39,293)
Purchases of intangible assets (27,699) (64,445)
------------ ----------
Net cash used in investing activities (47,090) (103,738)
------------ ----------
Cash flows from financing activities:
Principal payments on capital lease obligations (1,333) (16,449)
Principal payments on note payable - (264,000)
Proceeds from employee stock purchase plan 615 -
Proceeds from IPA notes 525,000 -
Debt issuance costs (100,642) (115,000)
Gross proceeds from convertible notes 850,000 1,150,000
Proceeds from issuance of shares of and warrants for Class A common
stock and the exercise of warrants - 2,405,888
------------- -----------
Net cash provided by financing activities 1,273,640 3,160,439
------------ -----------
Net (decrease) increase in cash and cash equivalents (229,970) 796,440
Cash and cash equivalents at beginning of year 256,234 26,264
------------ -----------
Cash and cash equivalents at end of year $ 26,264 822,704
============ ===========
Supplemental disclosure of cash flow information-
Interest paid $ 100,387 3,768
============ ===========
Supplemental disclosure of noncash information-
Equipment acquired under capital lease $ 13,337 -
============ ===========
Debt issuance cost incurred in connection with issuance of
Class A Common Stock warrants $ 225,000 798,794
============ ===========
Class B dividends payable offset against royalties receivable $ 75,600 75,600
============ ===========
Conversion of convertible notes payable into Class A common stock,
net of debt issuance costs $ - 291,106
===========
Exchange of IPA notes for convertible notes $ - 525,000
===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
(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 General 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.
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 $2,599,319 for the year
ended August 31, 2000, and as of August 31, 2000 had a working capital
deficiency of $45,286 and an accumulated deficit of $17,758,956. The
Company expects to incur additional expenditures for further development
and expand its product lines. The Company anticipates that its current
cash should be sufficient to fund research, development, testing,
regulatory requirements, operating and other capital needs through the
second quarter of fiscal 2001. 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 resources to support the Company's
research and development and product commercialization, the sale of its
New Jersey Tax Benefits under the State of New Jersey tax benefit
certificate transfer program, which is subject to certain limitations, 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 realize
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. As discussed above, the Company has suffered
recurring losses from operations, has negative working capital, and has a
net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Following February 28, 2001, the Company may need substantial additional
financing in order to continue development of and commercialize certain
of its proposed products and other potential products. The Company has no
binding commitments from any third parties to provide funds to the
Company. There can be no assurance that the Company will be able to
obtain financing from any other sources on acceptable terms or at all
(see note 17).
On February 26, 1998 the Company was notified by NASDAQ that, based on
the Company's current equity level, it did not satisfy NASDAQ's minimum
equity requirement of $2 million and would be scheduled for delisting.
The Company appealed the delisting decision but ultimately was informed
that it was delisted from the NASDAQ Small Cap Market effective November
16, 1998. The Company is now listed on the NASDOTC Bulletin Board.
F-6
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
All cash and cash equivalents are held in United States financial
institutions. A total of $25,000 is restricted as collateral for
long-term obligations and is included as a component of other long-term
assets. 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. Payments received for which revenue has not been
earned are recorded as deferred revenue.
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. 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 basis 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.
F-7
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
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 Statements 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.
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.
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 1999 and 2000 is
calculated based upon net loss after cumulative Series B preferred stock
dividends of $75,600 in both years, divided by the weighted average
number of shares of common stock outstanding during that period. For
purposes of the diluted loss per share calculation, the exercise or
conversion of all potential common shares is not included since their
effect would be antidilutive for all periods presented.
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. The fair value of long-term
debt is based on the discounted cash flow analysis, based on the
Company's current incremental borrowing rate for similar type of
borrowing arrangements which approximates the carrying value of the debt
at August 31, 2000.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which, as amended, becomes
effective for our financial statements for the fiscal year beginning
September 1, 2000. SFAS No. 133 requires a company to recognize all
derivative instruments as assets or liabilities in its balance sheet and
measure them at fair value. The Company does not expect the adoption of
this Statement to have material impact on the financial statements.
F-8
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
In December 1999 the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 requires the company to
adopt its guidance not later than the forth quarter of its fiscal year
2001 with a cumulative effect of change in accounting principle
calculated as of September 1, 2000. We are evaluating SAB 101 and the
effect it may have on our financial statements and its current revenue
recognition policy.
(2) Inventory
Inventory as of August 31, 2000 consists entirely of raw materials.
(3) Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements as of August 31, 2000
consist of the following:
Laboratory and production equipment $ 377,254
Office equipment 343,207
Leasehold improvements 28,236
---------
748,697
Less accumulated depreciation and amortization 614,902
---------
Furniture, equipment and leasehold improvements, net $ 133,795
=========
As of August 31, 2000, equipment acquired under capital leases (see note
6) amounted to $124,718 and related accumulated depreciation is $100,970.
The Company recognized depreciation expense of $87,325 and $87,187 for
the fiscal years ended August 31, 1999 and 2000, respectively.
(4) Intangible Assets
Intangible assets as of August 31, 2000 consist of the following:
Patents and trademarks $ 367,655
Patent application costs 81,592
---------
449,247
Less accumulated amortization 123,719
---------
$ 325,528
=========
(5) Note Payable and Private Placement Offerings
Note 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.
On November 23, 1999, the Company reached an agreement to refinance its
Bard debt. In order to satisfy the Bard debt obligation, the Company was
required to make principal payments of $75,000 immediately, 10% of net
funds that are received from subsequent financing, licensing and royalty
activity beginning January 1, 2000 with a minimum payment of $150,000 for
the year 2000, and beginning with the first calendar quarter of 2001 and
continuing thereafter 7.5% of net revenue and financing received in that
F-9
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
quarter, with a minimum payment of $75,000 every six months until the
indebtedness is repaid. Interest on the unpaid balance of the debt shall
accrue at the rate of prime plus 1% and continue to accrue until full
payment of all principal and interest outstanding. The note is secured by
virtually all of the Company's inventory, furniture and equipment. The
principal due as of August 31, 2000 is $488,806.
Convertible Debentures
The Company issued two convertible debentures to Investment Partners of
America, LP (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. These convertible debentures were converted in
the 1999 private placement (see below). The accrued interest of $32,076
was converted into 42,769 shares of Class A common stock at $0.75 per
share.
1999 Private Placement Offering
On October 29, 1999, the Company completed a private placement offering.
The offering consisted of Units of (i) a $25,000 convertible promissory
note and (ii) a three-year warrant to purchase 33,333 shares of Class A
Common Stock. A total of 3,366,633 warrants were issued. The notes bear
interest at 6.5% per annum and mature three-years from the date of the
final closing October 29, 1999, unless previously converted into Class A
Common Stock. A total of $2,525,000 of notes were issued through the
private placement, of which $1,250,000 are convertible into shares of
Common Stock at the option of the holder, at any time prior to the
maturity date, at a rate of one share of Class A Common Stock for each
$0.75 of debt (plus accrued and unpaid interest) and $1,275,000 of which
are convertible at the market price on the date of conversion, but not
less than $0.25 (plus accrued and unpaid interest); the notes are also
convertible at the option of the Company, one year after October 29,
1999, at a conversion price equal to the lesser of $0.75 or the average
closing sale price of the share of Class A Common Stock over the five day
period immediately prior to the maturity date, but not less than $0.25
per share. Each warrant entitles the holder to purchase one share of
Class A Common Stock at an exercise price of $0.75 per share. The
offering resulted in net proceeds of $1,784,000 and the conversion of
$525,000 of 6.5% convertible debentures into the same convertible debt
offered under the private placement described above. In connection with
the warrants issued, the Company recorded debt issuance costs totaling
$673,327, plus $30,642 of other debt issuance costs. The warrants were
valued at $0.20 per share using the Black-Scholes pricing model. The debt
issuance costs will be amortized over the life of the debt.
The holders of the Company's Class B common stock maintained "super
voting" rights, whereby they were entitled to 5 votes per Class B common
share. As a condition to the private placement offering, holders of a
minimum of 900,000 shares of the Company's Class B Common Stock were
required to convert their shares into Class A Common Stock at a ratio of
1 to 1. Additionally, each Class B Common stockholder converting their
shares received a five-year warrant to purchase shares of Class A Common
Stock for an equal number of shares, exercisable at $.75 per share. A
total of 1,172,018 warrants were issued. During fiscal 2000, all shares
of Class B Common Stock have been converted into Class A Common Stock. In
connection with the warrants issued, the Company recorded issuance costs
totaling $234,000. The warrants were valued at $0.20 per warrant using
the Black-Scholes pricing model. The issuance cost will be amortized over
the life of the debt.
The Placement Agents for the private placement offering were entitled to
cash compensation equal to 10% of the gross proceeds of the offering and
400,000 five-year warrants to purchase up to 400,000 shares of Class A
Common Stock at $0.75 per share. In connection with the warrants issued,
the Company recorded issuance costs totaling $80,000, plus $200,000 for
the placement agent fees. The warrants were valued at $0.20 per warrant
using the Black-Scholes pricing model. The issuance costs will be
amortized over the life of the debt.
F-10
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
Pursuant to the terms of the private placement the Company filed a
current effective Form S-3 Registration Statement with the U.S.
Securities and Exchange Commission in February 2000 registering the
underlying Class A common shares.
In August 2000, holders of the convertible promissory notes converted
$412,500 of principal and $33,945 of accrued interest into 1,035,133
shares of Class A common stock. Approximately $155,339 of debt issuance
cost was charged to the Class A common stock balance as a result of the
conversion.
2000 Private Placement Offering
On February 23, 2000, the Company offered its 6.5% convertible promissory
noteholders the opportunity to purchase four shares of Class A Common
Stock at $0.75 per share for every warrant they exercise at the same
price. The Company issued a total of 1,500,000 shares in this offering.
The number of shares that were offered were proportional to the number of
units purchased in the 6.5% convertible promissory note offering. For
each unit purchased in the 6.5% convertible promissory note offering, the
noteholder purchased up to 14,850 new shares at $0.75 per share and
exercised warrants for 3,712 shares at $0.75 per share. If a noteholder
did not purchase the shares available to them, those shares were made
available to the other noteholders participating in this offering. The
Company received proceeds of $1,405,888, including the proceeds from the
exercise of 375,000 warrants.
Sale of Units
In July 2000, a Director of the Company purchased 1,333,333 units from
the Company for $0.75 per unit for which the Company received $1,000,000
in net proceeds. Each unit consisted of a share of Class A common stock
and a three-year warrant to purchase an additional share of Class A
common stock at $0.75 per share.
(6) Obligations under Capital Leases
Equipment under capital leases are capitalized using interest rates
(ranging from 7.3% to 13.87%) 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, 2000:
2001 $ 14,956
2002 6,972
2003 1,890
---------
Total minimum lease payments 23,818
Less amount representing interest 3,133
---------
Present value of net minimum
lease payments 20,685
Less current portion of obligations under
capital lease 14,119
---------
Long-term portion of obligations
under capital lease $ 6,566
=========
F-11
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
(7) Stockholders' Deficit
Forfeitable Shares
In connection with the Company's initial public offering, the underwriter
required that certain stockholders agree to contribute an aggregate of
833,000 shares of Class B common stock, (now Class A common stock), to
the Company without consideration if specified earnings levels or market
price targets are not met (the Forfeitable Shares). The shares that have
converted to Class A common stock are still subject to the underwriting
agreement and terms subject to forfeiture. 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 minimum pretax income amounts to at least $8.5 million during
the fiscal year ending on August 31, 2001; or
(b) commencing 42 months from the effective date and ending 60 months
after the effective date, the bid price shall average in excess of
$16.75 per share (subject to adjustment in the event of any
reverse stock splits or other similar events) for 30 consecutive
business days.
If none of the foregoing targets are met, on November 30, 2001 the
Forfeitable Shares will be placed in the Company's treasury and 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.
During fiscal 2000, the Company determined that 114,896 shares of the
Forfeitable Shares were no longer forfeitable. Therefore, these
non-forfeitable shares are now included in the weighted average shares
outstanding calculation.
Preferred Stock and Related Litigation
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 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 280,000
shares of Series B preferred stock represent voting rights of 215,385
shares of Class A common stock, the amount of shares that could be
converted from preferred to common stock. 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 would be at the conversion rate of one
share of Class A common stock for each 1.3 shares of Series B cumulative
preferred stock.
On October 16, 1997, EP MedSystems delivered to the Company a complaint
(the "Complaint") filed in the United States District Court for the
District of New Jersey in connection with the Company's sale of
securities to EP MedSystems pursuant to a Subscription Agreement, dated
as of February 27, 1997, by and between the Company and EP MedSystems. In
the Complaint, EP MedSystems alleges that the Company violated
ss. 10(b) of the Exchange Act and committed common law fraud in
connection with EP MedSystems' purchase of securities from the Company.
EP MedSystems requested unspecified compensatory damages, costs,
attorneys' fees and punitive damages. On November 26, 1997, pursuant to
an order of the Court, the Company filed an Answer, without prejudice to
its right to move to dismiss the Complaint, denying the material
allegations of the Complaint, and asserting a counterclaim against EP
MedSystems seeking its costs and expenses in the action, including its
attorneys' fees, based on EP MedSystems' breach of the Subscription
Agreement. On December 3, 1997, EP MedSystems filed an amended complaint,
also alleging violations of ss. 10(b) of the Exchange Act, and common
law fraud. Pursuant to Court order, the Company's answer was due December
10, 1997, also without prejudice to the Company's right to move to
F-12
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
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 against the Company with prejudice, but
did not decide on the Company's outstanding counterclaims against EP
MedSystems. On June 9, 1999, EP MedSystems filed an appeal of that
dismissal. If the appeal is successful, the lawsuit will be reinstated.
The appellate court heard oral arguments of the appeal on December 7,
1999. The court has yet to rule on the appeal. There can be no assurance
that the Company will prevail in this matter, which could have a material
adverse effect on the Company's operations, financial position and cash
flows.
(8) Development and License and Distribution Agreements
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 and increasing to $40,000 per year starting January 2000
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,
2000, $226,666 of royalties due have been used to reduce accrued
dividends. As of August 31, 2000 the Company has $264,600 of accrued
preferred stock dividends before reduction by royalty payments, which is
included as a component of other liabilities on the accompanying Balance
Sheet.
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 non-refundable 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 was three months, and the non-refundable consideration received
for the option was $35,000. The option has been extended at the election
of the holder for three one-month periods upon payment of a
non-refundable fee to the Company of $10,000 per month. As of September
20, 1999, a new agreement was reached extending the term of the option
for four additional months starting November 1, 1999 upon monthly
payments of $10,000 per month. This agreement was further extended on
June 30, 2000 to July 31, 2000 for the additional consideration of
$10,000. The agreement was further extended, without additional
consideration to November 30, 2000.
(9) Income Taxes
As of August 31, 2000, the Company has available net operating loss
carryforwards of approximately $16,700,000 and $10,545,000 for federal
and state income tax reporting purposes, respectively, which are
available to offset future federal and state taxable income, if any, and
expire between 2009 and 2020 and 2001 and 2007, respectively. The Company
also has research and development tax credit carryforwards of
approximately $393,000 for Federal income tax purposes which are
F-13
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
available to reduce Federal income taxes, if any, through 2013. As a
result of the initial public offering and private placements of stock in
1996, the Company experienced an ownership changes as defined by rules
enacted with the Tax Reform Act of 1986. Accordingly, the Company's
ability to use its net operating loss carryforwards may be subject to
certain limitations or may expire unused.
In December 1999, the Company sold $6,600,000 of its state net operating
loss carryforwards under the New Jersey Corporation Tax Benefit
Certificate Transfer Program for $447,956. Such amount was recorded as a
tax benefit in the Statement of Operations. Historically, the Company had
recognized a 100% valuation allowance against these net operating loss
carryforwards. 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, 2000 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 6,316,000
Tax credit carryforward 393,000
Accrued expenses 287,000
Inventory 24,000
Vital Signs, Inc. joint venture loss 134,000
Technology rights 139,000
-----------
Total gross deferred tax assets 7,293,000
Less valuation allowance (7,278,000)
-----------
Net deferred tax assets 15,000
Deferred tax liabilities - Furniture, equipment and (15,000)
leasehold improvement, primarily due to differences in -----------
depreciation
Net deferred taxes $ -
===========
</TABLE>
The valuation allowance for deferred tax assets as of August 31, 2000 was
$7,278,000. The net change in the total valuation allowance for the years
ended August 31, 2000 and August 31, 1999 were increases of $816,000 and
$1,062,000 respectively, primarily attributable to increases in the net
operating loss and tax credit carryforwards.
(10) Related Party Transactions
During the years ended August 31, 1999 and 2000, the Company incurred
$26,004 and $13,740, 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) 401(k) Plan
The Company maintains a 401(k) profit sharing plan for its employees. 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
$13,126 and $12,569 to the plan in fiscal 1999 and 2000, respectively.
(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, 2000 are as follows:
F-14
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
2001 $ 299,167
2002 174,646
2003 3,219
2004 268
------------
$ 477,300
============
Rental expense aggregated $328,489 in fiscal 1999 and $347,849 in fiscal
2000.
(13) Stock Option Plans
On August 24, 1995 and 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 3,000,000 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 has not
recognized compensation cost for stock option plans and stock purchase
plans in its financial statements as all grants have been made at fair
market value. 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 would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Net loss to common stockholders -as reported $ (2,182,153) (2,674,919)
Net loss to common stockholders -pro forma (2,359,998) (2,900,188)
Net loss per common share- as reported (.81) (.71)
Net loss per common share - pro forma (.88) (.76)
==== ====
</TABLE>
The fair value of the stock options granted in 1999 and 2000 is estimated
at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1999 and 2000; dividend yield
of 0%; expected volatility of 50.1%; a risk-free interest rate of 6.5%;
and expected lives of 7 years.
Presented below is a summary of the stock option plans for the years
ended August 31, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
------------------------- ---------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 742,500 $ 3.375 952,500 $ 2.633
Granted 210,000 1.125 705,000 0.39
Exercised - - - -
Forfeited/expired - - - -
Options outstanding at end of
year 952,500 $ 2.633 1,657,500 $ 1.68
======= =========
</TABLE>
A total of 1,196,000 shares are vested as of August 31, 2000.
F-15
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
On October 9, 1999, the Board of Directors approved a compensation
committee recommendation and granted options for 500,000 shares to
management, vesting over three years, 190,000 shares to the
non-management members of the Board that vested immediately, and 15,000
shares to employees and consultants that vest equally over three years.
The grants issued to management and non-management Board members were
subject to shareholder approval which occurred on September 29, 2000 when
the Board increased the number of shares authorized under the 1995 Option
Plan to 3,000,000 shares. The date of the shareholder approval represents
the measurement date. As the fair market value on the measurement date
exceeded the exercise price of the options, the Company will record a
significant amount of deferred compensation in the first quarter of
fiscal 2001 which will be amortized on a straight- line basis to expense
over the respective vesting periods.
(14) Accrued Expenses
Accrued expenses as of August 31, 2000 consists of the following:
Professional fees $ 316,147
Payroll and benefits 104,932
Rent 147,131
Accrued interest expense on notes payable 141,654
---------
$ 709,864
=========
(15) Joint Venture Agreement
In February 1999, the Company entered into a joint venture with Vital
Signs, Inc., a related party. A member of the Company's Board of
Directors is also a member of Vital Signs, Inc. management. The joint
venture will develop technology related to the use of the Company's
EchoFlow technology in conjunction with the joint venture partner's
technology. The joint venture partner received a 50% ownership in return
for the contribution of certain technology valued at $665,000, as well as
cash and services valued at $165,000. The Company received 50% ownership
in the joint venture in return for contribution of its research and
development efforts on the technology contributed by the partner.
Additional funding of the joint venture is at the sole discretion of the
joint venture partners. During fiscal 1999, the Company incurred research
and development expenditures totaling $336,000 on behalf of the joint
venture, of which it was reimbursed $165,000 by the joint venture for
such services. This reimbursement was recorded as a decrease to research
and development expenses on the accompanying statement of operations.
During 2000, the Company incurred research and development expenditures
totaling $514,000 on behalf of the joint venture of which none has been
reimbursed by the joint venture for such services.
(16) Segment Information
The Company is managed and operated as one business. A single management
team that reports to the Chief Executive Officer comprehensively manages
the entire business. The Company does not operate separate lines of
business or separate business entities with respect to any of its
products. In addition, the Company does not directly conduct any of its
operations outside of the United States. Accordingly, the Company does
not prepare discreet financial information with respect to separate
product areas or by location and does not have separately reportable
segments as defined by SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information.
(17) Subsequent Event
On September 29, 2000 the stockholders of the Company approved an
increase in the authorized number of shares of Class A common stock
available for issuance to 50,000,000.
F-16
<PAGE>
ECHOCATH, INC.
Notes to Financial Statements
August 31, 2000
On November 15, 2000 a Director of the Company purchased 1,333,333 units
for $0.75 per unit for which the Company received $1,000,000 in net
proceeds. Each unit consisted of a share of Class A Common Stock and a
three-year warrant to purchase an additional share of Class A Common
Stock at $0.75 per share.
F-17
